Company Law

Contents
PAGE
About the Author
Preface to Seventh Edition
CHAPTER 1 : Introduction 2
CHAPTER 2 : Concept of Capital & Financing of Companies 32
CHAPTER 3 : Alteration of Share Capital 61
CHAPTER 4 : Prospectus 75
CHAPTER 5 : Allotment & Issue of Certificates 85
CHAPTER 6 : Transfer & Transmission of Securities 97
CHAPTER 7 : Membership 111
CHAPTER 8 : Debt Capital 129
CHAPTER 9 : Deposits 140
CHAPTER 10 : Creation & Registration of Charges 156
CHAPTER 11 : Divisible Profits & Dividends 165
CHAPTER 12 : Corporate Social Responsibility 179
CHAPTER 13 : Accounts & Audit 186
CHAPTER 14 : Meetings 222
CHAPTER 15 : Institution of Directors 255
CHAPTER 16 : Powers & Duties of Directors 282
CHAPTER 17 : Meetings of Board and its Committees 301
CHAPTER 18 : Virtual Meetings 312
CHAPTER 19 : Appointment & Remuneration of Key Managerial Personnel 321
CHAPTER 20 : Inter-Corporate Loans, Investments, Guarantees & Security & Related Party 345
Transactions
CHAPTER 21 : Transparency & Disclosures 358
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CHAPTER 22 : Registers, Forms & Returns 377
CHAPTER 23 : Majority Rule & Minority Rights 385
CHAPTER 24 : Offences, Penalties & Compounding 397
CHAPTER 25 : Amalgamation & Merger - Overview 405
CHAPTER 26 : Winding-up of Companies - Overview 426
CHAPTER 27 : An Introduction to E-Governance & XBRL 434
CHAPTER 28 : Drafting of Resolutions, Notices and Minutes 445
CHAPTER 29 : Legal Framework Governing Company Secretary 461
CHAPTER 30 : Secretarial Standards Board 478
APPENDIX I : Secretarial Standards 480
Solved Paper : CS Executive - June 2018 [As per old syllabus] 516
Solved Paper : CS Executive - December 2018 [As per new syllabus] 531
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ChAPTER
1
INTRODUCTION
MEANING & CHARACTERISTICS OF A COMPANY
Que. No. 1] Define the term 'Company'. How it is different than public corporation?
Ans.: The word 'Company' is derived from Latin word (Com = with or together; Panis = bread), and it originally
referred to an association of persons who took their meals together. A company is a corporate body and a legal
person having status and personality distinct from the members that constituting it.
It is called a body corporate because the persons composing it are made into one body by incorporating it according
to the law and clothing it with legal personality. The incorporated company owes its existence either to a Special
Act of Parliament or to company legislation.
The public corporations like Life Insurance Corporation of India and Darmodar Valley Corporation have been
brought into existence through Special Acts of Parliament, whereas companies like Tata Iron & Steel Co. Ltd.,
Reliance Industries Ltd. have been formed under the Company Legislation.
Company [Section 2(20)]: Company means a company incorporated under the Companies Act, 2013 or under any
previous company law.
Que. No. 2] State the scope and applicability of the Companies Act, 2013.
Ans.: Extent, Commencement and Application [Section 1]:
(1) The Companies Act, 2013 extends to whole of India.
(2) This section shall come into force at once and the remaining provisions of this Act shall come into force on
such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may
be appointed for different provisions of this Act and any reference in any provision to the commencement of this
Act shall be construed as a reference to the coming into force of that provision.
(3) The provisions of the Act shall apply to —
(a) Companies incorporated under this Act or under any previous company law.
(b) Insurance companies, except in so far as the said provisions are inconsistent with the provisions of the
Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999.
(c) Banking companies, except in so far as the said provisions are inconsistent with the provisions of the Banking
Regulation Act, 1949.
(d) Companies engaged in the generation or supply of electricity, except in so far as the said provisions are
inconsistent with the provisions of the Electricity Act, 2003.
(e) Any other company governed by any Special Act for the time being in force, except in so far as the said
provisions are inconsistent with the provisions of such Special Act.
(f) Such body corporate, incorporated by any Act for the time being in force, as the Central Government may, by
notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in
the notification.
Common Seal acts as the official signature of a company.
CS (Executive) - Dec 2008 (5 Marks), Dec 2009 (5 Marks) CS (Executive) - Dec 2013 (5 Marks)
Ans.: The most striking characteristics of a company are as follows:
(1) Corporate Personality: The Company is vested with a corporate personality quite distinct from individuals
who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has
a seal of its own. Its assets are separate and distinct from those of its member. It is also a different 'person' from
the members who compose it. As such it is capable of owning property, incurring debts, borrowing money, having
a bank account, employing people, entering into contracts and suing or being sued in the same manner as an
individual. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity.
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A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
The shareholders are not the agents of the company and so they cannot bind it by their acts.
(2) Separate Legal Entity: By registration under the Companies Act, 2013 a company becomes vested with
corporate personality, which is independent and distinct from its members. [Salomon v. Salomon & Co. Ltd. (1897)
A.C. 22], [Lee v. Lee's Air Farming Ltd. (1961) A.C. 12 (P.C.)]
(3) Limited Liability: Most of the companies formed are companies limited by shares. Thus, liability is limited up
to unpaid amount on shares.
In case of a company limited by guarantee, the liability of members is limited to a specified amount mentioned in
the memorandum.
(4) Perpetual Succession: An incorporated company never dies. It is wound up as per law. A company, being a
separate legal person is unaffected by death of any member and remains the same entity, despite total change in
the membership. A company's life is determined by the terms of its MOA. It may be perpetual or it may continue
for a specified time to carry on a task or object as laid down in the MOA. Thus, the membership of a company may
keep changing from time to time, but that does not affect its continuity.
Professor L.C.B. Gower rightly mentions, "Members may come and go, but the company can go on forever. During
the war all the members of one private company, while in general meeting, were killed by a bomb, but the company
survived - not even a hydrogen bomb could have destroyed it".
(5) Separate Property: A company is capable of owning, enjoying and disposing of property in its own name.
The company is the real person in which all its property is vested, and by which it is controlled, managed and
disposed of. No member can claim himself to be the owner of the company's property during its existence or in its
winding-up.
(6) Transferability of Shares: The shares are said to be movable property and freely transferable, so that no
shareholder is permanently wedded to a company. As per Section 82, the shares held by the members are movable
property and can be transferred from one person to another in the manner provided by the articles.
(7) Common Seal: On incorporation, a company acquires legal entity with perpetual succession and a common
seal, if any. Since the company has no physical existence, all contracts entered into by its agents may be under the
seal of the company. The Common Seal acts as the official signature of a company. The name of the company must
be engraved on its common seal. A rubber stamp does not serve the purpose. [As per Companies (Amendment) Act,
2015 affixation of common seal is no longer compulsory.]
(8) Capacity to sue and be sued: A company being a body corporate, can sue and be sued in its own name. The
company may bring an action against anyone in its own name. A company's right to sue arises when some loss is
caused to the company.
(9) Contractual Rights: A company, being a separate legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.
(10) Limitation of Action: A company cannot go beyond the power stated in the Memorandum of Association
(MOA). The MOA of the company regulates the powers and fixes the objects of the company and provides the base
upon which the entire structure of the company rests. The actions and objects of the company are limited within
the scope of its Memorandum of Association.
(11) Separate Management: Shareholders of the company are the owners but the company is administered and
managed by its managerial personnel, hence there is separate management from ownership.
(12) Termination of existence: A company is artificial person, does not die a natural death. It is created by law
ultimately is effaced by law. Generally, the existence of a company is terminated by means of winding up.
(13) Technical experience of member is technical experience of company. [New Horizons Ltd. v. Union of India,
(1995) 1 Comp. LJ 100 SC]
Salomon v. Salomon & Co. Ltd. (1897) A.C. 22: S incorporated a company to take over his personal business of
manufacturing shoes and boots. The seven subscribers to the memorandum were all his family members, each
taking only one share. The Board of Directors composed of S as Managing Director and his four sons. The business
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was transferred to the company at £40,000. S took 20,000 shares of £1 each and debenture worth £10,000. Within
a year the company came to be wound up and the state if affairs was like this:
Assets: £6,000.
Liabilities: Debenture creditors - £ 10,000, Unsecured creditors - £ 7,000.
It was argued on behalf of the unsecured creditors that, though the company was incorporated, it never had an
independent existence. It was S himself trading under another name, but the House of Lords held Salomon & Co.
Ltd, must be regarded as a separate person from S.
Lee v. Lee's Air farming Ltd. (1961) A.C. 12 (P.C.): Lee formed a company with a share capital of £3,000 of which
£2,999 was held by Lee. He was also the sole governing director. Lee was a qualified pilot also and was appointed
as the chief pilot of the company under the articles and drew a salary for the same. While flying the company's
plane he was killed in an accident. As the workers of the company were insured, workers were entitled for
compensation on death or injury. The question was while holding the position of sole governing director, could Lee
also be an employee of the company. It was held that if the company was a legal entity, there was no reason to
change the validity of any contractual obligations which were created between the company and the deceased.
The contract could not be avoided merely because Lee was the agent of the company in its negotiations.
Accordingly, Lee was an employee of the company and, therefore, entitled to the claim of compensation.
New Horizons Ltd. v. Union of India (1995) 1 Comp. LJ 100 SC: The experience of a shareholder of a company can
be regarded as experience of a company. The tender of the company, New Horizons Ltd., for publication of
telephone directory was not accepted by the Tender Evaluation Committee on the ground that the company had
nothing on record to show that it had the technical experience required to be possessed to qualify for tender. On
appeal the rejection of tender was upheld by the Delhi High Court.
The judgment of the Delhi High Court was reversed by the Supreme Court which observed as under:
"Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience of its
various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World Media
Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the Tender Evaluation
Committee had adopted the approach of a prudent businessman."
Que. No. 4] A company incorporated under the Companies Act, 2013, being an artificial person, is not entitled to
sue a natural person or to sue another company incorporated under the same Act.
CS (Executive) - Dec 2015 (5 Marks)
Ans.: A company being a body corporate, can sue and be sued in its own name. The company may bring an action
against anyone in its own name. A company's right to sue arises when some loss is caused to the company. By
registration under the Companies Act, 2013 a company becomes vested with corporate personality, which is
independent and distinct from its members. [Salomon v. Salomon & Co. Ltd. (1897) A.C. 22], [Lee v. Lee's Air
Farming Ltd. (1961) A.C. 12 (P.C.)]
Que. No. 5] Common seal can be used by any employee irrespective of his designation. Comment.
CS (Executive) - June 2014 (5 Marks)
Ans.: On incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the
company has no physical existence, all contracts entered into by its agents may be under the seal of the company.
The Common Seal acts as the official signature of a company.
Some important points relating to affixation of common seal are as under:
♦ The common seal should be affixed to any instrument only by authority of a resolution of the Board or a
committee authorized by the Board.
♦ The common seal should be affixed in the presence of managing director or any two directors, and the
company secretary or any other person as the Board may authorize for the purpose. The Articles may provide for
affixing of common seal in any other manner.
♦ The persons in whose presence the seal is affixed should sign every instrument to which the seal of the
company is so affixed.
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Thus, it is incorrect to say that common seal can be used by any employee irrespective of his designation.
Que. No. 6] Mr. M holds all the shares (except one) in a private company engaged in timber and also a substantial
creditor. He gets company insured on his own name. In a fire all the timber get destroyed by fire and claims loss
from insurance company. Is an insurance company be liable to Mr. M?
Ans.: A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and
disposing of property in its own name. The company is the real person in which all its property is vested, and by
which it is controlled, managed and disposed of. No member can claim himself to be the owner of the company's
property during its existence or in its winding-up. A member does not even have an insurable interest in the
property of the company.
The facts of the given case are similar to Macaura v. Northern Assurance Co. Ltd., wherein it was held that a
member does not even have an insurable interest in the property of the company. Hence, Insurance Company is
not liable to reimbursement of loss.
Que. No. 7] NSZ Ltd. engaged in petroleum products and for last few years company is facing the problem of
liquidity and is struggling for its survival. Some difference arises between the workmen and management of NSZ
Ltd. The workmen of the company prepared video cassettes showing their struggle against the company's
management. Advice as a Company Secretary to the management of NSZ Ltd. whether company can claim
damages against their workers?
Ans.: A company has a right to seek damages where a defamatory material published about it, affects its business.
In TVS Employees Federation v. TVS & Sons Ltd. (1996) 87 Com Cases 37, it was held that, where video cassettes
were prepared by the workmen of a company showing their struggle against the company's management is not
actionable unless it is shown that the cassette would be defamatory. Thus, company cannot claim damages against
their workers.
Que. No. 8] New Horizons Ltd. was formed as a joint venture by Thomson Press India Ltd. and Living Media India
Ltd. and the company have lot experience in publication business but the tender submitted by the New Horizons
Ltd. was rejected on the ground that company had nothing on record to show that it had the technical experience
required to be possessed to qualify for tender. Comment.
Ans.: The experience of a shareholder of a company can be regarded as experience of a company. The facts of the
given case are similar to New Horizons Ltd. v. Union of India (1995) 1 Comp. LJ 100 SC. In this case, the tender of
the company, New Horizons Ltd., for publication of telephone directory wras not accepted by the Tender Evaluation
Committee on the ground that the company had nothing on record to show that it had the technical experience
required to be possessed to qualify for tender. On appeal the rejection of tender was upheld by the Delhi High
Court.
The judgment of the Delhi High Court was reversed by the Supreme Court which observed as under: "Once it is
held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience of its various
constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World
Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the Tender
Evaluation Committee had adopted the approach of a prudent businessman."
Thus, depending upon circumstances of the case experience of shareholders can be treated as experience of
company.
Que. No. 9] Two companies are incorporated with the same set of shareholders. Are they same or distinct under
the Companies Act, 2013? Discuss. CS (Inter) - June 2008 (4 Marks)
Three companies incorporated with the same set of shareholders are treated as same companies under the
Companies Act, 2013. Comment. CS (Executive) - Dec 2017 (4 Marks)
Ans.: By registration a company becomes vested with corporate personality, which is independent and distinct
from its members. Even if two companies are incorporated with the same set of shareholders, they are distinct
and cannot to be treated as same company.
Que. No. 10] The managing director and other directors of the company are not liable to be sued for the dues
against the company. Comment. CS (Executive) - June 2011 (5 Marks)
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Ans.: A company being a body corporate, can sue and be sued in its own name.
In an Abdul Haq v. Das Mai, an employee was not paid salary for several months. He filed suit against directors for
the recovery of the amount of salary. It was held that he will not succeed because the remedy lies against the
company and not against the directors or members of the company.
Que. No. 11] A shareholder is personally liable for the acts of the company, if he hold virtually the entire share
capital of the company. CS (Executive) - June 2012 (5 Marks), Dec 2013 (5 Marks)
Ans.: The Company is vested with a corporate personality quite distinct from individuals who are its members. A
company, being a separate legal entity different from its members, can enter into contracts for the conduct of the
business in its own name. In case of company limited by shares, liability is limited up to unpaid amount on shares.
In leading case Salomon v. Salomon & Co. Ltd. (1897) A.C. 22, it was held that company separate distinct person
from its members and it is immaterial whether member has large or small proportion of share capital. As a separate
legal person, a company liable for its own act and members are not personally liable for the acts of the company.
Que. No. 12] In an annual general meeting of Amar Pvt. Ltd., all the shareholders were killed in a bomb blast.
State, whether the company is still in existence? CS (Executive) -Dec 2014 (4 Marks)
Ans.: By registration under the Companies Act, 2013 a company becomes vested with corporate personality, which
is independent and distinct from its members.
The membership of an incorporated company may change either because one shareholder has transferred his
shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member.
Thus, perpetual succession denotes the ability of a company to maintain its existence by the constant succession
of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B.
Gower rightly mentions, "Members may come and go, but the company can go on forever. During the war all the
members of one private company, while in general meeting, were killed by a bomb, but the company survived - not
even a hydrogen bomb could have destroyed it".
Que. No. 13] A company incorporated under the Companies Act, 2013 never dies except when it is woundup as
per the law. CS (Executive) - Dec 2015 (5 Marks)
Ans.: An incorporated company never dies. It is wound up as per law. A company, being a separate legal person is
unaffected by death of any member and remains the same entity, despite total change in the membership. A
company's life is determined by the terms of its MOA. It may be perpetual or it may continue for a specified time
to carry on a task or object as laid down in the MOA. Thus, the membership of a company may keep changing from
time to time, but that does not affect its continuity.
A company applied to sue as indigent person under Order 33, Rule 1 of the Civil Procedure Code, 1908 in a civil
case before a civil court. However, other party objected to the contention of the company. Discuss with
reference to deiced case whether company's contention is tenable.
Ans.: Company is an artificial person created by law. It is not a human being but it acts only through human beings.
It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can
be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the
contemplation of law. It is capable of enjoying rights and being subject to duties.
In Union Bank of India v. Khader International Construction and Other (2001) 42 CLA 296 SC, the question which
arose before the Court was whether a company is entitled to sue as an indigent (poor) person under Order 33, Rule
1 of the Civil Procedure Code, 1908. The aforesaid Order permits persons to file suits under the Code as
pauper/indigent persons if they are unable to bear the cost of litigation. The appellant in this case had objected to
the contention of the company which had sought permission to sue as an indigent person. The point of contention
was that, the appellant being a public limited company, it was not a 'person' within the purview of Order 33, Rule
1 of the Code and the 'person' referred to only a natural person and not to other juristic persons. The Supreme
Court held that the word 'person' mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, included any
company as association or body of individuals, whether incorporated or not. The Court observed that the word
'person' had to be given its meaning in the context in which it was used and being a benevolent provision, it was
to be given an extended meaning. Thus, a company may also file suit as an indigent person.
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Que. No. 15] Members of a company incorporated under the Companies Act, 2013 are the agents of the
company. Therefore, the company can be held liable for their acts. Comment.
Ans.: The Company is vested with a corporate personality quite distinct from individuals who are its members.
Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its
assets are separate and distinct from those of its member.
A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
The shareholders are not the agents of the company and so they cannot bind by their acts.
■ ■■ COMPANY AS DISTINGUISHED FROM OTHER FORM OF BUSINESS
Question No. 16] Distinguish between: Partnership & Company CS (Inter) - June 2005 (4 Marks),
Ans.: Following are the main points of distinction between partnership and company:
Points Partnership Company
Meaning Partnership is the relation between persons A company means company formed and
who have agreed to share the profits of a registered under Companies Act, 2013. A
business carried on by all or any of them acting company may be private company or public
for all. company.
Legal status A partnership firm has no separate existence A company is a separate legal entity distinct
apart from its members. from its member.
Governing Act Partnership is governed by Partnership Act, A company is governed by Companies Act,
1932. 2013.
Minimum Minimum two persons are required to form Minimum number of member required to form
membership partnership. a company are:
- For private company: 2
- For public company: 7
- For one person company: 1
Maximum A partnership with objects of acquisition for Maximum number of member are:
membership gains cannot be formed beyond 50 numbers of - For private company: 200
partners. [Section 464 read with Rule 10 of
- For public company: Unlimited
Companies (Miscellaneous) Rules, 2014]
Points Partnership Company
Registration Registration of partnership is not compulsory Registration of company is compulsory under

but Partnership Act, 1932 had made it Companies Act, 2013.
indirectly essential to enjoy certain benefits.
Capital Minimum capital is not specified. Minimum capital for the private and public
companies will be as specified in rules.
[Prior to the Companies (Amendment) Act,
2015, minimum paid up capital for private
company was ` 1,00,000 &for public company
was ` 5,00,000]
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Management All partners have a right to take part in the day- Affairs of company are managed by Board of
today affairs of the firm. Directors. Members cannot take part into day-
today business.
Mutual agency Every partner is principal as well as an agent of A member of company is not an agent of other
other partners. member or company.
Transfer of A partner cannot transfer his interest without A shareholder can freely transfer his share.
interest consent of all other partners. However, private can put restrictions on
transfer.
Liability of a Liability of a partner is unlimited. Liability of a member is limited up to unpaid

member amount on share.
Audit It not compulsorily for partnership firm's to Company has to get there accounts
get there accounts compulsory audited. compulsorily audited as per the provisions of
Companies Act, 2013.
Question No. 17] Distinguish between: Company & HUF Ans.: Following are the main points of distinction
between Company & HUF:
Points Company HUF
Meaning "Company" means a company formed and The HUF can be defined as a family that
registered under this Act or an existing consists of a common ancestor and all his lineal
company as defined in Companies Act, 2013. male descendants and their wives and
unmarried daughters.
Members A company consists of heterogeneous HUF consist of homogeneous members since it

members. consist of members of joint family itself.
Membership In case of company limited by shares a person A person becomes a member of HUF by virtue
can become member by acquiring shares. of birth.
Carrying of Affairs of company are managed by Board of In HUF business the Karta has the sole
business Directors. Members cannot take part into day authority to contracts, debts for the purpose of
to day business. business, other coparceners cannot do so.
Registration Every company must be registered as per No registration is compulsory for carrying on
Companies Act, 2013. business for gain by HUF.
Capital Minimum capital for the private and public There is no limit for carrying on HUF business.
[Prior to the Companies (Amendment) Act,
2015, minimum paid up capital for private
company was ` 1,00,000 & for public company
was ` 5,00,000]
Audit Company has to get there accounts HUF business are required to get there
compulsorily audited as per Companies Act, accounts audited only if there turnover
2013. exceeds limit prescribed under the Income Tax
Act, 1961.
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I Que. No. 18] Distinguish between: Company & Club CS (Foundation) - June 2010 (6 Marks)
Ans.: Following are the main points of distinction between Company & Club:
Points Company Club
Meaning "Company" means a company formed and Club is an association of persons formed with
registered under this Act or an existing the object to promote some common
company as defined in Companies Act, 2013. beneficial purpose.
Registration Registration of a company is compulsory. Registration of a club is not compulsory.
Profit motive Most of the companies are formed with a view Clubs are formed for not to earn profit.
to earn profit.
Audit Company has to get there accounts Clubs are not required to get their accounts
compulsorily audited as per Companies Act, audited.
2013.
Capital Minimum capital for the private and public There is no capital requirement.
Que. No. 19] Distinguish between: Limited Liability Partnership (LLP) and Company Ans.: Following are the main
points of distinction between LLP and Company :
Points Limited Liability Partnership Company
Meaning Limited liability partnership means a Company means a company incorporated

partnership formed and registered under under the Companies Act, 2013 or under any
Limited Liability Partnership Act, 2008. previous company law.
Governing Limited liability partnerships are governed by Companies are governed by the Companies
Law the Limited Liability Partnership Act, 2008. Act, 2013 and various Rules made there under.
Internal rules & Internal rules and regulation of LLFs are Internal rules and regulation of the companies
regulation governed by the LLP agreement. are governed by the MOA & AOA.
Meetings In the LLP Act, there is no stipulation for Every company must hold AGM every year.
meeting of partners either periodically or Every company must hold 4 board meetings
compulsory at the year end. and gap between two meetings should not be
more than 3 months.
Business In an LLP, each partner has the authority to do In case of a company no individual director can
so unless expressly prohibited by the conduct the business of the company
partnership terms.
Remuneration There are no provisions in the LLP Act, 2008 The Companies Act, 2013 regulates the
regulating the remuneration payable to remuneration payable to directors.
designated partners.
Borrowing There are no restrictions on the borrowing There are restrictions on borrowings power on
power powers on the LLP. the companies.
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Accounts The LLP can choose to maintain the accounts Companies have to keep their accounts on
on cash basis/ accrual basis. accrual basis.
Audit The audit of LLP is not compulsory if the capital Audit of a company is compulsory.
contributed or the turnover does not exceed
the limits prescribed under the Income Tax Act,
1961.
Cost Audit Cost audit is not applicable for LLPs. Certain companies are requ ired to do cost
audit also.
Company The appointment of Company Secretaries is Certain companies are required to appoint
Secretary not provided in the LLP Act, 2008. Company Secretary.
Que. No. 20] Distinguish between: Company & Corporation

CS (Executive) - June 2010 (4 Marks), June 2011 (5 Marks)
Ans.: Generally speaking an association of the persons incorporated according to the relevant law and clothed with
legal personality separate from the persons constituting it is known as corporation. Definition of the same which
is reproduced below is contained in clause.
Body Corporate or Corporation [Section 2(11)]: "Body corporate" or "corporation" includes a company
incorporated outside India, but does not include
(i) a co-operative society registered under any law relating to co-operative societies and
(ii) any other body corporate, which are specified by the Central Government by notification The expression
corporation or body corporate is wider than the word company.
A corporation sole is a single individual constituted as a corporation in respect of some office held by him or
function performed by him. The Crown or a Bishop under the English law are examples of this type of corporation.
It may be noted that though a corporation sole is excluded from the definition for the purposes of the Companies
Act, it continues to be a legal person capable of holding property and becoming a member of a company.
A society registered under the Societies Registration Act, 1860 has been held by the Supreme Court not to come
within the term 'body corporate' under the Companies Act, though it is a legal person capable of holding property
and becoming a member of a company. [Board of Trustees v. State of Delhi A.I.R. 1962 S.C. 458]
An industrial society formed under Industrial and Provident Societies Acts is not a company. [Great Northern
Railway Co. v. Coal Co-operative Society (1896) I Ch. 187]
ADVANTAGES & DISADVANTAGES OF CORPORATE FORM OF ENTERPRISE
Que. No. 21] State the advantages of company form of organization.
Ans.: Kindly see the nature and characteristics of a company as given earlier in this chapter.
Que. No. 22] State the disadvantages of company form of organization.
Ans.: Some of disadvantages of company form of organization are as follows:
(1) Formalities & Expenses: Incorporation of company is coupled with complex, cumbersome and detailed legal
formalities and procedures, involving considerable amount of time and money.
(2) Corporate Disclosure: Companies are required to make maximum disclosure of corporate information, as
the members of company are have restricted accessibility to its internal management and day to workings.
(3) Separation of control from ownership: Members of company are not having as effective and intimate
control over its working as one can have in other form of business organization.
(4) Greater social responsibility: The companies are called upon to show greater responsibility in their working
and are subject to greater control and regulation.
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(5) Greater tax burden: The tax burden on company is more than that on other forms business organization. A
company is liable to tax without any minimum taxable limit. Also it has to pay income-tax on the whole of its
income at a flat rate whereas others are taxed on graduated scale or slab system.
(6) Detailed winding up procedure: The Act provides elaborate and detailed procedure for winding up of
companies which is more expansive and time consuming than that which is applicable to other forms of business
organization.
LIFTING OF CORPORATE VEIL
Que. No. 23] Write a short note on: Lifting of corporate veil
Explain the concept of 'Corporate personality' and specify three circumstances under which corporate veil can
be lifted. CS (Inter) - June 2003 (8 Marks)
The separate personality of a company is a statutory privilege and it must be used for legitimate business
purposes only. CS (Executive) - Dec 2008 (4 Marks), Dec 2014 (4 Marks)
Ans.: When seven or more persons in case of public company and two or more person in case of private company
forms a company as per provisions of Companies Act, 2013 they are clothed with corporate personality and there
association known by the name of the company. However, sometime this veil of corporate personality is used for
some dishonest and fraudulent purpose in that case Court will look into reality and remove the corporate veil.
In the following case the courts have lifted the corporate veil.
(1) Prevention of fraud and misconduct: Where the medium of a company has been used for committing fraud
or improper conduct, the Courts have lifted the veil and looked at the realities of the situation. [Gilford Motor Co.
v. Home [1933] Ch 935]
(2) Company acting as agent: Where the company is in reality an agency or trust for someone else and the
corporate facade is used to cover up that agency or trust. [Re. F G Films Ltd. (1953) 1 All E.R. 615]
(3) Protection of public policy: Where the doctrine conflicts with public policy, Courts have lifted the
corporation veil for protecting the public policy. [Connors v. Connors Ltd. (1940) 4 All E.R. 179]
(4) Enemy character of company: Court will lift the corporate veil if the company has enemy character. [Daimler
Co. Ltd. v. Continental Tyre and Rubber Co. (1916) 2 A.C. 307]
(5) Evasion of taxes: Where the veil has been used for evasion of taxes and duties, the court upheld the piercing
of the veil to look at the real transaction. [Re. Dinshaw Maneckjee Petit A.I.R. 1927 Bombay 371]
(6) To protect labour welfare legislation: Where the purpose of company formation was to avoid the welfare
legislation, the Court will lift the corporate veil.
Where it was found that the sole purpose for the formation of new company was to use it as a device to reduce
the amount to be paid by way of bonus to workman the Supreme Court upheld the piercing of the veil to look at
the transaction. [Workmen of Associated Rubber Industries Ltd. v. Associated Rubber Industries Ltd. A.I.R. 1986 SC
1]
(7) Use of corporate veil for hiding criminal activities: Where the defendant used the corporate structure as a
device to conceal his criminal activities (evasion of customs and excise duties), the Court could lift the corporate
veil and treat the assets of the company as the realizable property of the shareholder.
(8) To punish for contempt of Court: [Jyoti Limited v. Kanzvaljit Kavr Bhasin 32 (1987) DLT198].
Gilford Motor Co. v. Horne [1933] Ch 935: In this case 'Home' had been employed by the company under an
agreement that he shall not solicit the customers of the company or compete with it for a certain period of time
after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a company which carried
on a competing business and allotted whole of its shares to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant (Home) in fact controlled the company, its
formation was a mere 'cloak or sham' to enable him to break his agreement with the plaintiff. Accordingly, an
injunction was issued against him and against the company he had formed restraining them from soliciting the
plaintiff's customers.
12
Re. F G Films Ltd. (1953) 1 All ER 615: FG films wanted Monsoon registered as a British film. It applied to be declared
as the 'maker' under the Cinematograph Films Acts 1938-1948. The Board of Trade refused because it was made
by the American 'Film Group Inc'. The American company had promised to finance and provide facilities to the UK
company for making the film. 90 shares were held by an American director and 10 by a British one. No shares were
held by the third director, who was British. The film was made in India. It was held that the film could not be
considered British made, even though the company owning the rights was a UK company.
Connors v. Connors Ltd. (1940) 4 All ER 179: In this case the principle was applied against the managing directors
he made use of his position contrary to public policy. In this case house of Lord determined the character of
company as enemy company, since the person who de facto in control of its affairs where resident of Germany,
which was at war with England at that time.
Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd. AIR 1927 Bombay 371: A Company was incorporated in
London for the purpose of selling tyres manufactured in Germany by a German Company. Its majority shareholder
and all the directors were Germans. On declaration of war between England and Germany in 1914, it was held that
since both the decision making belies, the Board of Directors and the general body of shareholders were controlled
by Germans, the company was a German company and hence, an enemy company. Accordingly, the suit filed by
the company to recover a trade debt was dismissed on the ground that such payment would amount to travelling
with enemy.
Re. Dinshaw Maneckjee AIR 1927 Bombay 37: The assessee was a millionaire earning huge income by way of
dividend and interest. He formed four private companies and transferred his investments to each of these
companies in exchange of their shares. The dividends and interest income received by the company was handed
back to Sir Dinshaw as a pretended loan. It was held that the company was formed by the assessee only as a means
of avoiding tax and company was nothing more than assesses himself.
Jyoti Limited vs Kanwaljit Kavr Bhasin 32 (1987) DLT 198: A firm of two partners agreed to sell two floors to parties
but cancelled the agreement. Litigation followed and the High Court restrained the firm from selling the property.
In the meantime, a private company was floated by the two partners who being the only two shareholders became
the chairman and the Managing Director respectively and the property was transferred to the Company. In spite
of the High Court's restraint order the company sold off the two floors. It was held that the sole purpose of
incorporating the company was to avoid the order of High Court and thus their contempt of Court order, according
sentence of 14 days was imposed on both the partners.
Kapila Hingorani v. State of Bihar: In this case, the petitioner had alleged that the State of Bihar had not paid
salaries to its employees in PSUs etc. for long periods resulting in starvation deaths. But the respondent took the
stand that most of the undertakings were incorporated under the provisions of the Companies Act, 2013, hence
the rights etc. of the shareholders should be governed by the provisions of the Companies Act and the liabilities of
the PSUs should not be passed on to the State Government by resorting to the doctrine of lifting the corporate
veil. The Court observed that the State may not be liable in relation to the day-to-day functioning of the PSUs but
its liability would arise on its failure to perform the constitutional duties and the functions of these undertakings.
It is so because, "life means something more than mere ordinal existence. The inhibition against deprivation of life
extends to all those limits and faculties by which life is enjoyed".
Que. No. 24] Mr. H was appointed as a managing director of G Ltd., on the condition that he shall not entice
away the customer of the company during his stay in the company or afterwards. Mr. H left the service of the
company and formed new company H Ltd., which enticed away the G Ltd. customer. What remedy is available
to G Ltd.?
Ans.: The facts of the given case is similar to Gilford Motor Co. v. Home, [1933] Ch 935. In this case 'Horne' had
been employed by the company under an agreement that he shall not solicit the customers of the company or
compete with it for a certain period of time after leaving its employment.
After ceasing to be employed by the plaintiff, Horne formed a company which carried on a competing business and
allotted whole of its shares to his wife and an employee of the company, who were appointed to be its directors.
13
It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere 'cloak or
sham' to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him
and against the company he had formed restraining them from soliciting the plaintiff's customers.
Que. No. 25] Rani is a wealthy lady enjoying large dividend and interest income. She has formed three private
companies and agreed with each of them to hold a block of investment as an agent for it. Income received was
credited in the accounts of the company but the company handed back the amount to her as a pretended loan.
This way, she divided her income in three parts in a bid to reduce her tax liability. Discuss the legality of the
purpose for which the three companies were formed.
Ans.: When a company is formed as per provisions of the Companies Act, 2013 they are clothed with corporate
personality and there association is known by the name of the company. However, sometime this veil of corporate
personality is used for some dishonest and fraudulent purpose. In such cases Court will look into reality and remove
the corporate veil.
As per the facts given in case, Rani has formed the four companies to avoiding tax and company is nothing more
than assesses himself. [Re. Dinshaw Maneckjee Petit, AIR 1927 Bombay 37]
Thus, applying the above principle Rani and four companies will be treated one and same person.
Que. No. 26] Explain clearly the meaning of 'lifting of corporate veil' in relation to a company incorporated under
the Companies Act, 2013. Examining the judicial decisions, state whether 'corporate veil' can be lifted in the
following cases:
(a) Where the corporate veil has been used for improper conduct and
(b) Where the acts of a company are opposed to workmen? CS (Executive) - Dec 2015 (4 Marks)
Ans.: When seven or more persons in case of public company and two or more persons in case of private company
forms a company as per provisions of Companies Act, 2013 they are clothed with corporate personality and
their association known by the name of the company. However, sometime this veil of corporate personality is used
for some dishonest and fraudulent purpose in that case Court will look into reality and remove the corporate veil.
Where the medium of a company has been used for committing fraud or improper conduct, the Courts have lifted
the veil and looked at the realities of the situation. [Gilford Motor Co. vs. Horne [1933] Ch 935]
Where the purpose of company formation was to avoid the welfare legislation, the Court will lift the corporate
veil.
Where it was found that the sole purpose for the formation of new company was to use it as a device to reduce
the amount to be paid by way of bonus to workman the Supreme Court upheld the piercing of the veil to look at
the transaction. [Workmen of Associated Rubber Industries Ltd. v. Associated Rubber Industries Ltd. A.I.R. 1986 SC
1]
Que. No. 27] Can employees of the 'Government Company' claim salary form the 'Government'? Discuss with
reference to decided case law.
Ans.: Employees of government companies are not government servants, they have no legal right to claim that the
Government should pay their salary or that the additional expenditure incurred on account of revision of their pay
scales should be met by the Government. It is the responsibility of the company to pay them the salaries. [A.K.
Bindal v. Union of India (2003) 114 Com Cases 590 (SC)]
■ ■■ ILLEGAL ASSOCIATION
Que. No. 28] What are the consequences of carrying on business by illegal association?
CS (Inter) - Dec 2000 (5 Marks)
Write a short note on: Illegal Association CS (Inter) - Dec 2004 (8 Marks), Dec 2007 (4 Marks)
What do you understand by the term 'illegal association'? What are the rights and liabilities of a member of
illegal association? CS (Executive) - Dec 2008 (8 Marks)
14
Ans.: In order to prevent the mischief arising from large trading undertakings being carried on by large fluctuating
bodies so that persons dealing with them did not know with whom they were contracting, the law has put a ceiling
on the number of persons constituting an association or partnership. An unincorporated company, association or
partnership consisting of large number of persons has been declared illegal.
Prohibition of association or partnership of persons exceeding certain number [Section 464]: No association or
partnership consisting of more than prescribed persons shall be formed for the purpose of carrying on any
business, unless it is registered as a company or is formed under any other law for the time being in force. The
number of persons which may be prescribed under this section shall not exceed 100.
Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.
Effects of an illegal association: An illegal association
(i) Cannot enter into any contract
(ii) Cannot sue any member, or outsider, not even if the company is subsequently registered
(iii) Cannot be sued by a member, or an outsider for recovery of any debts.
(iv) Cannot be wound up by an order of the Court. In fact, the Court cannot entertain a petition for winding up
as an unregistered company, for if it did, it would be indirectly according recognition to the illegal association.
[Raghubar Dayal v. Sarafa Chamber A.I.R. 1954 All. 555]
However, an illegal association is liable to be taxed. [Kumara Swamy Chattiarv. Income Tax Officer (1957) I.T.R.
457],
The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of
the association; they cannot either individually or collectively, bring an action to enforce any contract so made, or
to recover any debt due to the association. [Wilkinson v. Levison (1925) 42 T.L.R. 97],
Penalty [Section 464(3)]: Every member of an illegal association shall be punishable with fine which may extend
to ` 1 lakh and shall also be personally liable for all liabilities incurred in such business.
Babu Lai v. Laxmi Bharat Trading Co. A.I.R. 1966 Raj. 14 (D.B.): In this case, an unregistered association consisting
of 115 members was alleged to be formed at the instance of Government to help it in distribution of grain among
public. It was established from evidence that an element of acquisition of gain was present in its formation. It was,
therefore, held that it was an illegal association and came within the purview of Section 464 of the Act.
Section 464 does not apply to the case of a single joint family carrying on any business whatever may be the number
of its members. But, if two or more Joint Hindu Family firms carry on business together and the combined number
of members exceed 50, then their association will become illegal. In computing the number, minor members of
joint families are to be ignored. If by reason of minor members of such joint families on attaining majority, the
number of persons exceeds the statutory limit, it will ipso facto become an illegal association.
ipso facto = by that very fact or act.
This section is also not applicable to an association or partnership, if it is formed by professionals who are governed
by Special Acts.
Associations, like charitable, religious or scientific, which are not formed for the purpose of acquisition of gain are
excluded from the scope of this section. [Inland Revenue Commissioners v. Korean Syndicate] Foreign companies
are also excluded from the scope of this section.
Que. No. 29] Two Joint Hindu Families carry on a business as joint owners. The first family consists of 3 brothers
and their respective sons being 12 in number. The second family consists of the father, 4 major sons and 2 minor
sons. Is the association illegal as per the provisions of Companies Act, 2013?
Ans.: As per Section 464, no association or partnership consisting of more than prescribed persons shall be formed
for the purpose of carrying on any business, unless it is registered as a company or is formed under any other law
for the time being in force. The number of persons which may be prescribed under this section shall not exceed
100.
15
The effect of non-registration of an association which falls within the terms of Section 464 is that such association
is illegal and has no existence in the eyes of law. The law does not recognize it, so no relief can be granted either
to the association or to any of its members, as the contractual relationship on which it is founded is illegal. In
computing the number, minor members of joint families are to be ignored.
In given case number of adult members of the two families does not exceeds 50 and as such it is not illegal
association.
Que. No. 30] An association of 51 members (not being HUF) started banking business without being registered.
After one year, six members retired. Thereafter, three members instituted a suit for partition of assets of the
association. Discuss the fate of such a suit.
Ans.: As per Section 464, no association or partnership consisting of more than prescribed number of persons shall
be formed for the purpose of carrying on any business unless it is registered as a company or is formed under any
other law for the time being in force. The number of persons which may be prescribed under this section shall not
exceed 100.
Effects of an illegal association: An illegal association
(i) Cannot enter into any contract.
(ii) Cannot sue any member, or outsider, not even if the company is subsequently registered.
(iii) Cannot be sued by a member, or an outsider for recovery of any debts.
(iv) Cannot be wound up by an order of the Court.
The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of
the association; they cannot either individually or collectively, bring an action to enforce any contract so made, or
to recover any debt due to the association. [Wilkinson v. Levison (1925) 42 T.L.R. 97].
In this case association has 51 members and they are doing banking business which is against the provisions of
Section 464 and thus it is illegal association having no existence in the eyes of law. Therefore, a suit for partition of
assets of the association will not be allowed by the Court.
Que. No. 31] The competent Courl/Tribunal can entertain the petition for winding of an illegal association under
the company law. Comment. CS (Executive) - June 2011 (5 Marks)
Ans.: An illegal association cannot be wound up by an order of the Court/Tribunal. In fact, the Court cannot
entertain a petition for winding up as an unregistered company, for if it did, it would be indirectly according
recognition to the illegal association. [Raghubar Dayal v. Sarafa Chamber A.I.R. 1954 All. 555]
■ ■■ NATIONALITY; RESIDENCE & CITIZENSHIP OF A COMPANY
Que. No. 32] Write a short note on: Company as a Citizen
Ans.: The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or under the Constitution
of India. In State Trading Corporation of India Ltd. v. CTO AIR 1963 SC 1811, the Supreme Court held that the State
Trading Corporation though a legal person, was not a citizen and can act only through natural persons. It is to be
noted that certain fundamental rights enshrined in the Constitution for protection of "person", e.g., right to
equality (Article 14) etc. are available to citizens only and not to company.
Que. No. 33] Write a short note on: Nationality & Residence of a Company
Ans.: Though it is established through judicial decisions that a company cannot be a citizen, yet it has nationality,
domicile and residence. In Gasque v. Inland Revenue Commissioners (1940) 2 K.B. 88, it was held that a limited
company is capable of having a domicile and its domicile is the place of its registration and that domicile clings to
it throughout its existence.
A joint stock company resides where its place of incorporation is, where the meetings of the whole company or
those who represent it are held and where its governing body meets in bodily presence for the purposes of the
company and exercises the powers conferred upon it by statute and by the AOA.
MISCELLANEOUS PROVISIONS
16
Que. No. 34] UMC Ltd. has only 7 shareholders having fully paid-up shares. On 30.4.2016, all the shares of X (a
shareholder of the company) are sold to Y (another shareholder of the company) in an auction by the order of
the Court. Z, (a shareholder of the company) was in USA for a business trip from January and thus he was not
aware of the developments. The company continues to carry on its business thereafter. In December, 2016, the
company borrowed a sum of ` 5 lakhs from the Unique Bank. Later, the company was wound up and the assets
of the company were not sufficient for the payment of its liabilities. The Bank filed a suit against Y and Z for
recovery of the said loan from them. Decide the liabilities of Y and Z under the provisions of Companies Act,
2013. Would your answer be the same, if the said loan was taken in the month of March, 2016?CA (IPCC) - May
2010 (5 Marks)
Ans.: Members severally liable certain cases [Section 3A]: Where the number of members falls below the
statutory minimum (7 in the case of a public company and 2 in the case of a private company), and the company
carries on business for more than 6 months while the number is so reduced, every person who is a member of the
company during the time the company so carries on business after those 6 months and is cognizant of that fact,
shall be severally liable for the payment of company's debts contracted during that time.
Accordingly in the given problem:
(1) Y is personally liable for the payment of loan to the Unique Bank because the members of the UMC Limited
continued to carry on the business of the company with that reduced membership beyond the six months period
and Y knows this fact.
(2) Z is not responsible for any debt because he is not aware about the reduced membership.
(3) If the said loan was taken in March 2016, only the company is responsible for the payment of the loan. No
members shall be personally liable for the repayment.
Note: Section 3A is introduced by Companies (Amendment) Act, 2017 which correspond to Section 45 of the
Que. No. 35] State the exception to the principle limited liability.
Briefly discuss the provisions of the Companies Act, 2013 stating various circumstance when liability of members,
director or KMP can be made unlimited.
Ans.: Exceptions to the principle of limited liability are as follows:
(1) Members severally liable certain cases [Section 3A]: Where the number of members falls below the
statutory minimum (7 in the case of a public company and 2 in the case of a private company), and the company
carries on business for more than 6 months while the number is so reduced, every person who is a member of the
company during the time the company so carries on business after those 6 months and is cognizant of that fact,
shall be severally liable for the payment of company's debts contracted during that time.
(2) Unlimited Companies: Unlimited Company means a company not having any limit on the liability of its
members. Thus, the maximum liability of the member of such a company, in the event of its being wound up, might
stretch up to the full extent of their assets to meet the obligations of the company by contributing to its assets.
(3) Unlimited liability by the order of Tribunal - when company is incorporated by furnishing any false
information [Section 7(7)(b)]: Where a company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information in any of the documents or
declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants, direct that liability of the members of such
company shall be unlimited.
(4) Liability for fraudulent conduct of business [Section 339(1)]: Where in the course of winding up it appears
that any business of the company has been carried on with an intent to defraud creditors of the company or any
other persons or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to
the carrying on of the business in the manner aforesaid as personally liable, without limitation of liability, for all or
any of the debts/liabilities of the company.
(5) Unlimited liability when a prospectus has been issued with intent to defraud the applicants for the
securities of a company [Section 35(3)]: Where it is proved that a prospectus has been issued with intent to
17
defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every
person who was a director at the time of issue of the prospectus or has been named as a director in the prospectus
or every person who has authorized the issue of prospectus or every promoter or a person referred to as an expert
in the prospectus shall be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by any person who subscribed to the securities on the basis of such
prospectus.
(6) Damages for Fraud [Section 75]: Where a company fails to repay the deposit or part thereof or any interest
thereon within specified time or such further time as may be allowed by the Tribunal and it is proved that the
deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of
the company who was responsible for the acceptance of such deposit shall, without prejudice to other liabilities,
also be personally responsible, without any limitation of liability, for all or any of the losses or damages that may
have been incurred by the depositors.
(7) Action that can be taken in case of investigation of company in pursuance of report of inspector [Section
224(5)]: Where the report made by an inspector states that fraud has taken place in a company and due to such
fraud any director, KMP, other officer of the company or any other person or entity, has taken undue advantage
or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government
may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset,
property, or cash, and also for holding such director, KMP, officer or other person liable personally without any
limitation of liability.
Que. No. 36] What are the provisions of the Companies Act, 2013 in relation to 'authentication of documents
and contract' by the companies?
Ans.: Authentication of documents, proceedings and contracts [Section 21]: A document or proceeding requiring
authentication by a company or contracts made by or on behalf of a company, may be signed by any KMP or an
officer or employee of the company duly authorized by the Board of directors in this behalf.
Que. No. 37] What are the provisions of the Companies Act, 2013 in relation to 'execution of bills of exchange'?
Ans.: Execution of bills of exchange [Section 22]: A bill of exchange, hundi or promissory note shall be deemed to
have been made, accepted, drawn or endorsed on behalf of a company if made, accepted, drawn, or endorsed in
the name of, or on behalf of or on account of, the company by any person acting under its authority, express or
implied.
A company may, by writing under its common seal, if any, authorize any person, either generally or in respect of
any specified matters, as its attorney to execute other deeds on its behalf in any place either in or outside India.
A deed signed by such an attorney on behalf of the company and under his seal shall bind the company and have
the effect as if it were made under its common seal.
TYPES OF COMPANIES
The Companies Act, 2013 provides for the companies that can be promoted and registered under the Act. The
types of companies which may be registered under the Act are:
(a) Private Companies
(b) One Person Company (to be formed as private limited)
(c) Public Companies
(d) Producer Companies [The Companies Act, 2013 do not make any provisions for producer company. The
provisions of the Companies Act, 1956 will continue to apply until special Act is enacted for producer company. The
provisions relating to producer companies are discussed in details in Chapter No. 26]
Que. No. 38] Write a short note on: Private Company
A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons
and can accept deposits from the public. Comment.
Ans.: Private Company [Section 2(68)]: A private company means a company, which has a minimum paid-up capital
as may be prescribed, and by its articles:
18
(a) Restricts the right to transfer its shares
(b) Limits the number of its members to 200 excluding past and present employee
(c) Prohibits any invitation to the public to subscribe for any securities
A private company may issue debentures to any number of persons. The only condition being that an invitation to
the public to subscribe for debentures is prohibited.
The words 'Private Ltd.' must be added at the end of its name by a private limited company.
Deposits: A private company can only accept deposit from its members only and not from public.
No. of Members [Section 3(1)]: A private company may be formed for any lawful purpose by two or more persons,
by subscribing their names to a memorandum and complying with the requirements in respect of registration.
No. of Directors [Section 149(1)]: A private company shall have a minimum 2 directors. The only 2 members may
also be the 2 directors of the private company.
Que. No. 39] A private limited company wants to increase its subscribed capital by offering further issue of shares
to friends and relatives of directors by Board Resolution. Is it valid as per law?
Ans.: As per Section 2(68), a private company by its articles must prohibits any invitation to the public to subscribe
for any securities. However, it can raise capital privately from selected people. So, further issue of shares to friends
and relatives of directors by Board Resolution is valid as per law.
Que. No. 40] Write a short note on: Special obligations of a private company
Ans.: A private company owes certain special obligations as compared to a public company, which are as follows:
(1) Annual Return [Section 92]: While filing its annual return with the ROC, a private company must also send a
certificate stating that the company has not issued any invitation to the public to subscribe for its shares or
debentures and that the number of members of the company does not exceeds 200, the excess comprises wholly
of persons who are excluded while reckoning the number of 200.
(2) The Company continued to be a Private Company during the financial year.
Que. No. 41] What will be the consequence in case a Private Company defaults in complying with conditions
constituting Private Company in terms of Section 2(68) of the Companies Act, 2013.
Ans.: As per Proviso to Section 14(1), if a private company alters its articles in such a manner that they no longer
include the restrictions and limitations which are required to be included in the articles of a private company, such
company shall cease to be a private company. In such a-case, it shall be treated as a public company from the date
of alteration of its articles.
Que. No. 42] Write a short note on: One Person Company
One person company shall be formed only as a company limited by shares. Comment.
Ans.: One Person Company [Section 2(62)]: One Person Company means a company which has only one person
as a member.
One Person Company has to be formed as a private company. [Section 3(1) (c)]
Directors: A One Person Company shall have a minimum of one director. Therefore, a One Person Company will
be registered as a private company with one member and one director.
In case of OPC an individual being its member shall be deemed to be its first director until a director or directors
are duly appointed by the member in accordance with the provisions of that section. [Section 152(1)]
Type of OPC [Section 3(2)]: An OPC may be formed either as a company limited by shares or a company limited by
guarantee; or an unlimited liability company.
Que. No. 43] Write a short note on: Contract by One Person Company
Ans.: Contract by One Person Company [Section 193]: Where OPC enters into a contract with the sole member
who is also the director, the company shall ensure that the terms of the contract or' offer are recorded in a
19
memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held
next after entering into contract. If the contract is in writing no recording is required.
However, above said provision shall not apply to contracts entered into by the OPC in the ordinary course of its
business.
The company shall inform the ROC about every contract entered into by the company and recorded in the minutes
of the meeting of its Board of Directors within a period of 15 days of the date of approval by the Board of Directors.
Que. No. 44] Write a short note on: Benefits of One Person Company
Ans.: The concept of One Person Company is quite revolutionary. It gives the individual entrepreneurs all the
benefits of a company, which means they will get credit, bank loans, access to market, limited liability, and legal
protection available to companies.
Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a
company. But now the concept of OPC would provide tremendous opportunities for small businessmen and
traders, including those working in areas like handloom, handicrafts and pottery.
Earlier they were working as artisans and weavers on their own, so they did not have a legal entity of a company.
But now the OPC would help them do business as an enterprise and give them an opportunity to start their own
ventures with a formal business structure. Further, the amount of compliance by a one person company is much
lesser in terms of filing returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the
one person company will have direct access to the market and the wholesale retailers. The new concept would
also boost the confidence of small entrepreneurs.
Que. No. 45] Write a short note on: Small Company
Ans.: Small Company [Section 2(85)]: Small company means a private company,
(i) Paid-up share capital of which does not exceed X 50 lakh or such higher amount as may be prescribed which
shall not be more than X 10 Crore or
(ii) Turnover of which as per its last profit and loss account does not exceed X 2 Crore or such higher amount as
may be prescribed which shall not be more than X 100 Crore.
Nothing in this definition shall apply to: (This means following companies cannot be small companies)
(a) Holding or a subsidiary company
(b) Company registered u/s 8 or
(c) Company or body corporate governed by any Special Act.
Turnover [Section 2(91)]: Tumover means the gross amount of revenue recognized in the profit and loss account
from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a
financial year.
Que. No. 46] San Industries Private Limited Company has its paid-up share capital of X 40 lakhs and turnover of
X 10 Crore as per the last audited Balance Sheet. Examining the provisions of the Companies Act, 2013, decide
whether the company will be treated as small company.
What would be your answer in case the company is governed by any special Act?
Ans.: Small Company [Section 2(85)]: Small company means a private company,
(i) Paid-up share capital of which does not exceed X 50 lakh or such higher amount as may be prescribed which
shall not be more than X 10 Crore or
(ii) Turnover of which as per its last profit and loss account does not exceed X 2 Crore or such higher amount as
may be prescribed which shall not be more than X 100 Crore
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As per facts given in case San Industries Private Limited have paid-up capital X 40 lakh and turnover ofX 10 Crore.
As turnover of the San Industries Private Limited is above 2 Crore it is not small company.
If San Industries Private Limited is governed by Special Act, then it cannot be treated as small company.
Que. No. 47] Write a short note on: Public Company
Ans.: Public Company [Section 2(71)]: A public company means a company which:
(a) is not a private company and
(b) has a minimum paid-up capital as may be prescribed.
However, a company which is a subsidiary of a company, not being a private company, shall be deemed to be
public company even where such subsidiary company continues to be a private company in its articles.
(This means, if private company is subsidiary of public company then it will be treated as public company)
A public company should have 7 members.
Que. No. 48] Masons Pvt. Ltd. is a private limited company as per the article of association of the company.
However, a public company acquired shares in Masons Pvt. Ltd. thereby making the Masons Pvt. Ltd., a
subsidiary of that public company. State the impact of such acquisition of shares by the public company on
Masons Pvt. Ltd.
Ans.: As per Section 2(71), a company which is a subsidiary of a company, not being a private company, shall be
deemed to be public company even where such subsidiary company continues to be a private company in its
articles. This means, if private company is subsidiary of public company then it will be treated as public company.
Thus, if a public company acquires shares in Masons Pvt. Ltd making it subsidiary of that public company, the
Masons Pvt. Ltd will be treated as public company under the Companies Act, 2013 even though Masons Pvt. Ltd
continues to be a private company in its articles.
Que. No. 49] Distinction between: Public Company & Private Company
Ans.: Following are the main points of distinction between public and private company:
Points Public Company Private Company
Meaning The minimum number of persons required to The minimum requirement is only of 2 persons
form a public company is 7 and no restriction and the maximum limit is of 200 persons.
on maximum number of members.
No. of It must have at leas` 3 directors. It must have at leas` 2 directors.

directors
Subscription A public company can invite the general public A private company is prohibited by its Articles
for shares & to subscribe the shares or debentures of the to subscribe the shares or debentures of the
debenture company. company.
Transfer of Shares of public companies are freely In a private company, transferability of shares
shares transferable. is restricted by Articles.
Special There are no special privileges enjoyed by a A private company enjoys some special
privileges public company. privileges under the Companies Act, 2013.
Managerial In case of public company total managerial In case of private company, no such restriction
remuneration remuneration cannot exceed 11 % of the net on remuneration applies.
profits.
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Que. No. 50] Write a short note on: Companies Limited by Shares
The liability of the members of limited company can never be unlimited. Comment.
CS (Inter) - Dec 1999 (5 Marks), June 2007 (5 Marks)
Ans.: Company Limited by Shares [Section 2(22)]: Company limited by shares means a company having the liability
of its members limited by the MOA to the amount unpaid on the shares respectively held by them.
Accordingly, no member of a company limited by shares can be called upon to pay more than the nominal amount
of the shares held by him. If his shares are fully paid-up, he has nothing more to pay. But in the case of partly-paid
shares, the unpaid portion is payable at any time during the existence of the company on a call being made.
Que. No. 51] Write a short note on: Companies Limited by Guarantee
Ans.: Company Limited by guarantee [Section 2(21)]: A company limited by guarantee is a registered company
having liability of its members limited by its MOA to such amount as the member may respectively undertake to
contribute to the assets of the company in the event of its winding up.
Clubs, trade associations and societies for promoting different objects are examples of such companies.
Some important points relating to company limited by guarantee are given below:
(1) Liability: Members of company limited by guarantee are required to pay their guaranteed amounts only
when the company goes into liquidation and not when it is a going concern.
(2) Share Capital: A guarantee company may or may not have a share capital. As regards the funds, a guarantee
company without share capital obtains working capital from other sources, e.g. fees or grants. But a guarantee
company having a share capital raises its initial capital from its members, while the normal working funds would
be provided from other sources, such as fees, charges, subscriptions, etc.
(3) Undertaking: The MOA of every guarantee company must state that every member of the company
undertakes to contribute specified amount to assets of the company in the event of its being wound up.
The MOA of a company limited by guarantee must state the amount of guarantee. It may be of different
denominations.
In case of a guarantee company having share capital, the shareholders have two-fold liability:
♦ To pay the amount which remains unpaid on their shares and
♦ To pay the amount under the guarantee when the company goes into liquidation.
(4) Voting Power: The voting power of a guarantee company having share capital is determined by the
shareholding and not by the guarantee.
(5) Name: A guarantee company must include the word 'limited' or the words 'private limited' as part of its
name.
(6) Article: A guarantee company must register its articles, and it shall adopt the provisions of the Tables G & H
of Schedule I. It must also state the number of members with which it proposes to be registered.
(7) Participation in the divisible profits [Section 4(7)]: Any provision in the MOA of the company limited by
guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits
of the company otherwise than as a member shall be void.
Que. No. 52] An unlimited company is a company not having any limit on the liability of its members.
It is always mandatory for an unlimited company to have share capital.
Ans.: Unlimited Company [Section 2(92)]: Unlimited company means a company not having any limit on the
liability of its members. Thus, the maximum liability of the member of such a company, in the event of its being
wound up, might stretch up to the full extent of their assets to meet the obligations of the company by contributing
to its assets.
The members of an unlimited company are not liable directly to the creditors of the company. The liability of the
members is only towards the company and in the event of its being Wound up only the liquidator can ask the
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members to contribute to the assets of the company which will be used in the discharge of the debts of the
company.
An unlimited company may or may not have share capital.
Conversion into Limited Company [Section 18]: A company registered as an unlimited company may subsequently
re-register itself as a limited company, by altering its memorandum and articles of the company in accordance with
the provisions of Chapter II of the Companies Act, 2013. However, any debts, liabilities, obligations or contracts
incurred or entered before conversion will not be affected by such changed registration.
Que. No. 53] Mahesh is a creditor of an unlimited company. The company was wound-up. Mahesh, therefore,
wants to sue the members of the company to recover the dues. Advise Mahesh regarding the remedy available
to him. CS (Executive) - June 2015 (4 Marks)
Ans.: As per Section 2(92), unlimited company means a company not having any limit on the liability of its
members. Thus, the maximum liability of the member of such a company, in the event of its being wound up, might
stretch up to the full extent of their assets to meet the obligations of the company by contributing to its assets.
The members of an unlimited company are not liable directly to the creditors of the company. The liability of the
members is only towards the company and in the event of its being wound up only the liquidator can ask the
members to contribute to the assets of the company which will be used in the discharge of the debts of the
company.
Thus, Mahesh cannot directly sue the members of the company for recovery of his dues. He can file a claim to the
liquidator of the company.
Que. No. 54] The company may be formed without using the words 'Limited' or 'Private Limited' at the end of
its name. CS (Inter) - June 1995 (5 Marks)
Mr. V, along with 6 other persons desires to float a company for charitable purposes, as permissible under
Section 8 of the Companies Act, 2013. He seeks your advice about the procedure to be followed to give effect to
the above proposal. Advise him.
Ans.: Formation of companies with charitable objects [Section 8]: A company may be registered as non-profit
making company i.e. company having charitable object by fulfilling the following conditions:
(a) The company has to take licence from the Central Government.
(b) The object of the company should be to promote commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment.
(c) The company must apply its profits or other income in promoting its objects.
(d) The company must prohibit the payment of any dividend to its members.
If the Central Government allows by licence, the word 'Limited' or 'Private Limited' is not required to be written at
the name of the company.
Other important points relating to Section 8 companies are as follows:
(1) No Stamp Duty: Such companies can registered without paying any stamp duty on its MOA & AOA.
(2) Privileges & Obligations: On registration, the Section 8 companies are subject to all its obligations, except,
those in respect of which exemption by a notification is granted by the Central Government.
(3) Conditions for granting licence: A licence may be granted by the Central Government on subject conditions
and regulations as it thinks fit. The Central Government may direct that such conditions and regulations shall be
inserted in the MOA or AOA.
(4) No alteration in MOA & AOA: Section 8 companies cannot alter the provisions of its MOA or AOA except
with the previous approval of the Central Government.
(5) Partnership firm as a member: A firm may be a member of the Section 8 company.
(6) Conversion: A company registered u/s 8 can convert itself into other type of company after complying with
prescribe conditions.
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(7) Revocation of Licence: The Central Government may by order at any time revoke the licence of Section 8
company and on revocation of licence, the word 'Limited' or 'Private Limited' shall have to be used as part of its
name. The company will also lose the exemptions that might have been granted by the Central Government.
However, the Central Government can revoke the licence only after providing an opportunity to be heard to the
company. A copy of every order by which licence has been revoked has to be filed with the ROC.
(8) Exemptions: The Central Government has power to grant exemption to Section 8 companies from one or
more of the provisions of the Act. [Section 462(1)]
Que. No. 55] Write a short note on: Government Companies
Define government company and state the provisions of the Companies Act, 2013 relating to government
companies. State four exemption granted to such companies. CS (Inter) - Dec 1998 (10 Marks)
Ans.: Government Company [Section 2(45)]: Government Company means any company in which not less than
51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments,
or partly by the Central Government and partly by one or more State Governments, and includes a company which
is a subsidiary company of such a Government company.
Judicial Views:
♦ Notwithstanding all the pervasive control of the Government, the Government company is neither a
government department nor a government establishment. [Hindustan Steel Works Construction Co. Ltd. v. State of
Kerala (1998) 2 CLJ 383]
♦ Since employees of Government companies are not Government servants, they have no legal right to claim
that the Government should pay their salary or that the additional expenditure incurred on account of revision of
their pay scales should be met by the Government. It is the responsibility of the company to pay them the salaries.
[A. K. Bindal v. Union of India (2003) 114 Com Cases 590 (SC)]
Que. No. 56] Q Ltd. is a company registered under the Companies Act, 2013 and 40% of its paid up capital is held
by Central government and 11% is held by public institution like Life Insurance Corporation (LIC) and Unit Trust
of India (UTI). Can Q Ltd. be treated as government under the provisions of Companies Act, 2013?
Ans.: Section 2(45) defines a Government company as any company in which not less than 51% of the paid-up
share capital is held by the Central Government, or by any State Government or Governments or partly by the
Central Government and partly by one or more State Governments. Thus, in determining whether a company is
government company or not the holding by Central and State Government has to be considered and the shares
held by public institution has to be ignored. Accordingly, Q Ltd. cannot be treated as government company.
Que. No. 57] Can 'Government Company' is treated as 'State or Central Government' for claiming exemption
under the various statutes or Constitution of India?
Ans.: In Andhra Pradesh Road Transport Corporation v. ITO AIR 1964 SC 1486, the Andhra Pradesh State Road
Transport Corporation claimed exemption from taxation by invoking Article 289 of the Constitution of India
according to which the property and income of the State are exempted from the Union taxation. The Supreme
Court, while rejecting the Corporation's claim, held that though it was wholly controlled by the State Government,
it had a separate entity and its income was not the income of the State Government. The Court observed that the
companies which are incorporated under the Companies Act have a corporate personality of their own, distinct
from that of the Government of India. The land and buildings are vested in and owned by the companies, the
Government of India only owns the share capital.
In Hindustan Steel Works Construction Ltd. v. State of Kerala 1998,2 Comp LJ 383, it was held that inspite of all the
control of the Government, the company is neither a Government department nor a Government establishment,
it is just an agency of the Government, and hence not exempt from the purview of Kerala Construction Workers
Welfare Funds Act. The employees of a Government Company are not the employees of the Central or State
Government.
24
Que. No. 58] ABC Ltd. is a company incorporated under the Companies Act, 2013. The paid-up share capital of
the company is held as under :
- Government of India 20%
- Government of Andhra Pradesh 20%
- Government of Tamil Nadu 10%
- Government of Maharashtra 10%
Explaining the provisions of the Companies Act, 2013, state whether the said company be called a 'Government
company' and also state whether the employees of a Government company can claim their salaries from the
Government of India. CS (Executive) - Dec 2015 (4 Marks)
Ans.: As per Section 2(45), government company means any company in which not less than 51% of the paid- up
share capital is held by the Central Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, and includes a company which is a subsidiary
company of such a Government company.
As per the facts given in case, more than 51% capital is held in ABC Ltd. by the Central Government and State
Government; hence it is a government company.
Employees of government companies are not government servants, they have no legal right to claim that the
Government should pay their salary or that the additional expenditure incurred on account of revision of their pay
scales should be met by the Government. It is the responsibility of the company to pay them the salaries. [A.K.
Bindal v. Union of India (2003) 114 Com Cases 590 (SC)]
Que. No. 59] Write a short note on: Foreign Companies
CS (Inter) - June 1994 (4 Marks), Dec 1997 (4 Marks)
Define 'foreign company'. State the provisions of the Companies Act, 2013 applicable to foreign companies with
regard to establishment of place of business. CS (Inter) - June 2001 (8 Marks)
Ans.: Foreign Company [Section 2(42)]: 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 or through electronic mode
and
(b) conducts any business activity in India in any other manner.
Sections 379 to 393 of the Act deal with foreign companies.
(1) Application of Act to foreign companies [Section 379]: If 50% or more paid-up share capital of the foreign
company is held by Indian citizens or bodies corporate incorporated in India, such company shall comply with
prescribed provisions of the Act, as notified by the Central Government.
(2) Documents to be delivered to ROC by foreign companies [Section 380]: Every foreign company which
establishes a place of business in India must within 30 days of the establishment of such place of business, file with
the ROC for registration:
(a) A certified copy of MOA and AOA of the company. (If it is not in the English language, a certified translation in
the English language has to be filed)
(ib) The full address of the registered or principal office of the company.
(c) A list of the directors and secretary.
(d) The name and address of persons resident in India who are authorized to accept any notices or other
documents required to be served on the company.
(e) The full address of principal place of business in India.
(f) Particulars of opening and closing of a place of business in India on earlier occasions.
(g) Declaration that none of the directors of the company or the authorized representative in India has ever
been convicted or debarred from formation of companies and management in India or abroad.
(h) Any other prescribed information.
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(3) Accounts of foreign company [Section 381]: Foreign Company has to maintain books of Account and file a
copy of balance sheet and profit and loss account in prescribed form with ROC every calendar year. These accounts
should be accompanied by list of place of business established by the foreign company in India.
(4) Display of name of foreign company [Section 382]: Every foreign company has to ensure that the name of
the company, the country of incorporation, the fact of limited liability of members is exhibited in the specified
places or documents.
Que. No. 60] A representative of a foreign company in India was only receiving orders from customers. State
whether the place where the orders so received be termed as a place of business.
CS (Inter) - June 2005 (4 Marks)
Ans.: Foreign company means a company which is incorporated outside India under the law of that other country
and has a place of business in India.
If a representative of a foreign company in India merely receives the orders from customers it cannot be said that
it has 'place of business' in India. Hence, Sections 379 to 393 of the Companies Act, 2013 are not applicable and
need not be complied.
Que. No. 61] To consider a body corporate as a foreign company, a place of business in India is to be established.
State the activities that do not constitute carrying of business in India.
Ans.: Foreign Company means a company which is incorporated outside India under the law of that other country
and has a place of business in India.
The following activities are held as not constituting "carrying on of business":
♦ Carrying small transactions
♦ Conducting meetings of shareholders or even directors
♦ Operating bank accounts
♦ Transferring of shares or other securities
♦ Operating through independent contractors
♦ Procuring orders
.♦ Creating or financing of debts, charges, etc. on property
♦ Securing or collecting debts or enforcing claims to property of any kind.
Que. No. 62] Referring to the provisions of the Companies Act, 2013, state as to when shall a company
incorporated outside India be considered as a 'foreign company' within the meaning of the Companies Act, 2013.
Also examining the provisions of the Act, state whether in the following cases, the company shall be considered
as a 'foreign company':
(i) A company incorporated outside India has a representative in India, who on behalf of the company merely
receives orders from the customers.
(ii) Company incorporated outside India holds its Board meetings and general meetings in India.
Ans.: As per Section 2(42), 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 or through electronic mode
and
(b) conducts any business activity in India in any other manner.
In simple words, foreign company means a company which is incorporated outside India under the law of that
other country and has a place of business in India. A foreign company has to comply the provisions of Sections 379
to 393 of the Companies Act, 2013.
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If a representative of a foreign company in India merely receives the orders from customers it cannot be said that
it has 'place of business' in India. Hence, Sections 379 to 393 of the Companies Act, 2013 relating to foreign
companies are not applicable and need not be complied.
Similarly, conducting board meeting and general meeting in India by a foreign company has held to be not "carrying
on of business".
Que. No. 63] A group of Indian citizens hold 60% of the paid up share capital of a foreign company. This group
of shareholders claims that since the company was incorporated outside the country, the company is not bound
to comply with the provisions of the Companies Act, 2013 in relation to its business in India. Examine the validity
of such a claim by the group. CS (Executive) - Dec 2017 (4 Marks)
Ans.: Application of Act to Foreign Companies [Section 379]: Where not less than 50% of the paid-up share capital,
whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more
citizens of India or by one or more companies or bodies corporate incorporated in India, or by one
or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or
in the aggregate, such company shall comply with the provisions of Chapter XXII (Section 379 to Section 393) and
such other provisions of the Companies Act, 2013 as may be prescribed with regard to the business carried on by
it in India as if it were a company incorporated in India.
As per facts given in case 60% of the paid-up capital of the foreign company is held by a group of Indian citizen and
hence the foreign company must comply with the provisions of the Companies Act as stated above.
Que. No. 64] Write a short note on: Holding and Subsidiary Companies
It is necessary for a company to hold more than half of the nominal capital of another company to be called its
holding company. CS (Inter) - June 2001 (5 Marks)
Distinguish between: Holding and Subsidiary Companies. CS (Executive) - Dec 2010 (4 Marks)
Ans.: Holding and Subsidiary companies are relative terms. A company is a holding company of another if the other
is its subsidiary.
Holding Company [Section 2(46)]: Holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.
Subsidiary Company [Section 2(87)]: Subsidiary company in relation to any other company (that is to say the
holding company), means a company in which the holding company -
(a) Controls the composition of the Board of Directors or
(b) Exercises or controls more than 50% of the total voting power either at its own or together with one or more
of its subsidiary companies.
However, prescribed class or classes of holding companies shall not have layers of subsidiaries beyond the
prescribed limit.
Que. No. 65] The paid-up share capital of AVS (P) Ltd. is ` 1 Crore, consisting of 8 lakhs equity shares of ` 10 each,
fully paid-up and 2 lakhs cumulative preference shares of ` 10 each, fully paid-up. XYZ (P) Ltd. and BCL (P) Ltd.
are holding 3 lakhs equity shares and 1,50,000 equity shares respectively in AVS (P) Ltd.
XYZ (P) Ltd. and BCL (P.) Ltd. are the subsidiaries of TSR (P) Ltd. With reference to the provisions of the Companies
Act, 2013, examines whether AVS (P) Ltd. is a subsidiary of TSR (P) Ltd.? Would your answer be different if TSR
(P) Ltd. has 8 out of total 10 directors on the Board of Directors of AVS (P) Ltd.?
Ans.: Subsidiary company or subsidiary, in relation to any other company (that is to say the holding company),
means a company in which the holding company —
(a) Controls the composition of the Board of Directors or
(b) Exercises or controls more than 50% of the total voting power either at its own or together with one or more
of its subsidiary companies.
The first mentioned company is a subsidiary of any company which is the other's subsidiary.
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AVS (P) Ltd. is not subsidiary of TSR (P) Ltd. within meaning of Section 2(87), since that definition of 'subsidiary
company' requires direct relationship between subsidiary and holding company.
However, if TSR Ltd. is in a position to control the composition of Board of Directors of AVS (P) Ltd. through its
subsidiary, it will be subsidiary company as per Section 2(87) of the Companies Act, 2013.
Que. No. 66] You are the Company Secretary of Paragon Ltd. The chairman of the company seeks your advice on
the following:
Company XYZ Ltd. is a subsidiary of your company in which the holding of your company is 8,50,000 equity shares
of ` 10 each fully paid up which constitute 85% of its paid up capital. XYZ Ltd. desires to issue further 8,00,000
equity shares of ` 10 each on which initially a sum of ` 3 will be paid to ABC Ltd. to meet its long term capital
requirement. On such issue of further capital XYZ Ltd., will XYZ Ltd. continue to be the subsidiary of your
company? CS (Inter) - Dec 2001 (8 Marks)
Ans.: As per Section 2(87), a company shall be deemed to be subsidiary of another company, where the other
company holds more than 51% nominal value of its equity share capital.
Nominal capital of XYZ Ltd. = 8,50,000 × 100 /85 = 10,00,000 shares
The total nominal capital of XYZ Ltd. after further issue will be = 10,00,000 + 8,00,000 =. 18,00,000.
Percentage of holding in XYZ Ltd. after further issue = 8,50,000 /18,00,000 x 100 = 47.22%
As percentage of holding in XYZ Ltd. after further issue is less than 50%, XYZ Ltd. will be no more subsidiary
company.
Que. No. 67] Can subsidiary company hold shares of holding company?
"A body corporate cannot be a member of a company which is its holding company and any allotment or transfer
of shares in a company to its subsidiary shall be void." Explain the statement and comment on the exception to
the said general clause. CS (Inter) - Dec 2006 (4 Marks)
Vayu Ltd. holds more than 50% of nominal value of the equity capital of Stream Ltd. In these circumstances,
Stream Ltd. wants to become a member of Vayu Ltd. Can Stream Ltd. do so? Discuss the rights of the said
subsidiary in such a case. CS (Executive) - Dec 2009 (4 Marks)
Ans.: Subsidiary company not to hold shares in its holding company [Section 19]: Subsidiary company shall not
either by itself or through its nominees hold shares in its holding company and no holding company shall allot or
transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to
its subsidiary company shall be void.
Therefore, no company shall hold any interest in its holding company.
Exceptions: In following circumstances, a subsidiary can hold the shares of its holding company:
(a) Where the subsidiary company holds such shares as the legal representative of a deceased member of the
holding company.
(b) Where the subsidiary company holds such shares as a trustee.
(c) Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding
company
However, the subsidiary company referred above shall have voting right only in respect of the shares held by it as
a legal representative or as a trustee.
Que. No. 68] Reliable Ltd. holds 75% of the paid-up share capital in Trust Ltd. Board of Directors of Trust Ltd.
decides and resolves to hold 10% of the paid-up share capital in Reliable Ltd. The Board's proposal was also
approved by Trust Ltd. in its general meeting. However, certain members of Trust Ltd. objected to the decision
on the ground that both the Board's proposal and the resolution of the general meeting are in violation of the
provisions of the Companies Act, 2013. Examine.
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Ans.: Subsidiary company shall not either by itself or through its nominees hold shares in its holding company and
no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or
transfer of shares of a company to its subsidiary company shall be void. Therefore, no company shall hold any
interest in its holding company.
holding company.
company
As per the facts given in case, Reliable Ltd. holds 75% shares in Trust Ltd. Hence, Trust Ltd. is subsidiary of Reliable
Ltd. and is prohibited to hold any share? of its holding company as per Section 19 of the Companies Act, 2013.
Considering the above provisions, resolution passed by the Trust Ltd. to hold 10% shares of their holding company
i.e. Reliable Ltd. is not valid.
Que. No. 69] ABC Ltd. holds 75% equity share capital of DEF Ltd. and controls composition of Board of Directors
of DEF Ltd. ABC Ltd. goes for public issue for raising further share capital. Board of Directors of ABC Ltd. allot
10% of the issue to DEF Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity of
Board's decision to allot 10% of issue to DEF Ltd. DEF Ltd. holds certain number of shares as a legal representative
of a deceased member of ABC Ltd. and has a right to vote at a general meeting of ABC Ltd. in respect of such
shareholding, will this right be affected by issue of 10% to DEF Ltd. by ABC Ltd.?CS (Executive) - Dec 2017 (4
Marks)
Ans.: As per Section 19, subsidiary company shall not either by itself or through its nominees hold shares in its
holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and
any such allotment or transfer of shares of a company to its subsidiary company shall be void.
Therefore, no company shall hold any interest in its holding company.
holding company.
company
Keeping in view of above provisions, ABC Ltd. (Holding Company) cannot allot shares to DEF Ltd. (Subsidiary
Company) in its public issue. However, DEF Ltd. can continue to hold its shares already held as legal representative
of a deceased member of the holding company. It can also exercise its voting rights in relation to such shares.
Que. No. 70] Write a short note on: Associate Company
Ans.: Associate Company [Section 2(6)]: Associate company in relation to another company, means a company in
which that other company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
To add more governance and transparency in the working of the company, the concept of associate company has
been introduced. It will provide a more rational and objective framework of associate relationship between the
companies.
Further, as per Section 2(76), Related party includes 'Associate Company'. Hence, contract with Associate Company
will require disclosure/approval/entry in statutory register as is applicable to contract with a related party.
29
"Significant Influence" means control of at least 20% of total share capital, or of business decisions under an
agreement.
"Joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement.
Que. No. 71] Distinguish between: Subsidiary company & Associate company
Ans.: Following are the main points of distinction between subsidiary & associate company:
Points Subsidiary Company Associate Company
Meaning Subsidiary company means a company in Associate company in relation to another

which the holding company controls the company, means a company in which that
composition of the Board of Directors or other company has a significant influence, but
exercises or controls more than 50% of the which is not a subsidiary company of the
total voting power either at its own or together company having such influence and includes a
with one or more of its subsidiary companies. joint venture company.
Holding Paid Holding company holds more than 50% voting In associate companies, one company field's
up capital power in subsidiary company. more than 20% but less than 50% of share
capital.
Control Holding company has major control in In associate companies, one company has only
subsidiary company. significant influence over other company but
not major control.
Section The term 'subsidiary company' is defined in The term 'associate company' is defined in
Section 2(6). Section 2(87).
Que. No. 72] Write a short note on: An Investment Company

Ans.: An investment company is a company, the principal business of which consists in acquiring, holding and
dealing in shares and securities. The word 'investment', no doubt, suggests only the acquisition and holding of
shares and securities and thereby earning income by way of interest or dividend etc. But investment companies in
actual practice earn their income not only through the acquisition and holding but also by dealing in shares and
securities i.e. to buy with a view to sell later on at higher prices and to sell with a view to buy later on at lower
prices.
If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment
Que. No. 73] Write a short note on: Dormant Companies
A group of persons wants to form a company for a future project and acquire the status of a 'dormant company'.
The group seeks your advice about the procedure and the conditions to be complied with. State the privileges
and exemptions available to such a company under the provisions of the Companies Act, 2013.
Ans.: The Companies Act, 2013 has recognized a new set of companies called as dormant companies. Dormant
Company [Section 455]: Dormant Company means any of the following type of company:
(a) A company which has been formed and registered for a future project or to hold an asset or intellectual
property and has no significant accounting transaction.
(b) Inactive company.
Such company may make an application to the Registrar in Form MSC-1 under the Companies (Miscell aneous)
Rules, 2014 for obtaining the status of a dormant company.
Inactive Company means a company:
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- Which has not been carrying on any business or operation, or has not made any significant accounting
transaction during the las` 2 financial years or
- Has not filed financial statements and annual returns during the las` 2 financial years Significant Accounting
Transaction: It means any transaction other than-
(a) Payment of fees to the ROC.
(b) Payments made by it to fulfil the requirements of Companies Act or any other law.
(c) Allotment of shares.
(d) Payments for maintenance of its office and records.
Other important provisions applicable to dormant company are as follows:
(1) The Registrar on consideration of the application shall allow the status of a dormant company to the applicant
and issue a certificate Form MSC-2. [Section 455(2)]
(2) The Registrar shall maintain a register of dormant companies on its web-site ‘www.mca.gov.in'. [Section
455(3)]
(3) If a company has not filed financial statements or annual returns for 2 financial years consecutively, the
Registrar shall issue a notice to that company and enter the name of the company in the register of dormant
companies. [Section 455(4)]
(4) A dormant company shall have a minimum number of 3 directors in case of a public company, 2 directors in
case of a private company and 1 director in case of OPC. The provisions of the Act in relation to the rotation of
auditors shall not apply On dormant companies. [Section 455(5)] & [Rule 6]
(5) A dormant company shall file a "Return of Dormant Company" position duly audited by a chartered
accountant in practice in Form MSC-3 within a period of 30 days from the end of each financial year. [Section
455(5)] & [Rule 7]
(6) A dormant company may become an active company by making application in Form MSC-4. [Section 455(5)]
& [Rule 8]
(7) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which
has failed to comply with the requirements of this section. [Section 455(6)]
Privileges of a Dormant Company
The privileges and exemptions enjoyed by a dormant company or its advantages over other companies are as
follows:
Sections Nature of Exemption/Privileges
Section 2(40) The financial statement, with respect to a dormant company, may not include the cash flow
statement
Section 173(5) It is required to hold at least one meeting of the Board of Directors in each half of a calendar
year and the gap between the two meetings should not be less than ninety days.
Que. No. 74] Distinguish between: Small Company and Inactive Company
Ans.: Small Company [Section 2(85)]: Small company means a private company, —
(a) Paid-up share capital of which does not exceed ` 50 lakh or such higher amount as may be prescribed which
shall not be more than ` 10 Crore or
(b) Turnover of which as per its last profit and loss account does not exceed 12 Crore or such higher amount as
may be prescribed which shall not be more than ` 100 Crore.
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Inactive Company means a company:
- Which has not been carrying on any business or operation, or has not made any significant accounting
transaction during the las` 2 financial years or
- Has not filed financial statements and annual returns during the las` 2 financial years
Que. No. 75] Write a short note on: Public Financial Institutions CS (Executive) - June 2016 (4 Marks)
Ans.: Public Financial Institution [Section 2(72)]: Public financial institution means:
(1) Life Insurance Corporation of India
(2) Infrastructure Development Finance Company Limited
(3) Specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(4) Institutions notified by the Central Government
(5) Other institutions notified by the Central Government in consultation with the RBI Following institutions can
be notified as public financial institution-
(A) Institutions which has been established or constituted by or under any Central or State Act or
(B) Institutions in which not less than 51% of the paid-up share capital is held or controlled by the Central or
State Government or partly by the Central and partly by one or more State Governments.
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CHAPTER
2
CONCEPT OF CAPITAL & FINANCING OF COMPANIES
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Share Capital & Debentures) Rules,
2014.
■ ■■ EQUITY & PREFERENCE SHARE CAPITAL
Que. No. 1] Discuss the meaning of different types of capital.
'Issued share capital' and 'subscribed share capital' of a company are one and same. Comment.
Distinguish between: Nominal Capital & Subscribed Capital CS (Executive) - Dec 2009 (4 Marks)
Ans.: Share capital of a company is classified as under:
(1) Nominal, Authorized or Registered Capital [Section 2(8)]: This is the sum stated in the MOA of a company
limited by shares as the capital of the company with which it is registered. It is the maximum amount which the
company is authorized to raise by issuing shares. This is the capital, on which the company had paid the prescribed
fee at the time of registration; hence it is also called Registered Capital. As and when this is increased, fees for
such increase will have to be paid to the ROC.
(2) Issued Capital [Section 2(50)]: It is that part of the authorized which the company issues for the time being
for public subscription and allotment. This is computed at the face or nominal value.
(3) Subscribed Capital [Section 2(86)]: It is that portion of the issued capital at face value which has been
subscribed for or taken up by the subscribers of shares in the company.
(4) Called-up Capital [Section 2(15)]: It is that portion of the subscribed capital which has been called up on the
shares by the company.
(5) Uncalled Capital: It is the total amount not yet called up by the company on the shares subscribed, which
the shareholders are liable to pay as and when called.
(6) Paid-up-Capital [Section 2(64)]: It is the part of the total called up amount which is actually paid by the
shareholder.
(7) Unpaid Capital: It is the total of the called-up capital remaining unpaid.
Que. No. 2] Distinguish Between: Reserve Capital & Capital Reserve
CS (Executive) - Dec 2009 (4 Marks), June 2012 (4 Marks)
CS (Executive) - Dec 2012 (4 Marks), Dec 2014 (5 Marks)
Ans.: Following are the main points of distinction between reserve capital & capital reserve:
Points Reserve Capital Capital Reserve
Meaning Reserve capital is that part of the uncalled Capital reserves are created out of capital
capital of a company which the limited profit. Capital reserve may be statutory capital
company has decided by special resolution not reserve or non statutory capital reserve.
to call except in the event and for the purpose
of the company being wound up.
Points Reserve Capital Capital Reserve
Mandatory Creation of reserve capital is not mandatory. Creation of capital reserve is mandatory in
certain cases.
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Balance sheet There is no need to disclose reserve capital in Capital reserves are disclosed in balance sheet
disclosure balance sheet. under the head "Reserve & Surplus".
Writing off Reserve capital cannot be used to write-off Capital reserve can be used to write-off capital
capital losses capital losses. losses.
Que. No. 3] Write a short note on: Nature of a share

Ans.: Share [Section 2(84)]: A share means a share in the share capital of a company, and includes stock.
Nature of shares & debentures [Section 44]: A share or debentures or other interest of any member in a company
is a movable property transferable in the manner provided by the articles of the company.
Numbering of shares [Section 45]: Each share in a company having a share capital shall be distinguished by
distinctive number.
Que. No. 4] Write a short note on: Kinds of Shares
Ans.: Kinds of share capital [Section 43(1)]: The share capital of a company limited by shares shall be of two kinds,
namely:
(a) Equity share capital
- With voting rights
- With differentia] rights as to dividend, voting or otherwise
(b) Preference share capital
Que. No. 5] Explain the term 'equity shares' & 'preference shares' as per Companies Act, 2013.
Ans.: Shares defined [Section 43(2)]: Equity share capital with reference to any company limited by shares means
all share capital which is not preference share capital.
Preference share capital, with reference to any company limited by shares, means that part of the issued share
capital of the company which carries or would carry a preferential right with respect to -
(a) Payment of dividend, either as a fixed amount or at a fixed rate and
(b) Repayment in the case of a winding up or repayment of capital specified in the memorandum or articles of
the company.
Que. No. 6] Write a short note on: Cumulative and non-cumulative preference shares
Preference shares are cumulative unless expressly stated to be non-cumulative. Comment.
Ans.: With regard to the payment of dividends, preference shares may be cumulative or non-cumulative. A
cumulative preference share confers a right on its holder to claim fixed dividend of the past and the current year
artd out of future profits. The dividend keeps on accumulating until it is fully paid.
The non-cumulative preference share gives right to its holder to a fixed amount or a fixed percentage of dividends
out of the profits of each year. If no profits are available in any year, the shareholders get nothing, nor can they
claim, unpaid dividend in any subsequent year. Preference shares are cumulative unless expressly stated to be non-
cumulative. Dividends on preference shares, like equity shares, can be paid only out of profits.
Que. No. 7] Distinguish between: Preference Share Capital & Equity Share Capital
CS (Inter) - June 2002 (6 Marks), Dec 2004 (4 Marks) CS (Executive) - Dec 2015 (4 Marks)
Ans.: Following are the main points of distinction between preference share capital & equity share capital:
Points Preference Share Capital Equity Share Capital
Dividend Preference shares are entitled to a fixed rate of The rate of dividend on equity shares depends
dividend. upon the amount of profit available and the
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funds requirements of the company for future
expansion etc. •
Preference in Dividend on the preference shares is paid in The dividend on equity shares is paid only after
dividend preference to the equity shares. preference dividend has been paid.
Preference in In case of winding-up, preference share holder In case of winding-up, equity share holders get
winding up get preference over equity share holders with payment of capital after the payment of capital
regard to the payment of capital. to preference shareholders.
Cumulative Dividend on preference share may be The dividend on equity is not cumulative:
ness cumulative.
Voting rights The voting rights of preference shareholders An equity shareholder can vote on all matters
are restricted. A preference shareholder can affecting the company.
vote only when his special rights as a
preference shareholder are being varied, or on
any resolution for the winding up of the
company or for the repayment or reduction of
its equity or preference share capital or if their
dividend has not been paid for a period of 2
years or more. [Section 47(2)]
Bonus & right No bonus shares/ right shares are issued to A company may issue rights shares or bonus
shares preference share holders shares to the company's existing equity
shareholders.
Redemption Preference shares are liable to be redeemed Equity shares cannot be redeemed except
within a period of 20 years from the date of under a scheme involving reduction of capital
issue. or buy back of its own shares.
Que. No. 8] Whether equity shares already issued can be converted into redeemable preference shares?
Ans.: It was held that where the equity shares are to be converted into redeemable preference shares it was
necessary to adopt the process of reduction of capital u/s 66 of the Companies Act, 2013. [Chowgule & Co. (P) Ltd.
1972 Tax LR 2163, St. James Court Estates Ltd. [1944] Ch. 6]
Que. No. 9] Write a short note on: Redemption of Preference Shares CS (Inter) - June 2002 (5 Marks)
What are the conditions which must be fulfilled for redemption of preference shares?
Ans.: Issue and redemption of preference shares [Section 55]:
(1) A company limited by shares shall not issue preference shares which are irredeemable.
(2) A company limited by shares may issue preference shares which are liable to be redeemed within a period
20 years from the date of issue.
(3) A company may issue preference shares for a period exceeding 20 years for infrastructure projects, subject
to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such
preferential shareholders. (The term “infrastructure projects" means the infrastructure projects specified in
Schedule VI.)
(4) Preference shares shall be redeemed:
- Out of the profits available for dividend or
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- Out of the proceeds of a fresh issue of shares.
(5) Preference shares shall be redeemed unless they are fully paid-up.
(6) Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount
of the shares should be transferred to the Capital Redemption Reserve A/c.
(7) Premium payable on redemption of any preference shares shall be provided for:
- Out of the profits or
- Out of the securities premium account, before such shares are redeemed.
Que. No. 10] Briefly discuss provisions of the Companies (Share Capital and Debentures) Rules, 2014 relating to
issue and redemption of debentures.
Ans.: Issue and redemption of preference shares [Rule 9]:
Conditions [Rule 9(1)]: A company having a share capital may, if so authorized by its articles, issue preference
shares subject to the following conditions, namely:
(a) The issue of such shares has been authorized by passing a special resolution in the general meeting of the
company.
(b) The company, at the time of such issue of preference shares, has no subsisting default in the redemption of
preference shares issued in payment of dividend due on any preference shares.
Resolution authorizing preference shares to set out certain particulars [Rule 9(2)]: A company issuing preference
shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:
(a) Priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares.
(b) Participation in surplus fund.
(c) Participation in surplus assets and profits, on winding-up which may remain after the entire capital has been
repaid.
(d) Payment of dividend on cumulative or non-cumulative basis.
(e) Conversion of preference shares into equity shares.
(f) Voting rights.
(g) Redemption of preference shares.
Explanatory statement to special resolution to set out certain particulars [Rule 9(3)]: The explanatory statement
to be annexed to the notice of the general meeting pursuant to Section 102 shall, inter alia, provide the complete
material facts concerned with and relevant to the issue of such shares, including-
(a) Size of the issue and number of preference shares to be issued and nominal value of each share.
(b) Nature of such shares i.e. cumulative or non-cumulative, participating or non-participating, convertible or
non-convertible.
(c) Objectives of the issue.
(d) Manner of issue of shares.
(e) Price at which such shares are proposed to be issued.
(f) Basis on which the price has been arrived.
(g) Terms of issue, including terms and rate of dividend on each share, etc.
(h) Terms of redemption, including the tenure of redemption, redemption of shares at premium and if the
preference shares are convertible, the terms of conversion.
(i) Manner and modes of redemption.
(j) Current shareholding pattern of the company.
(k) Expected dilution in equity share capital upon conversion of preference shares.
Register of Members to contain the particulars of preference shareholders [Rule 9(4)]: Where a company issues
preference shares, the Register of Members maintained u/s 88 shall contain the particulars in respect of such
preference shareholders.
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Listing of preference shares [Rule 9(5)]: A company intending to list its preference shares on a recognized stock
exchange shall issue such shares in accordance with the regulations made by the SEBI in this behalf.
Redemption of preference shares [Rule 9(6)]: A company may redeem its preference shares only on the terms on
which they were issued or as varied after due approval of preference shareholders u/ s 48 and the preference
shares may be redeemed:
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company's option; or
(c) any time at the shareholder's option.
Issue and redemption of preference shares by company in infrastructural projects [Rule 10]: A company engaged
in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding
twenty years but not exceeding 30 years, subject to the redemption of a minimum 10% of such preference shares
per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference
shareholders.
Que. No. 11] Redeemable preference shares are not preference shares. Comment.
Ans.: As per Section 43 (2), preference share capital, with reference to any company limited by shares, means that
part of the issued share capital of the company which carries or would carry a preferential right with respect to-
(a) Payment of dividend, either as a fixed amount or at a fixed rate and
(b) Repayment in the case of a winding up or repayment of capital specified in the memorandum or articles of
the company.
Thus, it is incorrect to say that redeemable preference shares are not preference shares.
Que. No. 12] As per Section 55 of the Companies Act, 2013 preference shares can be redeemed out of the "profits
of the company available for dividend". Comment.
Ans.: One of the ways to redeem preference share is to use the profit available for dividend. Where any preference
shares are redeemed out of profits, a sum equal to the nominal amount of the shares so redeemed must be
transferred out of the profits of the company which would otherwise to be available for dividend to a reserve fund
called 'Capital Redemption Reserve A/c'.
Profits of available for dividend Profits not available for dividend
- Profit & Loss Account - Securities Premium Account

- General Reserve - Capital Reserve
- Dividend Equalization Fund - Investment Allowance Reserve
- Reserve Fund - Development Rebate Reserve
- Workmen's Compensation Fund - Profit Prior to incorporation
Que. No. 13] Details of share capital & reserve and surplus of New Horizon Ltd. are as under:
` in Lakhs
Share Capital:
Paid up equity share capital (3 lakh shares of ` 15 each) 45.00
8% Redeemable preference shares (10 lakh shares of ` 10 each) 100.00
Reserve & Surplus:
Profit & loss account 70.00
General reserve 30.00
Share premium 45.00
8% Redeemable preference shares of ` 100 lakh are due for redemption at a premium of ` 2 per share.
37
(a) Work out the amount to be transferred to capital redemption reserve account to carry out this
redemption.
(b) If it is possible to issue further 5 lakh equity shares of ` 10 each at a premium of ` 2 per share, whether it
is still necessary for the company to transfer any amount to the capital redemption reserve account?
Ans.: As per Section 55, preference shares shall be redeemed:
- Out of the profits available for dividend or
- Out of the proceeds of a fresh issue of shares
Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount of
the shares should be transferred to the Capital Redemption Reserve A/c.
(a) In first case there is no new fresh issue of equity shares, hence amount of ` 100 lakhs due on preference
share capital will be redeemed out of out of the profits available for dividend. Thus, ` 100 lakhs of 'profit available
for dividend' (i.e. ` 70 Lakhs from Profit & Loss A/c and ` 30 Lakhs from General Reserve A/c) will be transferred to
Capital Redemption Reserve A/c. Premium payable on redemption of preference share capital ` 20 lakhs will be
written off from Securities Premium A/c.
(b) In second case there is new fresh issue of equity shares and total proceeds received are ` 60 lakhs (5 lakh
shares x ` 12). Out of total proceeds of ` 60 lakhs, only proceeds of 150 lakhs can be used for the purpose of
redemption of preference shares as remaining ` 10 lakhs which represents securities premium cannot be utilized
for redemption of preference share capital. Total amount due for preference share capital 'is ` 100 lakhs and after
adjusting ` 50 lakhs out of proceeds of issue new equity shares, remaining ` 50 can be redeemed out of profit
available for dividend. Hence, total amount to be transferred to Capital Redemption A/c will be ` 50 lakhs.
■■■ ISSUE OF SHARES AT PREMIUM
Que. No. 14] State the provisions of Companies Act, 2013 regarding issue of shares at a premium. For what
purpose the securities premium may be applied? CS (Inter) - June 2007 (5 Marks)
Money received as share premium by a company can be applied for limited purpose only. Comment.
Ans.: A company may issue securities at a premium when it is able to sell them at a price above par or above
nominal value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of
securities by a company at a premium. However, it imposes conditions regulating the utilization of the amount of
premium collected on securities.
Application of premiums received on issue of shares [Section 52]: Securities premium can be used by the company
for the following purposes:
(a) Issuing fully paid bonus shares
(b) Writing off the preliminary expenses
(c) Writing off commission or discount or the expenses on issue of shares or debentures
(d) For providing premium on redemption of redeemable preference shares or debentures
(e) Buy-back of shares and writing off premium on buyback.
Where a company issues shares at a premium, even though the consideration may be other than cash, a sum equal
to the amount or value of the premium must be transferred to the securities premium account. [Head (Henry) &
Co. Ltd. v. Ropner Holding Ltd. (1951) 2 All ER 994: (152) Ch 124 (Ch D)]
Que. No. 15] In view of the provisions of the Companies Act, 2013 relating to 'securities premium', state whether
the amount lying in securities premium account of a company can be used:
(i) For issuance of bonus shares and
(ii) For payment of dividend declared by the company at its general meeting.
Ans.: As per Section 52, securities premium can be used by the company for the following purposes:
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(d) For providing premium on redemption of redeemable preference shares or debentures (e) Buy of shares and
writing off premium on buyback.
In view of above provisions, in relation to given case answer is as follows:
(i) Company can use the amount laying in securities premium for issuance of bonus shares.
(ii) Company cannot use the amount laying in securities premium for payment of dividend declared by the company
at its general meeting.
Que. No. 16] Radhika Textiles Ltd. has utilized the securities premium during the financial year 2016-2017 as
follows:
(i) ` 15 lakhs against expenses of foreign travelling of directors.
(ii) ` 5 lakhs for writing-off the balance of the preliminary expenses of the company.
(iii) ` 10 lakhs distributed as dividend for the financial year ending 31st March 2017.
You, being the Secretarial Auditor of the company, referring to the provisions of the Companies Act, 2013
relating to the Securities Premium Account, examine the validity of the above.
Ans.:
As per Section 53, securities premium can be used by the company for the following purposes:
(d) For providing premium on redemption of redeemable preference shares or debentures
(e) Buyback of shares and writing off premium on buyback.
Keeping in view of above provisions, answer to given problem is as follows:
(i) Balance in securities premium cannot be utilized for writing-off expenses of foreign travelling of directors.
(ii) Balance in securities premium can be utilized writing-off preliminary expenses of the company.
(iii) Balance in securities premium cannot be utilized for payment of dividend.
BH ISSUE OF SHARES AT DISCOUNT
Que. No. 17] Write a short note on: Issue of shares at discount
Ans.: Prohibition on issue of shares at discount [Section 53]: Except as provided in Section 54 (i.e. issue of sweat
equity shares), a company shall not issue shares at a discount. Any share issued by a company at a discount price
shall be void.
However, a company may issue shares at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or
directions or regulations specified by the RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation)
Act, 1949.
Penalty: When a company contravenes the provisions of this section, the company shall be punishable with fine
which shall not be less than ` 1 lakh but which may extend to ` 5 lakhs and every officer who is in default shall be
punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than
11 lakh but which may extend to ` 5 lakhs.
■ ■■ SWEAT EQUITY SHARES
Que. No. 18] What are the 'sweat equity shares'? Explain the provisions relating to issue of sweat equity shares.
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Write a short note on: Sweat Equity Shares CS (Inter) - June 2006 (3 Marks)
Ans.: Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its
directors or employees at a discount or for consideration, other than cash for providing know-how or making
available rights in the nature of intellectual property rights or value additions, by whatever name called.
Issue of sweat equity shares [Section 54]: A company can issue sweat equity shares, of a class of shares already
issued, if the following conditions are satisfied:
(1) The issue has been authorized by a special resolution passed by the company in the general meeting.
(2) Such special resolution should clearly specify:
- Number of shares
- Current market price
- Consideration and
- Classes of directors or employees to whom such equity shares are to be issued.
(3) At leas` 1 year should have elapsed from the date on which the company was entitled to commence business.
[Deleted by Companies (Amendment) Act, 2017]
(4) A company whose shares are listed on a recognized stock exchange issuing sweat equity shares should
comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.
(5) A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures)
Rules, 2014.
The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be
applicable to the sweat equity shares issued and the holders of sweat equity shares shall rank pari passu (on an
equal footing) with other equity shareholders. [Section 54 (2)]
Register of Sweat Equity Shares [Rule 8 (14) of the Companies (Share Capital & Debentures) Rules, 2014]:
The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3 and shall forthwith enter therein
the particulars of issue of sweat equity shares.
The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place
as the Board may decide.
The entries in the register shall be authenticated by the Company Secretary of the company or by any other person
authorized by the Board for the purpose.
Que. No. 19] Explain the provisions of the Companies (Share Capital & Debentures) Rules, 2014 relating to Sweat
Equity Shares.
Ans.: Provisions of the Companies (Share Capital & Debentures) Rules, 2014 relating to sweat equity shares are as
follows:
(1) Explanatory statement to contain certain particulars [Rule 8(2)]: The explanatory statement to be annexed
to the notice of the general meeting shall contain the prescribed content like the date of the board meeting;
reasons or justification for the issue; the class of shares under which sweat equity shares are intended to be issued;
total number of shares; etc.
(2) Validity of special resolution [Rule 8(3)]: The special resolution shall, be valid for making the allotment up
to period of 12 months.
(3) Limits on issue of sweat equity shares [Rule 8(4)]: The company shall not issue sweat equity shares for more
than 15% of the existing paid up equity share capital in a year or shares of the issue value of ` 5 Crores, whichever
is higher. The issuance of sweat equity shall not exceed 25% of the paid up equity capital at any time.
(4) Lock-in-period [Rule 8(5)]: The sweat equity shares issued to directors or employees shall be locked in for a
period of 3 years from the date of allotment and this fact shall be stamped in bold on the share certificate.
(5) Valuation Aspects [Rule 8(6) & (7) & (8)]: The sweat equity shares to be issued shall be valued at a price
determined by a registered valuer as the fair price giving justification for such valuation.
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The valuation of intellectual property rights or of know-how or value additions shall be carried out by a registered
valuer.
A copy of the valuation report shall be sent to the shareholders with the notice of the general meeting.
(6) Issue for non-cash consideration [Rule 8(9)]: When sweat equity shares are issued for a non-cash
consideration on the basis of a valuation report obtained from the registered valuer, such non-cash consideration
shall be treated in the following manner in the books of account of the company-
(a) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to
the balance sheet of the company in accordance with the accounting standards; or
(b) In other cases it shall be expensed as provided in the accounting standards.
(7) Forms part of managerial remuneration [Rule 8(10)]: The amount of sweat equity shares issued shall be
treated as part of managerial remuneration for the purposes of Sections 197 & 198, if the following conditions are
fulfilled, namely.-
(a) The sweat equity shares are issued to any director or manager or
(b) They are issued for consideration other than cash, which does not take the form of an asset which can be
carried to the balance sheet of the company in accordance with the applicable accounting standards.
(8) Sweat equity shares and compensation aspects [Rule 8(11) & (12)]:
(i) If the sweat equity shares issued pursuant to no acquisition of an asset: The accounting value (fair value)
of sweat equity shares shall be treated as a form of compensation to the employee or the director in the financial
statements.
(ii) If the shares are issued pursuant to acquisition of an asset: The value up to valuation report shall be carried in
the balance sheet as per the Accounting Standards and such excess value over the value as per valuation report
shall be treated as a form of compensation to the employee or the director in the financial statements of the
company.
(9) Disclosure in Board's Report [Rule 8(13)]: The details of issue of sweat equity shares shall be disclosed in
the Directors Report for the year.
(10) Maintenance of Register [Rule 8(14)]: The company shall maintain a Register of Sweat Equity Shares in Form
No. SH. 3. The Register shall be maintained at the registered office of the company or such other place as the Board
may decide. The entries in the register shall be authenticated by the Company Secretary or by any other person
authorized by the Board.
■ ■■ SHARES WITH DIFFERENTIAL VOTING RIGHTS
Que. No. 20] State the provisions for issuing "shares with differential voting rights" under the Companies (Share
Capital & Debentures) Rules, 2014.
Board of directors of Progressive Ltd. decides to issue equity shares of the company with differential voting
rights. Examining the provisions of the Companies Act, 2013, state the conditions to be complied with by the
company in this regard. CS (Executive) - Dec 2016 (8 Marks)
As a Practicing Company Secretary, advise your client company regarding the matters relating to issue of shares
with differential rights, to be included in the Board of Directors Report.
Ans.: The Companies (Share Capital & Debentures) Rules, 2014 makes the following provisions relating to issue of
shares with differential voting rights.
(1) Conditions for issuing shares with differential rights [Rule 4(1)]: Company limited by shares shall not issue
equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following
conditions, i`amely:
- The AOA authorizes the issue of shares with differential rights.
- The issue of shares is authorized by an ordinary resolution passed at a general meeting.
- In case of listed company, the issue shall be approved by the shareholders through postal ballot.
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- The shares with differential rights shall not exceed 26% of the total post-issue paid-up equity share capital
including equity shares with differential rights issued at any point of time.
- Company should have consistent track record of distributable profits for the las` 3 years.
- Company has not defaulted in filing financial statements and annual returns for las` 3 financial years.
- Company has no subsisting default in the payment of a declared dividend to its shareholders or repayment
of its matured deposits or redemption of its preference shares or debentures that have become due for
redemption or payment of interest on such deposits or debentures or payment of dividend.
, - Company has not defaulted
♦ In payment of the dividend on preference shares or
♦ In repayment of principle or interest on any term loan from a PFI or State Level Financial Institution or
Scheduled Bank
♦ In dues with respect to statutory payments relating to its employees to any authority
♦ In crediting the amount in Investor Education & Protection Fund to the Central Government.
- Company has not been penalized by Court or Tribunal during the las` 3 years of any offence under the RBI
Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation Act, 1956, the FEMA Act, 1999 or any other
special Act.
(2) Disclosures in the explanatory statement [Rule 4(2)]: The explanatory statement to be annexed to the
notice of the general meeting shall contain the prescribed particulars like - number of shares; percentage of the
shares; reasons or justification for the issue; etc.
(3) Conversion [Rule 4 (3)]: The company shall not convert its existing equity share capital with voting rights
into equity share capital carrying differential voting rights and vice versa.
(4) Disclosures in the Board's Report [Rule 4(4)]: The board of directors shall disclose in the Board's Report, the
following details, namely:
(i) Number of shares allotted with differential rights.
(ii) Details of the differential rights relating to voting rights and dividends.
(iii) Percentage of the shares with differential rights to the total post issue equity share capital with differential
rights issued at any point of time and percentage of voting rights which the equity share capital with differential
voting right shall carry to the total voting right of the aggregate equity share capital.
(iv) Price at which such shares have been issued.
(u) Particulars of promoters, directors or key managerial personnel to whom such shares are issued.
(vi) Change in control, if any, in the company consequent to the issue of equity shares with differential voting
rights.
(vii) Diluted EPS calculated in accordance with the applicable accounting standards.
(viii) The pre and post issue shareholding pattern along with voting rights.
(5) Rights of holders of equity shares with differential voting rights [Rule 4(5)]: The holders of the equity shares
with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of
equity shares are entitled to, subject to the differential rights with which such shares have been issued.
(6) Register of Members [Rule 4(6)]: When company issues equity shares with differential rights, the Register of
Members maintained u/s 88 shall contain all the relevant particulars of the shares so issued along with details of
the shareholders.
Que. No. 21] As a Company Secretary, prepare detailed note describing procedure for issue of shares with
Differential Voting Rights.
Ans.: Procedure for issue of equity shares with differential voting rights is as follows:
1. Check whether the Articles of Association of the company authorizes issue of equity shares with differential
rights and if not, alter the Articles of Association of the company.
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2. Hold the Board meeting to issue the notice of general meeting for issuance of equity share with differential
rights.
3. Before issuing equity shares with differential rights as to dividend, voting or otherwise, ensure that the'
conditions of issue are fully satisfied.
4. If the company is listed with any of the recognized stock exchange, then within 15 minutes of the closure of
the aforesaid Board Meeting intimate to the concerned Stock Exchange about the decision taken at the Board
Meeting.
5. Pass the ordinary resolution in the general meeting or through Postal Ballot u/ s 110.
6. Once the company makes any allotment, then it shall, within 30 days thereafter, file with the Registrar a
return allotment in Form No. PAS-3, along with the fees as specified in the Companies (Registration Offices and
Fees) Rules, 2014.
7. The company shall not convert its existing equity share capital with voting rights into equity share capital
carrying differential voting rights and vice versa.
8. In case of listed company, send copies of the notice and a copy of the proceedings of the general meeting to
the stock exchange within 24 hours of the occurrence of event. [Regulation 30 (6) of SEBI (LODR), 2015]
9. Complete all other proceedings for the issue of certificate of shares with differential voting rights making
necessary entries in various registers. In case of a company whose shares are dematerialized form, inform the
depositories about the same for credit to the respective accounts.
10. Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.
11. Maintain the Register of Members u/s 88 containing all the relevant particulars of the shares so issued along
with details of the shareholders.
■ ■■ RIGHT ISSUE
Que. No. 22] In a further issue of share capital by a public company, shares must always be issued to its existing
shareholder. Comment. CS (Inter) - June 2005 (4 Marks)
Write a short note on: Right issue of shares CS (Inter) - June 2006 (4 Marks)
Section 62 ensures pre-emptive rights of shareholder. Discuss. CS (Executive) - Dec 2012 (4 Marks)
Ans.: Further issue of share capital [Section 62(1)]: Where at any time, a company having a share capital proposes
to increase its subscribed capital by the issue of further shares, such shares shall be offered to:
(1) Existing shareholder in proportion to the paid-up share capital on those shares by sending a letter of offer.
Such right issue is subject to the following conditions:
- The offer shall be made by notice specifying the number of shares offered, time for accepting offer which
may be minimum 15 days and maximum 30 days.
- The notice shall be dispatched through registered post or speed post or through electronic mode to all the
existing shareholders at leas` 3 days before the opening of the issue.
- If offer is not accepted within period specified, it shall be deemed to have been declined.
- The offer shall include a right to renounce the shares in favour of any other person and this fact should be
specifically mentioned in the notice.
- After the expiry of the time specified in the notice or on receipt of earlier intimation from the person that he
declines to accept the shares offered, the Board of Directors may dispose of them in manner which is advantageous
to the shareholders and the company.
(2) To employees under a scheme of employees stock option by passing special resolution and complying with
prescribed conditions.
(3) To other persons by passing a special resolution either for cash or for a consideration other than cash. The
price of such shares has to be determined by the valuation report of a registered valuer subject to prescribed
conditions.
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Notice of right entailment [Section 62(2)]: The notice of right entailment shall be dispatched through registered
post or speed post or through electronic mode to all the existing shareholders at leas` 3 days before the opening
of the issue.
Conversion of debentures or loan of financial institution into shares [Section 62(3)]: Nothing in this section shall
apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached
to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the
company:
However, the terms of issue of such debentures or loan containing such an option have been approved before the
issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
Que. No. 23] A company has taken a term loan from a financial institution and is regularly paying the loan
instalments and interest. The financial institution proposes to convert 20% of the loan into equity shares of the
company as per terms of the agreement. Advise the company, whether the financial institution can enforce such
a convertibility clause? Also examine the validity of such a clause.
Ans.: If a financial institution provides a loan, the terms of issue may contain a clause to convert later such loan
into shares. It amounts to issue of further share capital and hence provisions of right issue contained in Section 62
will have to be complied. To remove this difficulty Section 62(3) provides that - nothing in this section shall apply
to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to
the debentures issued or loan raised by the company to convert such debentures or loans into shares in the
company.
However, the terms of issue of such debentures or loan containing such an option have been approved before the
issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
Thus, as per facts given in case a company can convert its loan into equity shares as per the terms of agreement
provided that the terms of loan containing such an option have been approved before raising of loan by a special
resolution passed by the company in general meeting.
Que. No. 24] Write a note on the powers of the Central Government in regard to conversion of debentures and
loans into shares of the company under the following heads:
(i) When terms of issue of such debenture or terms of loan do not include term providing for an option of
conversion.
(ii) Matters considered in determining the terms and conditions of such conversion.
Remedy available to the company if conversion or terms of conversion is not acceptable to it.
CA (PE-II) - May 2005 (5 Marks)
Ans.: Powers of the Central Government to convert debentures and loans into shares [Section 62(4)]: The
Central Government has power to covert the debenture held by it or loan given by it to a company into shares by
issuing order. Such conversion of debentures or loan can be made if Government considers it necessary in the
public interest so to do so.
Such conversion shall be made on terms and conditions as appear to the Government to be reasonable in the
circumstances of the case.
The Government has power to convert the loan even if terms of the issue of debentures or loans do not include a
term for providing for an option for conversion.
Appeal to Tribunal: If the terms and conditions of conversion are not acceptable to the company, it may, within 60
days from the date of communication of order, appeal to the Tribunal.
The Tribunal after hearing the company and the Government pass such order as it deems fit.
Factors to be considered by Government [Section 62(5)]: In determining the terms and conditions of conversion,
the Government shall have due regard to the financial position of the company, the terms of issue of debentures
or loans, the rate of interest payable on such debentures or loans and such other matters as it may consider
necessary.
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Memorandum is automatically altered [Section 62(6)]: Where the Government directs that any debenture or loan
shall be converted into shares, the memorandum of the company shall stand altered and the authorized share
capital of the company shall stand increased by an amount equal to the amount of the value of shares with which
debentures or loans has been converted into shares.
Que. No. 25] Distinguish between: Letter of allotment & Letter of renunciation
Ans.: Following are the main points of distinction between letter of allotment & letter of renunciation:
Points Letter of allotment Letter of renunciation
Meaning Letter of allotment is a letter by which When a company issue right shares it has to
company communicates the subscriber to the issue a letter stating that if shareholder do
shares that the company has allotted some want to subscribe the shares, he can renounce
shares to him. the shares in favour of any other person. Such
letter is known as letter of renunciation.
Applicability Letter of allotment is applicable in all cases Letter of renunciation is applicable in case of
where shares are allotted to persons. right issue under Section 62 of the Companies
Act, 2013.
Option Letter of allotment do not contain any option. Letter of renunciation contains an option to
renounce the shares in favour of any other
person.
Surrender Letter of allotment is required to be Letter of renunciation is not required to be

surrendered to company for issue of share surrendered to company. Infact it is right to
certificate. transfer to subscribe the right shares of the
company.
Transfer of Shares can be transferred with the help of Shares cannot be transferred with the help of
shares letter of allotment if share certificate do not letter of renunciation. But right shares can be
exists. subscribed by the persons in whose favour the
right has been renounced.
Que. No. 26] You are the Company Secretary of Golden Securities Ltd. The Board of Directors wants to make a
right issue of shares to its existing shareholder in the ratio of 2 shares for every single shares held by the
shareholder. Prepare a note highlighting the steps involved in issue of rights shares.
CS (Inter) - Dec 2006 (6 Marks) CS (Inter) - Dec 2011 (8 Marks)
Ans.: The various steps involved for issue of rights share are enumerated below:
1. Check whether the rights issue is within the authorised share capital of the company. If not, steps should be
taken to increase the authorised share capital.
2. Notify the stock exchange concerned the date of Board Meeting at which the rights issue is proposed to be
considered at leas` 2 days in advance of the meeting.
3. Rights issue shall be kept open for at least 15 days and not more than 30 days.
4. Convene the Board meeting and place before it the proposal for rights issue.
5. The Board should decide on the following matters:
♦ Quantum of issue and the proportion of rights shares.
♦ Alteration of share capital, if necessary, and offering shares to persons other than existing holders of shares
in terms of Section 62 of the Companies Act, 2013.
♦ Fixation of record date.
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♦ Appointment of merchant bankers and underwriters
♦ Approval of draft letter of offer or authorisation of managing director/company secretary to finalise the
letter of offer in consultation with the managers to the issue, the stock exchange and SEBI.
6. Immediately after the Board Meeting notify the concerned Stock Exchanges about particulars of Board's
decision.
7. If it is proposed to offer shares to persons other than the shareholders of the company, a General Meeting
has to be convened and a resolution is to be passed for the purpose in terms of Section 62 of the Companies Act,
2013.
8. Forward 6 sets of letter of offer to concerned Stock Exchange.
9. Despatch letters of offer to shareholders by registered post.
10. Check that an advertisement giving date of completion of despatch of letter of offer has been released in at
least an English National Daily, one Hindi National Paper and a Regional Language Daily where registered office of
the issuer company is situated.
11. Check that the advertisement contains the list of centres where shareholders or persons entitled to rights
may obtain duplicate copies of composite application forms in case they do not receive original application form
along with the prescribed format on which application may be made.
12. The applications of shareholders who apply both on plain paper and also in a composite application form are
liable to be rejected.
13. Make arrangement with bankers for acceptance of share application forms.
14. Prepare a scheme of allotment in consultation with Stock Exchange.
15. Convene Board Meeting and make allotment of shares.
16. Make an application to the Stock Exchange where the company's shares are listed for permission of listing
of new shares.
ESOS & ESOP
Que. No. 27] State the provisions of the Companies Act, 2013 relating to issue of shares under a scheme of
employees stock option.
Ans.: Employee Stock Option [Section 2 (37)]: 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.
As per Section 62(1) (b), where at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares can be offered to employees under a scheme of employees stock
option by passing special resolution and complying with prescribed conditions.
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 makes the following provisions relating to
issue of employee stock options.
A listed company can issue employee stock options as per SEBI's Employee Stock Option Scheme Guidelines.
An unlisted company offer shares to its employees under Employees Stock Option Scheme (ESOS) by complying
following provisions.
Passing of special resolution: The issue of Employees Stock Option Scheme has been approved by the shareholders
of the company by passing a special resolution.
"Employee" means:
(a) A permanent employee of the company who has been working in India or outside India or
(b) A director of the company, whether a whole time director or not but excluding an independent director or
(c) .An employee of a subsidiary, in India or outside India, or of a holding company of the company but does not
inelude-
(i) An employee who is a promoter or a person belonging to the promoter group or
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(ii) A director who either himself or through his relative or through any body corporate, directly or indirectly,
holds more than ten per cent of the outstanding equity shares of the company.
Disclosures in the explanatory statement: The company shall make the following disclosures in the explanatory
statement annexed to the notice for passing of the resolution-
(a) The total number of stock options to be granted
(b) Identification of classes of employees entitled to participate in the ESOS
(c) The appraisal process for determining the eligibility of employees to the ESOS
(d) The requirements of vesting and period of vesting
(e) The maximum period within which the options shall be vested (/) The exercise price or the formula for
arriving at the same
(g) The exercise period and process of exercise
(h) The Lock-in period, if any
(i) The maximum number of options to be granted per employee and in aggregate
(j) The method which the company shall use to value its options
(k) The conditions under which option vested in employees may lapse e.g. in case of termination of employment
for misconduct
(l) The specified time period within which the employee shall exercise the vested options in the event of a
proposed termination of employment or resignation of employee
(m) A statement to the effect that the company shall comply with the applicable accounting standards.
Exercise Price: The companies granting option to its employees pursuant to Employees Stock Option Scheme will
have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any.
Separate Resolution: The approval of shareholders by way of separate resolution shall be obtained by the company
in case of-
(a) Grant of option to employees of subsidiary or holding company; or
(b) Grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital
(excluding outstanding warrants and conversions) of the company at the time of grant of option.
Variation in terms of ESOS: The company may by special resolution, vary the terms of ESOS not yet exercised by
the employees provided such variation is not prejudicial to the interests of the option holders. The notice for
passing special resolution for variation of terms of Employees Stock Option Scheme shall disclose full of the
variation, the rationale, and the details of the employees who are beneficiaries of such variation.
Vesting of options and lock-in-period: There shall be a minimum period of 1 year between the grant of options
and vesting of option.
In a case, where options are granted by a company under its ESOS in lieu of options held by the same person under
an ESOS in another company, which has merged or amalgamated with the first mentioned company, the period
during which the options granted by the merging or amalgamating company were held by him shall be adjusted
against the minimum vesting period required under this clause;
The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of
option.
The Employees shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a
shareholder in respect of option granted to them, till shares are issued on exercise of option.
Forfeiture of amount: The amount payable by the employees, at the time of grant of option may be forfeited by
the company if the option is not exercised by the employees within the exercise period. However, the amount may
be refunded to the employees if the options are not vested due to non-fulfilment of conditions relating to vesting
of option as per the ESOS.
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Restriction on options: The option granted to employees shall not be transferable to any other person. The option
granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated
in any other manner.
Who can exercise the options:
- No person other than the employees to whom the option is granted shall be entitled to exercise the option.
- In the event of the death of employee while in employment, all the options granted to him till such date shall
vest in the legal heirs or nominees of the deceased employee.
- In case the employee suffers a permanent incapacity while in employment, all the options granted to him as
on the date of permanent incapacitation, shall vest in him on that day.
- In the event of resignation or termination of employment, all options not vested in the employee as on that
day shall expire. However, the employee can exercise the options granted to him which are vested within the
period specified in this behalf, subject to the terms and conditions under the scheme granting such options as
approved by the Board.
Disclosure in Directors' Report: The Board of directors, shall, inter alia, disclose in the Directors Report for the
year, the following details of the Employees Stock Option Scheme:
(a) Options granted
(b) Options vested
(c) Options exercised
(d) The total number of shares arising as a result of exercise of option (ie) Options lapsed
(f) The exercise price
(g) Variation of terms of options
(h) Money realized by exercise of options
(i) Total number of options in force
(j) Employee wise details of options granted to:- (i) key managerial personnel
(if) any other employee who receives a grant of options in any one year of option amounting to 5% or more of
options granted during that year
(iii) identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued
capital (excluding outstanding warrants and conversions) of the company at the time of grant.
Register of Employee Stock Options: The company shall maintain a Register of Employee Stock Options in Form
SH-6 and shall forthwith enter therein the particulars of option granted Sectipn 62(l)(b).
The Register of Employee Stock Options shall be maintained at the registered office of the company or such other
place as the Board may decide.
The entries in the register shall be authenticated by the Company Secretary of the company or by any other person
Que. No. 28] Write a short note on: Employees Stock Option Scheme (ESOS)
CS (Inter) - June 2007 (5 Marks) CS (Executive) - June 2011 (4 Marks), June 2013 (3 Marks)
Ans.: "Employee stock option scheme or ESOS" means a scheme under which a company grants employee 'stock
option' directly or through a trust.
Important provisions relating to ESOS are summarized below:
♦ A company may implement schemes either directly or by setting up an irrevocable trust.
♦ An employee shall be eligible to participate in the ESOS of the company as determined by the compensation
committee.
♦ The employee should not be a promoter or belongs to the promoter group.
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♦ A director who either himself or through his relative or through any body corporate, directly or indirectly
holds more than 10% of the outstanding equity shares of the company cannot participate as he is not eligible to
participate in the scheme.
♦ A company shall constitute Compensation Committee for administration & superintendence of the ESOS.
♦ The Compensation Committee formulate the detailed terms and conditions of the schemes which include
the provisions as specified by SEBI.
♦ ESOS has to be approved by the shareholder by passing special resolution.
♦ The company cannot vary terms of the ESOS, which may be detrimental to the interests of the employees.
♦ Option granted to an employee cannot be transferred to any other person.
♦ Shares issued under ESOS are required to be listed in stock exchange.
♦ The company granting option to its employees pursuant to ESOS will have the freedom to determine the
exercise price.
♦ Minimum vesting period for ESOS is one year.
♦ The company may specify the lock-in period for the shares issued pursuant to exercise of option.
Logic behind ESOS & ESPS: An employee or director works best when he has 'sense of belonging'. He will put his
best if he is amply rewarded. One way is to offer him shares of the company at low price or at concessional price.
This will give him more incentive to work as he will be indirectly participating in the profits of the company. It will
help to develop keen interest and commitment to work. They develop feeling of 'participation' in management.
That's why companies issue shares to its employees under ESOS or ESPS.
In case of Employees Stock Option Scheme (ESOS), employees are given an option to purchase shares at a later
date, at a predetermined price which is usually lower than current market price.
In case of Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase shares on the spot
at a discounted price.
Example of ESOS and its accounting treatment:
ESOS - Vesting period is < 1 year
On 1st April, 2015, a company offered lOO shares to each of its 400 employees at ` 25 per share. The employees
are given a month to accept the shares. The shares issued under the plan shall be subject to lock-in to transfer for
three years from the grant date i.e. 30, April, 2015. The market price of shares of the company on the grant date
is t 30 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is
estimated at ` 28 per share.
Fair value of an option = `28-`25 = `3
Number of employees accepting the offer = 400 employees * 50% = 200 employees Number of shares issued = 200
employees x 100 shares = 20,000 shares Fair value of ESPP = 20,000 shares x ` 3 = ` 60,000 Expenses recognized in
2015-2016 - ` 60,000
Journal Entry
Date Particular Dr. ? Cr. ?
30.4.2015 Bank (20,000 x 25) Dr. 5,00,000
Employees Compensation Expense A/ c Dr. 60,000
To Share Capital (20,000 x 10) 2,00,000
To Securities Premium (20,000 x 18) 3,60,000
Que. No. 29] Write a short note on: Employees Stock Purchase Scheme (ESPS)
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Ans.: "Employes stock purchase scheme or ESPS" means a scheme under which a company offers shares to
employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary
acquisition for the purposes of the scheme.
In simple words, under the Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase
shares on the spot at a discounted price.
Important provisions relating to ESPS are summarized below:
♦ The company's are free to determine the price of shares to be issued under an ESPS.
♦ Shares issued under an ESPS shall be locked-in for a minimum period of one year from the date of allotment.
,
♦ If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public
issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.
Que. No. 30] Every employee of the company shall be eligible to participate in Employees Stock Option Scheme
(ESOS). Comment. CS (Executive) - Dec 2012 (5 Marks)
The option to participate in ESOP/ESPS is not open for all employees of the company. Comment.
Ans.: Following persons can participate in ESOS or ESPS:
♦ Permanent employee of the company who has been working in India or outside India.
♦ A director whether a whole time director or not but excluding an independent director.
♦ An employee of subsidiary company or of an associate company Following persons cannot participate in
ESOS or ESPS:
♦ An employee who is a promoter or a person belonging to the promoter group.
♦ A director who either himself or through his relative or through any body corporate, directly or indirectly,
holds more than 10% equity shares of the company.
Thus, it is correct to say that the option to participate in ESOP/ ESPS is not open for all employees of the company.
Que. No. 31] State briefly the provisions of the Employees Stock Purchase Scheme (ESPS) relating to:
(i) Eligibility to participate in the scheme and
(ii) Pricing and lock-in period CS (Inter) - Dec 2005 (4 Marks)
Ans.: Eligibility to participate in the scheme: Please see the answer to Question No. 17C.
Pricing and lock-in period for ESOS:
♦ The company granting option to its employees pursuant to ESOS will have the freedom to determine the
exercise price.
♦ Minimum vesting period for ESOS is one year.
♦ The company may specify the lock-in period for the shares issued pursuant to exercise of option. Pricing and
lock-in period for ESPS:
♦ The company's are free to determine the price of shares to be issued under an ESPS.
♦ Shares issued under an ESPS shall be locked-in for a minimum period of one year from the date of allotment.
Que. No. 32] Distinguish between: Employees Stock Option Scheme & Employees Stock Purchase Scheme
Ans.: Following are the main points of difference between ESOS & ESPS:
Points Employees Stock Option Scheme Employees Stock Purchase Scheme
Meaning "Employee stock option scheme or ESOS" Employee stock purchase scheme or ESPS"
means a scheme under which a company means a scheme under which a company offers
shares to employees, as part of public issue or
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grants employee 'stock option' directly or otherwise, or through a trust where the trust
through a trust. may undertake secondary acquisition for the
purposes of the scheme.
Purchase of Under ESOS employees are given an option to Under ESPS employees are given an option to
shares purchase shares at a later date i.e. after vesting purchase shares on the spot at a discounted
period. price.
Lock-in The company may specify the lock-in period for Shares issued under an ESPS shall be locked-in
the shares issued pursuant to exercise of for a minimum period of one year from the
option. date of allotment.
Public issue ESOS has to be approved separately by the Shares under ESPS can be issued as a part of a
company in general meeting by passing special public issue.
resolution. It cannot be part of public issue.
Vesting period Minimum vesting period for ESOS is one year. No vesting periods for ESPS as shares are
offered on the spot.
Compensation A company has to constitute Compensation There is no such requirement for ESPS.
Committee Committee for administration &
superintendence of the ESOS.
BONUS ISSUE
Que. No. 33] Referring to the provisions of Companies Act, 2013, state the conditions required to be fulfilled
before a company can issue bonus shares to the shareholders of the company.
CS (Inter) - June 2006 (4 Marks) CS (Executive) - June 2015 (4 Marks)
Ans.: Issue of bonus shares [Section 63]:
(1) A company may issue fully paid-up bonus shares to its members out of:
- Free reserves
- Securities premium
- Capital redemption reserve
However, revaluation reserve created by the revaluation of assets cannot be used for the bonus issue.
(2) A company shall comply with following additional condition for bonus shares:
♦ Bonus issue is authorized by its articles.
♦ Bonus issue is made on the recommendation of the Board and authorization from general meeting of the
company.
♦ Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities
issued by it.
♦ Company has not defaulted in payment of statutory dues of the employees like PF contribution, gratuity and
bonus.
♦ Bonus issue can be made only on fully paid up shares.
♦ Company also has to comply with other prescribed conditions.
♦ The bonus shares shall not be issued in lieu of dividend.
The company which has once announced the decision of its Board recommending a bonus issue, shall not
subsequently withdraw the same. [Rule 14]
Que. No. 34] What do you understand by 'bonus shares' and what are the advantage of issuing bonus shares?
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Ans.: A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares. The issue of
bonus shares by a company is a common feature. When a company is prosperous and accumulates large
distributable profits, it converts these accumulated profits into capital and divides the capital among the existing
members in proportion to their entitlements. Members do not have to pay any amount for such shares. They are
given free. The bonus shares allotted to the members do not represent taxable income in their hands.
[Commissioner of Income Tax, Madras v. A.A.V. Ramchandra Chettiar (1964) 1 Mad CJ 281] Issue of bonus shares
is a bare machinery for capitalizing undistributed profits. The vesting of the rights in the bonus shares takes place
when the shares are actually allotted and not from any earlier date.
Advantages of Issuing Bonus Shares:
1. Fund flow is not affected adversely.
2. Market value of the Company's shares comes down to their nominal value by issue of bonus shares.
3. Market value of the members shareholdings increases with the increase in number of shares in the company.
4. Bonus shares is not an income. Hence it is not a taxable income:
5. Paid-up share capital increases with the issue of bonus shares.
Que. No. 35] The Board of directors of Aakash Ltd., a listed company, at its meeting held on 1st April, 2015
announced a proposal for issue of bonus shares to all equity shareholders of the company a` 1:1 ratio. On 1st
May, 2015, the directors at another meeting passed a resolution to reverse the proposal of bonus issue
announced on 1st April, 2015. Discuss the validity of the proposal and the reversal.
Ans.: As per Rule 14 of the Companies (Shares & Debentures) Rule, 2014, the company which has once announced
the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
Thus, a resolution passed by the director to reverse the bonus issue announced is not valid. The Board of directors
of Aakash Ltd. must issue bonus shares to the shareholder.
Que. No. 36] What are the guidelines issued by the SEBI for issue of bonus shares? Do these guideline apply to
bonus issue by existing private or unlisted companies?
CS (Inter) - Dec 2001 (4 Marks), Dec 2003 (5 Marks)
Ans.: SEBI Guidelines for bonus issues are as follows:
A listed company proposing to issue bonus shares shall comply with the following.
(1) No company shall, pending conversion of Fully Convertible Debenture (FCDs)/Partly Convertible Debenture
(PCDs), issue any shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs,
through reservation of shares in proportion to such convertible part of FCDs or PCDs.
The shares so reserves may be issued at the time of conversion(s) of such debentures on the same terms on which
the bonus issues were made.
(2) The bonus issue shall be made out free reserves built out of the genuine profits or share premium collected
in cash only.
(3) Revaluation reserves created by revaluation of fixed assets are hot capitalized.
(4) The declaration of bonus issue, in lieu of dividend, is not made.
(5) The bonus issue is not made unless the partly-paid shares, if any, existing are made fully paid-up.
(6) The company:
(a) has not defaulted in payment of interest or principal in respect of fixed deposits and debentures thereof and.
(b) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the
employees such as contribution to provident fund, gratuity, bonus, etc.
(7) A company which announces its bonus issue after the approval of the Board of Directors must implement
the proposal within a period of 6 months from the date of such approval and shall not have the option of changing
the decision.
(8) The Articles of Association of the company shall contain a provision for capitalization of reserves, etc.
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If there is no such provision in the Articles of Company shall pass a resolution at its general body meeting making
provisions in the Articles of Associations for capitalization.
(9) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share
capital, a resolution shall be passed by the company at its general body meeting for increasing the authorized
capital.
(10) A certificate duly signed by the issuer company and countersigned by statutory auditors or Practicing
Company Secretary to the effect that above provisions are duly complied shall be forwarded to the SEBI.
Que. No. 37] Bonus issue may be viewed as a 'right issue' except that money is paid by the company on behalf
of the investing shareholders from its reserves. Comment.
Ans.: In right issue the company gives right to existing shareholder to purchase the shares of the company. Thus,
shareholder gets the right to purchase further shares in company. In such case the amount is invested by the
shareholder form own funds.
When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits
into capital and divides the capital among the existing members in proportion to their entitlements. Thus, in case
of bonus issue, reserves which belong to shareholder is paid/converted into equity shares. Hence, it is correct to
say that bonus issue may be viewed as a 'right issue' except that money is paid by the company on behalf of the
investing shareholders from its reserves.
Que. No. 38] Distinguish between: Bonus Shares & Right Shares
CS (Executive) - Dec 2008 (5 Marks), Dec 2010 (4 Marks) CS (Executive) - June 2011 (3 Marks)
Ans.: Following are the main points of distinction between bonus shares & right shares:
Point Bonus Shares Right Shares
Meaning Bonus shares are shares issued by a company When Company issues further shares to
free of cost to its existing shareholders on a pro existing shareholder in ratio of their holding
rata basis out of free reserve. such issue is known as right issue.
Cash flow In case of bonus issue there is no cash flow. In case of right issue there is cash inflow to the
company.
Consideration Company does not receive any consideration in Company receives consideration as shares are
case of bonus issue. issued against cash.
Authorization Bonus issue is made on the recommendation In case of right issue authorization from
of the Board and authorization from general members through ordinary or special
meeting of the company. resolution is necessary.
Market value Issue of bonus shares does not affect the Right issue of shares affects the market value
market value of the company. of the company.
Section It is governed by Section 63 of the Companies It is governed by Section 62 of the Companies

Act, 2013. Act, 2013.
Que. No. 39] Discuss briefly the steps involved in issue of bonus shares by a listed company.
Ans.: The procedure for issue of bonus shares by a listed company is enumerated below:
1. Ensure that if conversion of FCDs/PCDs is pending, similar benefit has been extended to the holders of such
FCDs/PCDs, through reservation of shares in proportion of such convertible part of FCDs/PCDs.
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2. The shares so reserved may be issued at the time of conversions of such debentures on the same terms on
which the bonus issue was made.
3. Ensure that bonus issue has been made out of free reserves built out of the genuine profits or securities
premium collected in cash only.
4. Ensure that reserves created by revaluation of fixed assets are not capitalised.
5. Ensure that the company has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it or in respect of the payment of statutory dues of the employees such as contribution
to provident fund, gratuity, bonus etc.
6. Ensure that the bonus issue is not made in lieu of dividend.
7. There should be a provision in the articles of association of the company permitting issue of bonus shares; if
not, steps should be taken to alter the articles suitably.
8. The share capital as increased by the proposed bonus issue should be well within the authorised capital of
the company; if not, necessary steps have to be taken to increase the authorised capital.
9. Finalise the proposal and fix the date for the Board Meeting for considering the proposal and for authorising
the taking up of incidental and attendant matters.
10. If there are any partly paid-up shares, ensure that these are made fully paid-up before the bonus issue is
recommended by the Board of directors.
11. The date of the Board Meeting at which the proposal for bonus issue is proposed to be considered should
be notified to the Stock Exchange where the company's shares are listed.
12. Hold the Board Meeting and get the proposal approved by the Board.
13. The resolution to be passed at the General Meeting should also be approved by the Board in its meeting. The
intention of the Board regarding the rate of dividend to be declared in the year after the bonus issue should be
indicated in the resolution for bonus issue to be passed by members in general meeting.
14. Immediately after the Board meeting intimate the Stock Exchange regarding the outcome of the Meeting.
15. Ensure that the company has announced bonus issue after the approval of Board of Directors and did not
require shareholders' approval for capitalization of profits or reserves for making bonus issue as per the Article of
Association, had implemented bonus issue within fifteen days from the date of approval of the issue by the board
of directors of the company and must not have the option of changing the decision. However, where the company
was required to seek shareholders' approval for capitalization of profits or reserves for making bonus issue as per
the Article of Association, the bonus issue has implemented within two months from the date of the meeting of
the Board of Directors where in the decision to announce bonus was taken subject to shareholders' approval.
16. Arrangements for convening the general meeting should then be made keeping in view the requirements of
the Companies Act, with regard to length of notice, explanatory statement etc. Also 3 copies of the notice should
be sent to the Stock Exchange concerned.
17. Hold the general meeting and get the resolution for issue of bonus shares passed by the members. A copy
of the proceedings of the meeting is to be forwarded to the concerned Stock Exchange.
18. In consultation with the Regional Stock Exchange fix the date for closure of register of members or record
date and get the same approved by the Board of directors. Issue a general notice in respect of the fixation of the
record date in two newspapers one in English language and other in the language of the region in which the
Registered Office of the company is situated.
19. Give 7 day's notice to the Stock Exchange concerned before the date of book closure/record date.
20. After the record date process the transfers received and prepare a list of members entitled to bonus shares
on the basis of the register of members as updated. This list of allottees is to be approved by the Board or any
Committee thereof. The list usually serves as allotment list and on this basis the allotment is to be made to the
eligible members.
21. File return of allotment with the Registrar of Companies within 30 days of allotment. Also intimate Stock
Exchange concerned regarding the allotments made.
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22. Ensure that the allotment is made within 15 days of the date on which the Board of directors approved the
bonus issue.
23. Submit an application to the Stock Exchange for listing the bonus shares allotted.
■ ■■■ SOURCES OF CAPITAL
Que. No. 40] Write a short note on: Methods for raising capital from the public
Write a short note on: Preferential allotment CS (Executive) - June 2006 (4 Marks)
Ans.: Broadly speaking, there are 2 methods by which a company can raise capital from the public:
(1) By issuing a prospectus: The Company invites offers from public to subscribe for its shares or debentures,
through the prospectus. An investor studies the prospectus and if convinced, about the prospects of the company,
applies for shares.
(2) By private placement of Shares: A public company can raise capital by private placement. Private placements
by listed companies are governed by SEBI (ICDR) Regulations, 2009. Private placements by unlisted public
companies are governed by Unlisted Companies (Preferential Allotment) Rules, 2003.
Que. No. 41] Distinguish between: Sweat equity & Issue of capital on preferential basis
Ans.: Following are the main points of distinction between sweat equity & issue of capital on preferential
allotments:
Points Sweat Equity Shares Issue of capital on preferential basis
Meaning Sweat equity shares mean equity shares issued A preferential issue is an issue of shares? or of
by a company to its employees or directors at convertible securities by listed companies to a
a discount or for consideration, other than select group of persons under Section 81 which
cash for providing know-how or making is neither a rights issue nor a public issue.
available right in the nature of intellectual
property rights or value additions, by whatever
name called.
To whom Sweat equity shares are issued to employees A preferential issue is an issue to a select group
issued or directors. of persons.
How issued Sweat equity shares are issued at a discount or A preferential issue is at par or at premium.
for consideration, other than cash.
Que. No. 42] Distinguish between: Sweat Equity Shares & ESOP
Ans.: Following are the main points of distinction between sweat equity shares & ESOP:
Points Sweat Equity Shares ESOP
Meaning Sweat equity shares means equity shares Employee stock option means the option given
issued by a company to its directors or to the whole-time directors, officers or
employees at a discount or for consideration, employees of a company, which gives such
other than cash for providing know-how or directors, officers or employees the benefit or
making available rights in the nature of right to purchase or subscribe at a future date,
intellectual property rights or value additions, the securities offered by the company at a pre-
by whatever name called. determined price.
How regulated Issue of sweat equity shares is regulated by Issue of shares under employee stock option
Section 53 of the Companies Act, 2013 and plan is regulated by Section 2 (37) of the
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SEBI (Issue of Sweat Equity) Regulations, 2002 Companies Act, 2013 and SEBI (Employee Stock
(listed companies) and the Companies (Share Option Scheme & Employee Stock Purchase
Capital & Debentures) Rules, 2014. Scheme) Guidelines, 1999
Points Sweat Equity Shares ESOP
Issue Sweat equity shares can be issued at Employee stock options can be issued with
discounted price or free for know-how and conversion right at a pre-determined price. The
services to the company. issue price can be less than the intrinsic value
of the shares.
Consideration The consideration can be partly cash and partly The consideration has to be paid in cash.
IPRs/value addition or fully non-cash
consideration.
Purpose Sweat equity shares are mainly intended to be Employee stock options can be used for
issued to build up equity for directors or multiple purposes - as a talent retention tool,
employees with technical capability but with as an incentive, as a remuneration mechanism.
meager financial resources.
Lock-In-Period Sweat equity shares have compulsory lock- Lock-in-period is not specified for the ESOP.
inperiod of 3 years.
Que. No. 43] Explain the provisions relating to 'private placement' as under the Companies Act, 2013.
Ans.: Section 62(l)(c) deals with issue of shares to persons other than existing shareholders and provides that a
company can issue further shares to persons other than existing shareholders either for cash or for a consideration
other than cash, if —
(а) The company in General Meeting passes a special resolution to this effect; and
(b) The price of such shares is determined by the valuation report of a registered valuer, subject to the compliance
with the applicable provisions of Chapter III (Section 42) and any other conditions as may be prescribed.
Issue of shares on private placement basis [Section 42]: Private placement means any offer or invitation to
subscribe or issue of securities to a select group of persons by a company through private placement offer- cum-
application, which satisfies the conditions specified in this section.
(1) A company may make a private placement of securities.
(2) A private placement shall be made only to a select group of persons who have been identified by the Board
(herein referred to as "identified persons"), whose number shall not exceed 50 or such higher number as may be
prescribed excluding QIBs and employees of the company being offered securities under a scheme of ESOS.
(3) A company making private placement shall issue private placement offer and application in prescribed form
and manner to the identified persons. However, the private placement offer and application shall not carry any
right of renunciation.
(4) Every identified person willing to subscribe to the private placement issue shall apply in the private
placement and application issued to such person along with subscription money paid either by cheque or demand
draft or other banking channel and not by cash. A company shall not utilize monies raised through private
placement unless allotment is made and the return of allotment is filed with the Registrar.
(5) No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made
earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.
(б) A company making an offer or invitation shall allot its securities within 60 days from the date of receipt of
the application money and if the company is not able to allot the securities within that period, it shall repay the
application money to the subscribers within 15 days from the expiry of 60 days and if the company fails to repay
the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate
56
of 12% p.a. from the expiry of the 60th day. Monies received on application shall be kept in a separate bank account
in a scheduled bank and shall not be utilized for any other purpose.
(7) No company issuing securities on private placement basis shall release any public advertisements or utilize
any media, marketing or distribution channels or agents to inform the public at large about such an issue.
(8) A company making any allotment of securities on private placement basis shall file with the ROC a return of
allotment within 15 days from the date of the allotment.
(9) Any private placement issue not made in compliance of the provisions of this section shall be deemed to be
a public offer and all the provisions of the Act and the Securities Contracts (Regulation) Act, 1956 and SEBI Act,
1992 shall be applicable.
Que. No. 44] Preferential issue is not for retail investors. Comment. CS (Executive) - Dec 2012 (4 Marks)
Ans.: Preferential issue means issuance of equity shares to promoter group or selected investors. It covers
allotment of convertible debentures or any other financial instruments that could be converted into equity shares
at a later date. The investors could be institutional investors, private equity investors, high net-worth individuals,
or companies.
Preferential issue is one of the key sources of funding for companies. One of the biggest advantages of a
preferential issue is that the company can raise money quickly and cheaply compared with other means of raising
money, say IPO or issue of shares on a rights basis.
Preferential issues and private placement is only for selected class of investors and not for the retail investors. It is
like a wholesale market, where institutions with financial clout are allowed to participate.
Que. No. 45] Discuss briefly provisions relating to issue of shares on preferential basis as contained in the
Companies (Share Capital & Debentures) Rules, 2014.
Ans.: Issue of shares on preferential basis [Rule 13(1)]: For the purposes of Section 62(1) (c), if authorized by a
special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever
including by way of a preferential offer, to any persons whether or not those persons include the persons referred
to in clause (a) or clause (b) of Section 62(1) and such issue on preferential basis should also comply with conditions
laid down in Section 42.
However, the price of shares to be issued on a preferential basis by a listed company shall not be required to be
determined by the valuation report of a registered valuer.
Preferential Offer: 'Preferential Offer' means an issue of shares or other securities, by a company to any select
person or group of persons on a preferential basis and does not include shares or other securities offered through
a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat
equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.
The expression, "shares or other securities" means equity shares, fully convertible debentures, partly convertible
debentures or any other securities, which would be convertible into or exchanged with equity shares at a later
date.
Preferential offer by unlisted companies to comply with the rules [Rule 13(2) & (3)]: Where the preferential offer
of shares or other securities is made by a company whose share or other securities are listed on a recognized stock
exchange, such preferential offer shall be made in accordance with the provisions of the Companies Act, 2013 and
regulations made by the SEBI, and if they are not listed, the preferential offer shall be made in accordance with the
provisions of the Companies Act, 2013 and rules made hereunder and subject to compliance with the following
requirements, namely:
(a) The issue is authorized by its AOA.
(b) The issue has been authorized by a special resolution of the members.
(c) The securities allotted by way of preferential offer shall be made fully paid up at the time of their allotment.
(d) The company shall make the following disclosures in the explanatory statement to be annexed to the notice
of the general meeting pursuant to Section 102:
(i) Objects of the issue;
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(ii) Total number of shares or other securities to be issued;
(iii) Price or price band at/ within which the allotment is proposed;
(iv) Basis on which the price has been arrived at along with report of the registered valuer;
(v) Relevant date with reference to which the price has been arrived at;
(vi) Class or classes of persons to whom the allotment is proposed to be made;
(vii) Intention of promoters, directors or key managerial personnel to subscribe to the offer;
(viii) Proposed time within which the allotment shall be completed;
(ix) the names of the proposed allottees and the percentage of post preferential offer capital that may be held
by them;
(x) Change in control, if any, in the company that would occur consequent to the preferential offer;
(xi) Number of persons to whom allotment on preferential basis have already been made during the year, in
terms of number of securities as well as price;
(xii) Justification for the allotment proposed to be made for consideration other than cash together with
valuation report of the registered valuer.
(e) The allotment of securities on a preferential basis made pursuant to the special resolution passed pursuant
to sub-rule (2)(b) shall be completed within a period of twelve months from the date of passing of the special
resolution.
(f) If the allotment of securities is not completed within 12 months from the date of passing of the special
resolution, another special resolution shall be passed for the company to complete such allotment thereafter.
(g) The price of the shares or other securities to be issued on a preferential basis, either for cash or for
consideration other than cash, shall be determined on the basis of valuation report of a registered valuer.
(h) Where convertible securities are offered on a preferential basis with an option to apply for and get equity
shares allotted, the price of the resultant shares shall be determined beforehand on the basis of a valuation report
of a registered valuer and also complied with the provisions of Section 62 of the Act.
(i) Where shares or other securities are to be allotted for consideration other than cash, the valuation of such
consideration shall be done by a registered valuer who shall submit a valuation report to the company giving
justification for the valuation;
(j) Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall
be treated in the following manner in the books of account of the company -
(i) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to
(ii) Where clause (i) is not applicable, it shall be expensed as provided in the accounting standards.
Que. No. 46] You are the Company Secretary of Golden Securities Ltd. The Board of Directors wants to issue of
shares on preferential basis. Prepare a note highlighting procedure for issue of shares on preferential basis.
Ans.: Procedure for issue of shares on preferential basis:
(a) Check whether the issue is authorized by Articles. If not make necessary amendments to alter the AO A,
through special resolution passed at the shareholders' meeting.
(b) Convene a Board Meeting to approve the notice of General Meeting and necessary Special Resolution(s)
along with explanatory statements as required. It is to be noted that preferential issue of share are required to
comply with Section 42 also which relates to private placement.
(c) The company shall ensure that all the disclosures in the explanatory statement are annexed to the notice of
the general meeting pursuant to Section 102.
(d) Convene General Meeting and pass necessary Special Resolution(s).
(e) Ensure to file Form No. MGT-14 with ROC within 30 days of passing the resolution.
(f) The allotment of securities on a preferential basis made pursuant to the special resolution passed shall be
completed within a period of 12 months from the date of passing of the special resolution. If the allotment of
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securities is not completed within 12 months from the date of passing of the special resolution, another special
resolution shall be passed for the company to complete such allotment thereafter.
(g) The price of the shares or other securities to be issued on a preferential basis, either for cash or for
consideration other than cash, shall be determined on the basis of valuation report of a registered valuer and when
convertible securities are offered on a preferential basis with an option to apply for and get equity shares allotted,
the price of the resultant shares pursuant to conversion shall be determined
(1) Either up-front at the time when the offer of convertible securities is made on the basis of valuation report
of the registered valuer given at the stage of such offer, or
(2) At the time, which shall not be earlier than 30 days to the date when the holder of convertible security
becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than
60 days of the date when the holder of convertible security becomes entitled to apply for shares.
The company shall take a decision on the above clauses (1) and (2) at the time of offer of convertible security itself
and make such disclosure in the explanatory statement to be annexed to the notice.
(h) Where shares or other securities are to be allotted for consideration other than cash, the valuation of such
consideration shall be done by a registered valuer who shall submit a valuation report to the company giving
justification for the valuation.
(i) Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration
shall be treated in the following manner in the books of account of the company -
(1) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to
(2) Where clause (1) is not applicable, it shall be expensed as provided in the accounting standards.
(j) Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar a return
of allotment in Form No. PAS.-3, along with the fee as specified in Companies (Registration of Offices & Fees)
Rules, 2014.
(k) Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment. (Z)
Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.
■ ■■■ UNDERWRITING
Que. No. 47] Write a short note on: Underwriting Commission CS (Inter) - June 1999 (5 Marks)
Ans.: The amount payable to the underwriters for underwriting the issue of shares or debentures of a company is
called underwriting commission. It is paid at specified rate on the issue price.
Section 40 (6) provides that a company pay commission to any person in connection with issue of securities as per
prescribed conditions.
Payment of commission [Rule 14 of the Companies (Prospectus & Allotment of Securities) Rule, 2014]: A
company may pay commission to any person in connection with the subscription or procurement of subscription
to its securities, whether absolute or conditional, subject to the following conditions, namely:
(a) The payment of commission shall be authorized by the company's articles of association.
(b) The commission may be paid out of proceeds of the issue or the profit of the company or both.
(c) The rate of commission paid or agreed to be paid shall not exceed:
- In case of shares: 5% of the issue price or a rate authorized by the articles, whichever is less.
- In case of debentures: 2.5% of the issue price, or as specified in the company's articles, whichever is less.
(d) The prospectus of the company shall disclose the following:
- The name of the underwriters.
- The rate and amount of the commission payable to the underwriter.
- The number of securities which is to be underwritten or subscribed by the underwriter absolutely or
conditionally.
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(e) There shall not be paid commission to any underwriter on securities which are not offered to the public for
subscription.
(f) A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of
the prospectus for registration.
Que. No. 48] Distinguish between: Brokerage & Underwriting commission
Ans.: Underwriting Commission: Underwriters undertake the to find buyers who are willing to buy shares or
debentures and guarantees the sale of shares or debentures and the amount paid to underwriters is known as
underwriting commission.
Brokerage: A broker undertakes only to find buyers who are willing to buy shares or debentures and does not
guarantee the sale of shares or debentures and amount paid to brokers for their services is known as brokerage.
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CHAPTER
3
ALTERATION OF SHARE CAPITAL
ALTERATION & REDUCTION OF SHARE CAPITAL
Que. No. 1] Write a short note on: Alteration of share capital
Ans.: Power of limited company to alter its share capital [Section 61]: A company limited by shares or guarantee
and having a share capital may, if so authorized by its articles, alter, by an ordinary resolution, its memorandum in
the following ways:
(a) It may increase the authorized share capital by such amount, as it thinks expedient.
(b) It may consolidate and divide, all or any of its existing shares into a larger denomination than of its existing
shares e.g., by consolidating ten shares of ` 10 each into one share of ` 100 each. No consolidation and division
which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the
Tribunal on an application made in the prescribed manner.
(c) It may convert all or any of its fully paid-up shares into stock or reconvert that stock into fully paid-up shares
of any denomination.
(d) It may sub-divide its existing shares or any of them into smaller denomination than fixed by its Memorandum
but it must keep the existing proportion between the paid-up and unpaid amount e.g., one share of ` 100 each, `
60 paid-up and be sub-divided into ten shares of ` 10 each, ` 6 paid-up per share.
(e) It may cancel shares which have not been taken up or agreed to be taken by any person and diminish the
amount of the share capital by the amount of the shares so cancelled. However, such cancellation of shares does
not amount to reduction of share capital.
Notice to be given to Registrar for alteration of share capital [Section 64]: When company alters its share capital
as per Section 61, the company shall file a notice in Form No. SH. 7 to the ROC within 30 days of alteration along
with an altered memorandum.
Que. No. 2] A company increased its authorized capital from ` 7 Crore to ` 32 Crore by passing appropriate
resolution at general body meeting. But it did not file the notice in Form No. SH. 7 before the ROC and also did
not pay the requisite filing fee within the stipulated period or thereafter. Two years later, the earlier resolution
was rescinded and the share capital brought back to ` 7 Crore as it originally stood. Is the company absolved
from liability for failure to follow the procedure?
Ans.: As per Section 64, when company increases authorized capital, the notice in Form SH-7 along with the
prescribed fee is required to be filed within 30 days of adopting the resolution.
The subsequent cancellation of the resolution to increase the share capital or adoption of the resolution to reduce
the share capital will not absolve the petitioners from their liability to file Form SH-7. [Amison Foods Limited v.
Registrar of Companies]
Que. No. 3] Distinguish between: Share & Stock CS (Executive) - June 2010 (4 Marks)
Ans.: Following are the main points of distinction between share & stock:
Points Share Stock
Nature Shares in physical form bear distinct numbers. Stocks are the consolidated value of share
capital.
Paid-up value Shares may or may not be fully paid-up. Stock is always fully paid-up.
Nominal value Shares have a nominal value. Stock does not have any nominal value.
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Denomination All shares are of equal denomination. Denomination of stocks varies.
Fractions It is not possible to transfer shares into Stock is divisible into any amount required.
fraction. Thus, it is possible to transfer even into
fractions.
Existence A share comes into existence before the stock Stock comes into existence after conversion of
and it is issued initially. shares into stock and on conversion of shares
into stock, the provisions of the Act governing
the shares shall cease to apply to the share
capital as it is converted into stock.
Que. No. 4] What are the provisions of the Companies Act, 2013 relating to reduction of share capital?
Ans.: Reduction of share capital [Section 66(1)]: A company limited by shares or limited by guarantee and having
a share capital may by passing special resolution and by taking confirmation from the Tribunal, alter its
memorandum to reduce the share capital in following manner:
(a) Extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up or
(b) Cancel any paid-up share capital which is lost or is unrepresented by available assets or
(c) Pay off any paid-up share capital which is in excess of the wants of the company.
However, no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted
by it or the interest payable thereon.
Notice by Tribunal [Section 66(2)]: The Tribunal shall give notice of every application made to it to the Central
Government, Registrar and to the SEBI and the creditors of the company.
The company shall take into consideration the representations made to it by that Government, Registrar, the SEBI
and the creditors within a period of 3 months from the date of receipt of the notice.
If no representation has been received from the Central Government, Registrar, the SEBI or the creditors within 3
months, it shall be presumed that they have no objection to the reduction.
Confirmation by Tribunal [Section 66(3)]: If the Tribunal is satisfied that the debt or claim of every creditor of the
company has been discharged or determined or has been secured or his consent is obtained, make an order
confirming the reduction of share capital on such terms and conditions as it deems fit.
The Tribunal shall not sanction reduction of share capital unless the accounting treatment, proposed by the
company for such reduction is in conformity with the accounting standards and a certificate to that effect by the
company's auditor has been filed with the Tribunal.
Publication of order of confirmation [Section 66(4)]: The order of confirmation of the reduction of share capital
by the Tribunal shall be published by the company in such manner as the Tribunal may direct.
Filing of documents [Section 66(5)]:The company shall deliver a certified copy of the order of the Tribunal along
with the prescribed details to the Registrar within 30 days of the receipt of the copy of the order and Registrar shall
register the same and issue a certificate to that effect.
Que. No. 5] Distinguish between: Alteration of Share Capital & Reduction of Share Capital
CA (IPCC) - Nov 2014 (5 Marks)
Ans.: Following are the main points of difference between alteration of share capital & reduction of share capital:
Points Alteration of Share Capital Reduction of Share Capital
Meaning Alteration of share capital is governed by the Reduction of share capital is governed by the
provisions of Section 61 of the Companies Act, provisions of Section 66 of the Companies Act,
2013. 2013
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Resolution Alteration of share capital is required to be Reduction of share capital is required to be
done by ordinary resolution. done by special resolution.
Points Alteration of Share Capital Reduction of Share Capital
Tribunal Alteration of share capital is not required to be Reduction of share capital is to be confirmed by
Confirmation confirmed by the Tribunal. the Tribunal.
Examples Alteration of share capital may be done in the Reduction of share capital may be done in the
following manner: following manner:
(1) Increasing its nominal capital by issuing (1) Extinguishing or reducing the liability of
new shares. members in respect of the capital not paid up.
(2) Consolidating and dividing all or any of (2) Writing off or cancelling any paid up
its share capital into shares of large capital which is in excess of the needs of the
denomination. company.
(3) Converting fully paid up shares into stock (3) Paying off any paid up share capital
or vice versa which is in excess of the needs of the company
(4) Sub dividing its shares into shares of
smaller amount.
(5) Cancelling shares which have not been
taken up and diminishing the amount of share
capital by the amount of the shares so
cancelled.
Que. No. 6] State the cases of "reduction of share capital without sanction of the Tribunal".
Whether buyback of shares amounts to reduction of share capital. Comment.
Diminution of share capital is always regarded as reduction of share capital.
Ans.: The following are cases which amount to reduction of share capital and where no confirmation by the
Tribunal is necessary:
(a) Surrender of Shares: Surrender of shares means the surrender to the company on the part of the registered
holder of shares already issued. Where shares are surrendered to the company it will have the same effect as a
transfer in favour of the company and amount to a reduction of capital. But if such shares instead of being
surrendered to the company, are transferred to a nominee of the company then there will be no reduction of
capital. Surrender may be accepted by the company under the same circumstances where forfeiture is justified. It
has the effect of releasing the shareholder whose surrender is accepted from further liability on shares.
The Companies Act, 2013 contains no provision for surrender of shares. Thus, surrender of shares is valid only
when AOA provide for the same and:
(i) Where forfeiture of such shares is justified or
(ii) When shares are surrendered in exchange for new shares of same nominal value.
Both forfeiture and surrender lead to termination of membership. But in the former case, it is at the initiative of
company and in the latter case at the initiative of shareholder.
(b) Forfeiture of Shares: A company may if authorized by its articles, forfeit shares for non-payment of calls and
the same will not require confirmation of the Tribunal. Where power is given in the articles, it must be exercised
strictly in accordance with the regulations regarding notice, procedure and manner stated therein, otherwise the
forfeiture will be void. Forfeiture will be effected by means of Board resolution. The power of forfeiture must be
exercised bona fide and in the interest of the company.
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(c) Diminution of Capital: Diminution of capital is the cancellation of the unsubscribed part of the issued capital.
It can be effected by an ordinary resolution provided articles of the company authorizes to do so. It does not need
any confirmation of Tribunal.
(d) Redemption of redeemable preference shares.
(e) Buy-back of shares u/s 68.
Que. No. 7] Buy back of shares does not amount to reduction of share capital. Comment.
Ans.: Buy back of share capital amounts to reduction of share capital as after buy back paid share capital on the
liability side will be reduced and by equivalent amount the bank balance on the asset side will get reduced. Though
buy back amounts to reduction of share capital but it does not require confirmation by the Tribunal as buy back up
to certain percentage is specifically authorized in Section 68 of the Companies Act, 2013.
Que. No. 8] A company incorporated under the Companies Act, 2013 does not have the right to reduce its share
capital on selective basis. Comment. CS (Executive) - Dec 2015 (5 Marks)
Ans.: Reduction of the share capital of a company is a domestic concern of the company and the decision of the
majority would prevail. If the majority by special resolution decides to reduce the share capital of the company, it
has the right to decide to reduce the share capital of the company and it has the right to decide how this reduction
should be effected. While reducing the share capital, the company can decide to extinguish some of its shares
without dealing in the same manner with all other shares of the same class. A selective reduction is permissible
within the frame work of law for any company limited by shares. [SIEL Ltd., In re. [(2008) 144 Com Cases 469 (Del)]
Que. No. 9] Can a public company give a loan or any financial assistance for the purpose of purchase of its shares
to any person?
Ans.: Restrictions on purchase by company or giving of loans by it for purchase of its shares [Section 67(1)]:
A company limited by shares or by guarantee and having a share capital cannot buy its own shares unless the
consequent reduction of share capital. (Exception is buy back u/s 68)
Prohibition on loan or guarantee to purchase its own shares [Section 67(2)]: A public company shall not give
loan or any financial assistance to any person for the purpose of purchase of its shares or of its holding company.
The exemptions are as follows:
(a) Lending of money by a banking company in the ordinary course of its business.
(b) Provision by a company of purchase of fully paid-up shares in the company or its holding company. Such
purchase can be only under the scheme approved by company through special resolution. Such shares will be
purchased by trustee. The trustee will hold shares for the benefit of employees.
(c) Loan to bona fide employees (other than its directors or key managerial personnel) to enable them to
purchase fully paid-up shares in the company or its holding company to be held by them by way of beneficial
ownership. Such loan cannot exceed 6 months salary or wages of the employee.
These restrictions are not applicable for private companies.
Que. No. 10] MNO Private Ltd., a subsidiary of PQR Ltd. decides to give a loan of ` 4,00,000 to HR (Human
Resources) Manager, who is not a Key Managerial Personnel of MNO Private Ltd., drawing salary of ` 30,000 per
month, to buy 500 partly paid-up equity shares of ` 1,000 each in MNO Private Ltd. Examine the validity of
Company's decision under the provisions of the Companies Act, 2013.
CA (IPCC) - Nov 2015 (5 Marks)
Ans.: As per Section 67(2), a public company shall not give loan or any financial assistance to any person for the
purpose of purchase of its shares or of its holding company. However, Loan to bona fide employees (other than its
directors or key managerial personnel) can be given to enable them to purchase fully paid-up shares in the
company or its holding company to be held by them by way of beneficial ownership. Such loan cannot exceed 6
month's salary or wages of the employee. Restrictions u/s 67 (2) are not applicable for private companies.
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As per Section 3(iv), a company which is a subsidiary of a company, not being a private company, shall be deemed
to be public company even where such subsidiary company continues to be a private company in its articles. This
means, if private company is subsidiary of public company then it will be treated as public company.
As per the facts given in case, MNO Private Ltd. is a subsidiary of PQR Ltd. and hence it will be treated as public
company and restriction mentioned u/s 67(2) are applicable to it.
Thus, MNO Private Ltd. can give loan to its employee for purchase of its shares to enable them to purchase shares
in the company or its holding company to be held by them by way of beneficial ownership. Such loan cannot exceed
6 month's salary or wages of the employee. Salary of HR Manager is ` 30,000 p.m. and thus his 6 month's salary is
` 1,80,000. The company intends to give loan to buy 500 partly paid-up equity shares of ` 1,000 each. Thus total
loan amount is ` 5,00,000 (500 * 1,000).
As amount of loan is in excess of limit prescribed, hence, the decision of company is not valid.
Que. No. 11] Explain the provisions of Companies Act, 2013 relating to 'buy-back'?
State the conditions which are required to be satisfied by a company for the purpose of buy-back of shares.
CS (Inter) - June 2003 (4 Marks) CS (Inter) - Dec 2003 (4 Marks), Dec 2005 (12 Marks)
Ans.: Power of Company to Purchase its Own Securities [Section 68]:
Sources for buy-back [Section 68(1)]: A company may purchase its own shares or other specified securities out of
-
♦ Free reserves or
♦ Securities premium account or
♦ Proceeds of the issue of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other specified securities.
Conditions for buy-back of shares [Section 68(2)]: No company shall purchase its own shares or other specified
securities, unless -
(i) The buy-back is authorized by its articles.
(ii) A special resolution has been passed at a general meeting of the company authorizing the buy-back where buy-
back is above 10% but up to 25% of the aggregate of paid-up capital and free reserves of the company. However,
where buy-back is up to 10% of paid-up capital and free reserves of the company Board resolution is sufficient.
In respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with
respect to its total paid-up equity capital in that financial year.
(iii) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves i.e. to say -
Secured + Unsecured Debts/Paid-up Capital + Free Reserves <2
The Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or
classes of companies.
(iv) All the shares or other specified securities for buy-back are fully paid-up.
(v) The buy-back of the shares or other specified securities listed on any recognized stock exchange is in
accordance with the SEBI (Buy Back of Securities) Regulations, 1998.
(vi) The buy-back in respect of shares or other specified securities for unlisted public company and private
companies is in accordance with the Companies (Share Capital & Debentures) Rules, 2014.
(vii) No offer of buy-back shall be made within a period of 1 year reckoned from the date of the closure of the
preceding offer of buy-back, if any. (in simple words, there should be gap ofl year between two buy back)
Content and details of notice [Section 68(3)]: The notice of the meeting at which the special resolution is proposed
to be passed shall be accompanied by an explanatory statement stating -
(a) A full and complete disclosure of all material facts.
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(b) The necessity for the buy-back.
(c) The class of shares or securities intended to be purchased under the buy-back.
(d) The amount to be invested under the buy-back.
(e) The time-limit for completion of buy-back.
Time limit for completion of buy-back [Section 68(4)]: Every buy-back shall be completed within a period of 1 year
from the date of passing of the special resolution/Board resolution.
Method of buy-back [Section 68(5)]: The buy-back may be -
(a) From the existing shareholders or security holders on a proportionate basis.
(b) From the open market.
(c) By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or
sweat equity.
Declaration of solvency [Section 68(6)]: Where a company proposes to buy-back its own shares or other specified
securities, it shall, before making such buy-back, file with the ROC and the SEBI, a declaration of solvency signed
by at leas` 2 directors of the company, one of whom shall be the managing director.
Such declaration of solvency has to be filed in Form SH-9.
Declaration of solvency should be verified by an affidavit to the effect that the Board of Directors of the company
has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is
capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of
declaration adopted by the Board.
However, no declaration of solvency shall be filed with the SEBI by unlisted company.
Extinguishment and physical destruction of securities [Section 68(7)]: Where a company buy-back its own shares
or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within
7 days of the last date of completion of buy-back.
Prohibition of issue of shares of same kind for next six months [Section 68(8)]: Where a company completes a
buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or
other securities including allotment of new shares u/s 62(l)(a) [i.e. right issue] or other specified securities within
a period of 6 months. However, bonus issue, conversion of warrants, stock option schemes, sweats equity or
conversion of preference shares or debentures into equity shares will be allowed.
Register of buy-back [Section 68(9)]: Where a company buy-back its shares or other specified securities, it shall
maintain a register of the shares or securities so bought in Form SH-10. Such register should contain following
details -
♦ The consideration paid for the shares or securities bought back
♦ The date of cancellation of shares or securities
♦ The date of extinguishing and physically destroying the shares or securities
♦ Other prescribed particulars.
Filing of return [Section 68(10)]: A company shall, after the completion of the buy-back, file with the ROC and the
SEBI a return relating to the buy-back in Form SH-11 within 30 days from the date of completion of buy-back.
However, no return shall be filed with SEBI by unlisted company.
Penalty [Section 68(11)]: If a company makes any default in complying with the provisions of this section or any
regulation made by the SEBI:
(a) The company shall be punishable with fine which shall not be less than ` 1 lakh but which may extend to` 3
lakh and
(b) Every officer of the company who is in default shall be punishable -
- with imprisonment for a term which may extend to 3 years or
- with fine which shall not be less than ` 1 lakh but which may extend to ` 3 lakh or
- with both.
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Explanation I: "Specified securities" includes employees' stock option or other securities as may be notified by the
Central Government from time to time.
Explanation II: "Free reserves" includes securities premium account.
Que. No. 12] Following information is available from the audited balance sheet of Short Cut Ltd. as at 31st March,
2004:
Paid-up Share Capital ` 500 lakhs
Share Premium Account ` 100 lakh
General Reserves ` 800 lakh
Secured Loans ` 500 lakh
Unsecured Loans ` 400 lakh
The company plans to buy-back its shares. Compute the maximum limit up to which the company can buy-back
its shares. [ CS (Inter) - Dec 2005 ] (4 Marks)
Ans.: To compute the maximum limit up to which the company can buy-back its shares, following provisions are
required to be complied with:
(1) The buy-back of equity shares in any financial year should not exceed 25% of its total paid-up equity capital
in that financial year. 500 lakhs × 25% = 125 lakhs]
(2) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves i.e. to say
Secured + Unsecured Debts/Paid - up Capital + Free Reserves < 2
Let the amount to be buyback be 'x'.
500 + 400 = 2
500 + 400/ 500 -x + (100 + 800- x)
900/ 1,400 = 2x
900 = 2,800 - 4x
-1,900 = - 4x x
= 475 lakhs
No. of shares = 475/10 = 47.5 lakhs
Thus, maximum amount that can be brought back = ` 47.5 Lakhs.
Que. No. 13] Write a short note on: Objectives of buy back of securities
It is a well known fact that to maximize the shareholders value, a company having surplus funds often induced
to buy-back its own shares. What are common reasons which usually induces a company to resort to buy-back?
CS (Professional) - June 2011 (5 Marks)

"Measuring the shareholders' value" is the objective of Good Corporate Governance. Comment on the
statement, how buy-back of shares achieves it. CS (Professional) - June 2017 (5 Marks)
Ans.: Good corporate governance calls for maximizing the shareholder value. When a company has surplus funds
for which it does not have good avenues for deployment assuring an average return on capital employed and
earnings per share, the company's financial structure requires balancing.
The reasons/objectives for buy-back may be one or more of the following:
♦ To improve earnings per share (EPS).
♦ To improve return on capital, return on net worth and to enhance the long term shareholder value.
♦ To provide an additional exit route to shareholders when shares are under-valued or are thinly traded.
♦ To enhance consolidation of stake in the company.
♦ To prevent unwelcome takeover bids.
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♦ To return surplus cash to shareholders.
♦ To achieve optimum capital structure.
♦ To support share price during periods of sluggish market conditions.
♦ To service the equity more efficiently.
The decision to buy-back is also influenced by various other factors relating to the company, such as growth
opportunities, capital structure, sourcing of funds, cost of capital and optimum allocation of funds generated.
Que. No. 14] Board of directors of Pious Ltd. gives you the following information extracted from the company's
financial statements as at 31st March, 2015:
Authorized equity share capital 10 Crore
(1 Crore shares oft 10 each)
Paid-up equity share capital 5 Crore
General reserve 5 Crore
Debenture redemption reserve 2 Crore
Board of directors by a resolution passed at its meeting decides to go for buy-back of shares to the extent of 20%
of the company's paid-up share capital and free reserves. Examine the validity of the Board's resolution with
reference to the provisions of the Companies Act, 2013.
Ans.: As per Section 68(2) the board of director are authorized to buy back up to 10% of the total paid-up equity
capital and free reserves of the company by passing resolution at its meeting.
Under Section 179(3)(b), the Board of Directors of a company has given power to buy-back of securities as per
Section 68 by passing resolution at meetings of the Board.
Therefore, in the present case, the Board of Directors are authorized to buy-back the shares of the company up to
10% of the paid-up capital, provided the resolution authorizing the buy-back is passed at the Board meeting and
not by circular resolution.
As per Section 68(2)(c), a special resolution has to be passed at a general meeting of the company for buy-back
above 10% and up to 25% of the total paid-up equity capital and free reserves.
As per the facts given in case, the board of directors of Pious Ltd. desires to buy-back 20% of paid-up capital and
free reserve. This can be done by passing special resolution at general meeting and board resolution is not
sufficient.
Total shares that can be brought back by passing special resolution are calculated as follows:
[` 5 Crore (Paid-up Capital) + ` 5 Crore (General Reserve)] × 20% = ` 2 Crore The company should also comply with
the other conditions specified in Section 68.
Que. No. 15] Distinguish between: 'Free Reserves' and 'Net Worth' under the provisions of Companies Act, 2013.
Ans.: Section 68 and many other sections use the 'free reserve' in its provisions thus it is necessary to know the
meaning of the term 'free reserve'.
Free Reserve [Section 2(43)]: Free reserves means such reserves which, as per the latest audited balance sheet of
a company, are available for distribution as dividend.
However, following cannot be treated as free reserve -
(i) Any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve
or otherwise, or
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(ii) Any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and
loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.
Net Worth [Section 2(57)]: Net worth means the aggregate value of the paid-up share capital and all reserves
created out of the profits and securities premium account and debit or credit balance of profit and loss account,
after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation.
"Net worth" is wider term and “free reserve" is part of “net worth".
Que. No. 16] Extracts of the balance sheet of Strong Ltd. as on 31st March, 2016 is as follows:
LIABILITIES
Paid-up share capital (1,00,00,000 shares fully paid-up) 1,00,00,000
Reserves and surplus:
General reserve 1,00,00,000
Securities premium 3,00,00,000
Revaluation reserve 1,50,00,000
Long-term loans 3,00,00,000
Short-term loans 50,00,000
Provisions 50,00,000
TOTAL 10,50,00,000
ASSETS
Fixed assets (acquired in November and December, 2015) 5,00,00,000
Capital work-in-progress 50,00,000
Investments 50,00,000
Stores and spares 2,00,00,000
Cash and bank 2,00,00,000
Deferred revenue expenditure not written-off 50,00,000
TOTAL 10,50,00,000
Compute the net worth of the company as on 31st March, 2016 as per Section 2(57) of the Companies Act, 2013.
[
CS (Professional) - June 2016] (3 Marks)
Ans.: Net Worth [Section 2(57)]: Net worth means the aggregate value of the paid-up share capital and all reserves
created out of the profits, securities premium account and debit or credit balance of profit and loss account, after
deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure
69
not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation.
Particulars `
Paid-up share capital 1,00,00,000
General reserve 1,00,00,000
Securities premium 3,00,00,000
Deferred revenue expenditure not written-off (50,00,000)
Net Worth 4,50,00,000
Que. No. 17] By analyzing a balance sheet of Aadarsh Ltd., it was found that there are plethora of reserves in the
balance sheet for the year ended 31st March, 2019, and the reserves are summarized below:
(i) Investment fluctuation reserve (ii) Statutory reserve (iii) Securities premium account
(iv) General reserve
(р) Foreign currency fluctuation reserve (PI) Dividend equalization reserve
(vii) Dividend redemption reserve (preference shares)
(viii) Capital, redemption reserve.
Now, the Chairman of Aadarsh Ltd. asks you as a Company Secretary to know which of the above reserves can
be utilized for the proposed buy-back of shares of the company. Advice.
CS (Professional) - Dec 2010 (4 Marks)
Ans.: According to Section 68(1) of the Companies Act, 2013, a company may purchase its own shares or other
specified securities out of -
(a) Free reserves or
(b) Securities premium account or
(с) Proceeds of the issue of any shares or other specified securities
According to Explanation II to the Section 68 of the Companies Act, 2013, "Free Reserves" includes Securities
Premium Account.
Keeping in view above provisions, Aadarsh Ltd. can utilize the following reserves for the proposed buy-back of
shares:
(i) Investment fluctuation reserve (ii) Securities premium account (ill) General reserve
(iv) Foreign currency fluctuation reserve (provided it is not in the nature of provision)
(v) Dividend equalization re-serve. * 1 2 3 * 1 2 3
Que. No. 18] NSZ Ltd. (a non-listed company) has the following capital structure as on 31.3.2019:
Particulars (` in Crore)
(1) Equity Share Capital (Shares of ` 10 each fully paid) 330
(2) Reserves & Surplus
- General Reserve 240
- Securities Premium Account 90
- Profit & Loss Account 90
- Infrastructure Development Reserve 180
(3) Loan Funds 1,800
The shareholders of NSZ Ltd., on the recommendation of their Board of Directors, have approved on
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12.9.2019a proposal to buy back the maximum permissible number of equity shares considering the large
surplus funds available at the disposal of the company.
The prevailing market value of the company's shares is ` 25 per share and in order to induce the existing
shareholders to offer their shares for buy back, it was decided to offer a price of 20% over market.
You are also informed that the Infrastructure Development Reserve is created to satisfy Income-tax Act, 1961
requirements.
You are required to compute the maximum number of shares that can be bought back in the light of the above
information and also under a situation where the loan funds of the company were ` 1,200 Crore,
` 1,500 Crore, 300 Crore.
Ans.: Situation I: Loan funds of the company are ` 1,800 Crore
in that financial year. [` 330 lakhs x 25% = ` 82.5 Crore]
(2) 25% of the aggregate of paid-up capital and free reserves of the company.
[(330 Crore + 240 Crore + 90 Crore + 90 Crore) x 25% = ` 187.5 Crore]
than twice the paid-up capital and its free reserves.
In question, it is stated that the company has surplus funds to dispose-off therefore, it is presumed that buyback
is out of free reserves or securities premium and hence a sum equal to the nominal value of the share bought back
shall be transferred to Capital Redemption Reserve (CRR).
Buy-back price = 25 x 120% = 30 (out of which 110 is nominal value and t 20 is buy-back premium)
Let the nominal of amount shares to be buy-back be (equal amount will be transferred to CRR)
Premium on buy-back = 2x
Secured + Unsecured Debts /Paid-up Capital + Free Reserves < 2
Let the amount to be buy-back be 'x'.
1800/ 330 - x + (240 + 90 + 90 - x - 2x) =2
1,800/ 750 - 4 x = 2
1,800 = 1,500 - 8x
300 = - 8x
x = - 37.5 (value is minus; hence amount of nominal value of shares that can be buy-back will be taken zero) No. of
shares to be brought back = Nil.
Since, out of the above three calculation minimum amount is zero; hence buy-back is not possible when company
has loan funds of ` 1,800 Crore.
Situation II: Loan funds of the company are ` 1,200 Crore
In the question, it is stated that the company has surplus funds to dispose-off therefore, it is presumed that buy-
back is out of free reserves or securities premium and hence a sum equal to the nominal value of the share bought
back shall be transferred to Capital Redemption Reserve (CRR).
Buy-back price = 25 x 120% = 30 (out of which 110 is nominal value and ` 20 is buy-back premium)
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Let the nominal of amount shares to be buy-back be (equal amount will be transferred to CRR)
Secured + Unsecured Debts/Paid-up Capital + Free Reserves < 2
Let the amount to be buy-back be
1,200 /330 -x + (240 + 90 + 90 - x - 2x) =2
1,200 /750 -4x =2
1,200 = 1,500 - 8x
- 300 = - 8x
x = 37.5 Crore
Since, out of the above three calculations minimum amount is t 37.5 Crore; hence buy-back of equity shares having
nominal amount of t 37.5 Crore is possible.
No. of shares = 37.5/10 = 3.75 Crore shares
Situation III: Loan funds of the company are ` 1,500 Crore
in that financial year. [` 330 lakhs * 25% = ` 82.5 Crore]
Buy-back price = 25 x 120% = 30 (out of which ` 10 is nominal value and ` 20 is buy-back premium)
Let the nominal of amount shares to be buy-back be 'x'. (equal amount will be transferred to CRR)
Secured + Unsecured Debts /Paid - up Capital + Free Reserves < 2
Let the amount to be buy-back be ‘x’.
1,500/330 -x + (240 + 90 + 90 - x - 2x) =2
1,500
750 - 4x = 2
1,500 = 1,500 - 8x
0 = - 8x
x = 0 (since value is zero hence amount of nominal value of shares that can be buy-back will be taken zero)
Since, out of the above three calculation minimum amount is zero; hence buy-back is not possible when company
has loan funds of ` 1,500 Crore.
Situation IV: Loan funds of the company are ` 300 Crore
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Buy-back price = 25 * 120% = 30 (out of which ` 10 is nominal value and ` 20 is buy-back premium)
Let the nominal of amount shares to be buy-back be 'x'. (equal amount will be transferred to CRR)
Secured + Unsecured Debts / Paid - up Capital + Free Reserves < 2
Let the amount to be buy-back be 'x'.
300 / 330 -x + (240 + 90 + 90 - x - 2x) = 2
300/ 750 - 4x = 2
300 = 1,500 - 8x
-1,200= - 8x
X = 150 Crore
Since, out of the above three calculation minimum amount is ` 82.5 Crore; hence buy-back of equity shares having
nominal amount of ` 82.5 Crore is possible.
No. of shares = 82.5/10 = 8.25 Crore shares.
Que. No. 19] The position of capital and reserves as on 31st March, 2019 of Matrix Ltd. are given below:
`
Equity shares (Fully paid-up of face value ` 10 each) 1,00,00,000
Equity shares (` 5 is paid-up on face value of ` 10 each) 1,00,00,000
Equity shares with differential voting rights
(Fully paid-up of face value of ` 10 each) 1,00,00,000
Preference shares (Fully paid-up of ` 100 each) 1,00,00,000
Free reserves 7,50,00,000
The managing director of Matrix Ltd. wanted to place proposal before the Board for buy-back of its 100%
preference share capital. You, as a Company Secretary, advise your managing director on the following issues:
(t) Maximum limit up to which Board can approve buy-back of shares.
(«) Maximum limit up to which shareholders can approve buy-back of shares.
(tit) Maximum limit up to which company can buy-back its own shares.
(iv) The situation in which further offer of buy-back can be given by the company within a period of 365 days.
CS (Professional) - June 2010 (4x2 = 8 Marks)

Answer:
(i) According to the proviso to Section 68(2) of the Companies Act, 2013, the Board can authorize buy back of
securities not exceeding 10% of total paid-up equity capital and free reserves of the company. The total paid-up
equity capital of the company is ` 3,00,00,000.
Thus, the maximum amount up to which board can approve buy back is:
(` 3,00,00,000 + ` 7,50,00,000) × 10% = ` 1,05,00,000.
(ii) According to Section 68(2)(b) and (c) of the Companies Act, 2013, shareholders by passing special resolution
can approve buy-back up to 25% of paid-up capital and free reserves. According to the second • proviso to Section
68(2) of the Companies Act, 2013, in respect of the buy-back of equity shares in any financial year, the reference
to 25% shall be construed with respect to its total paid-up equity capital in that financial year.
Thus, the maximum amount up to which shareholder can approve buy back is by passing special resolution is:
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(7 3,00,00,000 + ` 7,50,00,000) x 25% = ` 2,67,50,000.
(iii) A company can buy-back up to 25% of the total paid-up capital and free reserves [Section 68(2)(c], Further, buy
back of equity shares in any financial year should not exceed 25% of the total paid-up equity capital of the company.
Hence, in the given question maximum buy-back of equity shares should be limited to 25% of the total paid up
equity capital of ` 3,00,00,000 which is ` 75,00,000.
(iv) According to the third proviso to Section 68(2) of the Companies Act, 2013, no offer of buy-back shall be made
within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any.
Que. No. 20] The paid-up capital of Cool Ltd. as on 31st March, 2019 is ` 10 Crore and its free reserves as on the
same date was ` 10 Crore. Cool Ltd. proposes to buy-back its shares for a value up to 15% of its paid-up capital.
State whether the Board of Cool Ltd. can approve buy-back of company's shares up to 15% of the paid-up capital
under the provisions of the Companies Act, 2013. CS (Professional) - June 2015 (5 Marks)
Ans.: According to the proviso to Section 68(2) of the Companies Act, 2013, the Board can authorize buy-back of
securities not exceeding 10% of total paid-up equity capital and free reserves of the company.
(10 Crore + 10 Crore) x 10% = 2 Crore.
Cool Ltd. proposes to buy-back its shares for a value up to 15% of its paid-up capital.
10 Crore x 15% =1.5 Crore.
Since proposed buy-back is with the limit specified in proviso to Section 68(2), Board of directors can approve buy-
back of company's equity shares up to 15% of the paid-up equity capital.
Que. No. 21] Hardnut Ltd. wants to buy-back its equity shares. The company has equity share capital of ` 100
Crore (face value of ` 10 fully paid-up) and free reserves of ` 200 Crore. Partly paid equity shares are ` 60 Crore.
Preference share capital of face value ` 100 fully paid is ` 40 Crore. The company seeks your opinion about the
quantum of shares that can be bought back.
Ans.:
(i) Calculation of possible amount of buy-back by passing board resolution:
According to the proviso to Section 68(2) of the Companies Act, 2013, the Board can authorize buy back of
securities not exceeding 10% of total paid-up equity capital and free reserves of the company.
(100 Crore + 60 Crore + 200 Crore) x 10% = 30 Crore.
Thus, maximum number of equity shares that can be brought back by passing board resolution is 3 Crore equity
shares (30 Crore/10).
(ii) Calculation of possible amount of buyback by passing shareholders resolution:
According to Section 68(2)(b) and (c) of the Companies Act, 2013, shareholders by passing special resolution can
approve buy-back up to 25% of paid-up capital and free reserves. According to the second proviso to Section 68(2)
of the Companies Act, 2013, in respect of the buy-back of equity shares in any financial year, the reference to 25%
shall be construed with respect to its total paid-up equity capital in that financial year.
(100 Crore + 60 Crore + 200 Crore) x 25% = 90 Crore.
Further, buy back of equity shares in any financial year should not exceed 25% of the total paid-up equity capital
of the company.
(100 Crore + 60 Crore) x 25% = 40 Crore.
Thus, maximum number of equity shares that can be brought back by passing shareholders resolution is 4 Crore
equity shares (40 Crore/10).
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Chapter 4
4
PROSPECTUS
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Prospectus & Allotment of Securities)
Rules, 2014.
PROSPECTUS
Que. No. 1] Define 'Prospectus'. What are the ingredients to constitute a prospectus?
CS (Inter) - Dec 1998 (4 Marks) CS (Executive) - Dec 2009 (6 Marks)
Ans.: Prospectus [Section 2(70)]: Prospectus means any document described or issued as a prospectus and
includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document
inviting offers from the public for the subscription or purchase of any securities of a body corporate.
One the basis of aforesaid definition, it may be said that a document should have following ingredients to
constitute a prospectus:
♦ There must be an invitation to the public.
♦ The invitation must be made "by or on behalf of the company".
♦ The invitation must be "to subscribe or purchase".
♦ The invitation must relate to shares or debentures or other instrument.
Judicial Views:
♦ Advertisement in news paper to invite application for purchase of remaining shares of a company is
prospectus. In this case directors were penalized for not complying with the requirements of filing a copy thereof
with ROC. [Pramatha Nath Sanyal v. Kali Kumar Dutt, AIR 1925 Cal. 714]
♦ A single private communication does not satisfy the term "issue". In this case, several copies of a document
marked "strictly confidential" and containing particulars of a proposed issue of shares, were sent accompanied
with application form by the managing director who, in turn, gave it to a client who passed it on to a relation. Thus,
the document was passed on privately through a small circle of friends of the directors. It was held that there had
been no issue to the public and any action for compensation by the allottee for loss sustained by reason of an
omission in the document, failed. [Nash v. Lynde (1929) A.C. 158]
♦ A circular issued by a company to the shareholders of other companies to acquire their shares held in those
companies and issue its own shares in exchange of those shares did not amount to be a prospectus, as there is no
public issue. It was pointed out that the circular did not involve an offer for the purchase of any shares. The shares
in question were unissued shares of new company, so that they could not be the subject of an offer for purchase.
Thus, the circular was not a prospectus, but only the communication of an offer to exchange shares in the new
company for shares in the other existing companies. [Government Stock & Other Securities Investment Co. Ltd. v.
Christopher, (1956) I.W.L.R. 237]
♦ "Public" is a general word, and includes any section of the public. If a document inviting persons to buy shares
is issued, for example, to all advocates, or to all doctors, or to all foreigners living in India, or to all Indian citizens,
or to all shareholders in a particular company, it will still be deemed to be issued to the public within the meaning
of the Act. In the aforesaid case, 3,000 copies of a document in the form of a prospectus were sent out and
distributed among the members of certain gas companies only. It was held that the document so sent and
distributed was a prospectus issued to the public. [Re. South of England Natural Gas and Petroleum Co. Ltd., (1911)
1 Ch. 573]
Que. No. 2] State the cases in which prospectus is not required to be issued?
CS (Inter) - June 2002 (5 Marks), June 2005 (5 Marks)
CS (Executive) -
Ans.: In the following cases a prospectus is not required to give the all necessary details:
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(1) Where a person is a bona fide invitee to enter into an underwriting agreement with regard to shares or
debentures. [Section 33(1) (a)]
(2) Where the securities are not offered to public. [Section 33(1) (b)]
(3) Where the issue relates to shares or debentures uniform in all respects, with the shares or debentures
already issued and dealt in or quoted at a recognized stock exchange [Section 26(2)]
(4) Advertisement of prospectus [Section 30]: Where an advertisement of any prospectus of a company is
published in any manner, entire prospectus is not required to be issue. However, it shall be necessary to specify
therein the contents of its memorandum as regards the objects, the liability of members and the amount of share
capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed
for by them, and its capital structure.
Advertisement of prospectus should also adhere to the guidelines issued by SEBI as to the code of advertisement.
Que. No. 3] Write a short note on: Statement in lieu of prospectus
Ans.: The Companies Act, 2013 has done away with the concept of Statement in lieu of prospectus. Thus, question
is not relevant as per the provisions of the Companies Act, 2013.
Que. No. 4] State the provision relating to prospectus on the following specific matters:
(i) Dating of prospectus
(ii) Registration of prospectus CS (Inter) - June 1999 (4 + 4 = 8 Marks) * 1
Ans.: Various provisions are provided in the Companies Act, 2013 in respect of prospectus which is the primary
source for the investor to ascertain the soundness or otherwise of the company are as follows:
(1) Dating [Section 26(1)]: Every prospectus must be dated. The date indicated in the prospectus shall be
deemed to be the date of its publication.
(2) Filing & signing of prospectus [Section 26(4)]: A copy of prospectus must be filed with the ROC on or before
its publication. The copy sent for registration must be signed by every person who is named therein as a director
or proposed director of the company or by his duly authorized attorney.
(3) Statement of expert [Section 26(5)]: If the prospectus includes a statement to be made by an expert, consent
in writing of that expert should be obtained and this fact should be stated in the prospectus. It should also state
that the consent given has not been withdrawn. The expert should not be one who is himself engaged or interested
in the formation, promotion, or management of the company. He should be unconnected with the formation or
management of the company.
(4) The prospectus must contain a statement that a copy has been delivered for registration, also indicating the
requisite documents (giving names) delivered with it. [Section 26(6)]
(5) Prospectus - when issued [Section 26(7)]: The prospectus must be issued after 90 days after the date on
which a copy thereof is delivered to the Registrar.
In addition to provisions of the Companies Act, 2013 stated above, following provisions of the Companies
(Prospectus & Allotment of Securities) Rules, 2014 also has to be complied.
- Prospectus must contain information stated in Rule 3.
- Prospectus must contain reports stated in Rule 4.
- Prospectus must contain other matters and reports specified in Rule 5.
- All information and reports referred in Rules 3,4 & 5 is required to be given for 5 years. It shall be sufficient
compliance for a company which has not completed 5 years, if such company provides such particulars or
information for all the previous years since its incorporation. [Rule 6]
Que. No. 5] Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the
Registrar of Companies, Mumbai. Explain the remedies available to the investor in this regard.
Ans.: In case an allotment has been made without delivering to the Registrar of Companies, a copy of the
prospectus along with other specified documents either before or on the date of its issue, the company and every
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person who is knowingly a party to the issue of the prospectus shall be punishable with fine which shall not be less
than ` 50,000 but which may extend to ` 3,00,000 [Section 26 (9)]. The allotment, however, shall remain valid.
The allotment made in violation of provisions of Section 39 is irregular allotment, but not void allotment. [This is
because Section 39 (5) makes the provisions for penalty in case of default but does not provide that such allotment
is void]
In some cases, if the provisions of the Companies Act, 2013 are not complied until the allotment is improper and
the company and officers who are in default can be penalized. However, the allotment remains valid, as Companies
Act, 2013 does not provide for avoiding allotment in such cases. Such allotment is improper but not 'irregular'.
Que. No. 6] Registrar of Companies can refuse registration of prospectus. Explain.
Ans.: The Registrar shall not register a prospectus unless the requirements with respect to its registration of
prospectus are complied with and the prospectus is accompanied by the consent in writing of all the persons
named in the prospectus. [Section 26(7)]
Que. No. 7] Write a short note on: Deemed Prospectus
Ans.: Document containing offer of securities for sale to be deemed prospectus [Section 25(1)]: Where a
company allots or agrees to allot any securities of the company with a view to all or any of those securities being
offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes,
be deemed to be a prospectus issued by the company. Thus, to such offer for sale of securities all the provisions
relating to prospectus will be applicable.
When 'offer for sale' will not be considered as 'prospectus' [Section 25(2)]: 'Offer for sale' will not be considered
as 'prospectus' only when:
(a) Company receives full consideration in respect of securities and
(b) The 'offer for sale' is made at leas` 6 months after the shares are allotted to issue house.
In vieio of strict requirements as well as requirement of SEBI Regulations, the practice of selling shares to issue
house is now nonexistent. However, legal provisions have been retained.
Que. No. 8] Can company make variation in objects for which the prospectus was issued?
Ans.: Variation in terms of contract or objects in prospectus [Section 27]: A company shall not, at any time, vary
the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject
to the approval of, or except subject to an authority given by the company in general meeting by way of special
resolution. Prescribed details shall also be published in news paper one in English and one in vernacular language
indicating clearly the justification for such variation.
Such special resolution has to be passed by postal ballot. The advertisement of notice of special resolution shall be
in Form PAS-1.
The company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in
equity shares of any other listed company.
Exist option to dissenting shareholders: The dissenting shareholders, who have not agreed to the proposal to vary
the terms of contracts or objects in the prospectus, shall be given an exit offer by promoters or controlling
shareholders at such exit price and in such manner and conditions as may be specified by the SEBI.
Ans.: Offer of sale of shares by certain members of company [Section 28]: Where certain members of a company
in consultation with the Board of Directors can offer whole or part of their holding of shares to the public. They
may do so in accordance with such procedure as may be prescribed.
Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus
and all laws and rules as to the contents of the prospectus and as to liability in respect of mis-statements in and
omission from prospectus or otherwise relating to prospectus shall apply as if this is a prospectus issued by the
company.
The members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the
public, shall collectively authorize the company, whose shares are offered for sale to the public, to take all actions
77
in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it
on this matter.
An existing shareholder can sale his shares in stock exchange. However, sometimes, large shareholders may intend
to sale their shares in such case provisions of Section 28 are applicable. Such sale of shares by existing large
shareholder may be by any of the following method:
(a) Disinvestment by one of the promoters
(b) Disinvestment by Government of shares held by it in a public listed company.
Que. No. 10] Write a short note on: Shelf Prospectus
CS (Inter) - Dec 2006 (2 Marks), June 2007 (3 Marks) CS (Executive) - June 2014 (5 Marks)
Write a short note on: Information Memorandum CS (Inter) - Dec 2006 (2 Marks)
Ans.: Sometimes, securities are issued in stages over a period of time. In such case filing of prospectus each time
will be expensive and hence provision of self prospectus has been introduced.
Thus, suppose if the company wants to issue securities in one year time span in stages, such company has to file
self prospectus at the time of first issue and at the time of second and subsequent issue within period of one year
they have file only information memorandum and need not to file prospectus again. Thus, information
memorandum indicates the changes that have occurred between two issues of securities.
Shelf Prospectus [Section 31]: Shelf prospectus means a prospectus in respect of which the securities are issued
for subscription over a certain period without the issue of a further prospectus.
(1) Any classes of companies, as the SEBI may provide by regulations, may file a shelf prospectus with the ROC
at the stage of the first offer of securities which shall indicate a period of 1 year as the validity period of such
prospectus.
(2) The period of 1 year shall commence from the date of opening of the first offer of securities.
(3) In respect of a second or subsequent offer of securities issued during the period of 1 year, no further
prospectus is required to be issued.
(4) A company filing a shelf prospectus shall be required to file an information memorandum between the first
offer of securities or the previous offer of securities and the succeeding offer of securities. An information
memorandum shall contain all material facts relating to new charges created, changes in the financial position of
the company that have occurred between two issues.
(5) If a company or any other person has received applications for the allotment of securities along with advance
payments of subscription before the making of any change, the company or other person shall intimate the changes
to applicants and if they express a desire to withdraw their application, the company or other person shall refund
all the monies received as subscription within 15 days.
(6) Where an information memorandum is filed, every time an offer of securities is made, such memorandum
together with the shelf prospectus shall be deemed to be a prospectus.
The information memorandum shall be prepared in Form PAS-2 and filed with the ROC along with the fee within
1 month prior to the issue of a second or subsequent offer of securities under the shelf prospectus. [Rule 10]
Que. No. 11] Write a short note on: Red-herring Prospectus
CS (Executive) - June 2009 (4 Marks), Dec 2009 (6 Marks) CS (Executive) - Dec 2014 (4 Marks)
'Red-herring prospectus' means a prospectus which has complete particulars on the price of the securities
offered and the quantum of securities offered. CS (Executive) - June 2010 (5 Marks)
Ans.: Red herring prospectus means a prospectus which does not include complete particulars of the quantum or
price of the securities offered.
(1) A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of
a prospectus.
(2) A company proposing to issue a red herring prospectus shall file it with the ROC at leas` 3 days prior to the
opening of the subscription list and the offer.
78
(3) A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation
between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
(4) Upon the closing of the offer of securities, the prospectus stating therein the total capital raised, whether by
way of debt or share capital, and the closing price of the securities and any other details as are not included in the
red herring prospectus shall be filed with the ROC and the SEBI.
Que. No. 12] Distinguish between: Shelf Prospectus & Red-herring Prospectus
Ans.: Following are the main points of distinction between shelf prospectus & red-herring prospectus:
Points Shelf Prospectus Red-herring Prospectus
Meaning Shelf prospectus means a prospectus in Red herring prospectus means a prospectus
respect of which the securities are issued for which does not include complete particulars of
subscription over a certain period without the the quantum or price of the securities offered.
issue of a further prospectus.

Act, 2013. Act, 2013.
Applicability As per SEBI Guidelines, provisions of self Provisions of red herring prospectus are
prospectus are applicable to issue of securities applicable to all companies except those are
in stages by public sector banks, scheduled covered under shelf prospectus. The provision
commercial banks and public financial is mainly applicable for book building.
institutions.
Filing A company filing a shelf prospectus shall be A company proposing to issue a red herring
required to file an information memorandum prospectus shall file it with the ROC at leas` 3
between the first offer of securities or the days prior to the opening of the subscription
previous offer of securities and the succeeding list and the offer.
offer of securities.
Prospectus Where an information memorandum is filed, A red herring prospectus shall carry the same
every time an offer of securities is made, such obligations as are applicable to a prospectus
memorandum together with the shelf and any variation between the red herring
prospectus shall be deemed to be a prospectus and a prospectus shall be
prospectus. highlighted as variations in the prospectus.
Que. No. 13] Write a short note on: Abridged Prospectus

Ans.: Abridged Prospectus [Section 2(1)]: Abridged prospectus means a memorandum containing such salient
features of a prospectus as may be specified by the SEBI by making regulations in this behalf.
Issue of application forms for securities [Section 33]: No form of application for the purchase of any of the
securities of a company shall be issued unless such form is accompanied by an abridged prospectus.
Following details are required to be given in abridged prospectus:
1. General information
2. Capital structure of the issuer company
3. Terms of the present issue
4. Particulars of the issue
5. Company, management and project
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6. Particulars in regard to the listed companies under the same management which made any capital issue in
the las` 3 years
7. Basis for issue price
8. Outstanding litigations and defaults (in a summarized tabular form)
9. Material development after the date of the latest balance sheet and its impact on performance and
prospects of the company.
10. Expert opinion obtained, if any
11. Change, if any, in directors and auditors during the las` 3 years and reasons thereof
12. Time and place of inspection of material contracts
13. Financial performance of the company for the las` 5 years
14. Listed ventures of promoters
15. Previous public or rights issues, if any, of las` 5 years
16. Disclosure on investor grievances & redressal system
17. Statement regarding minimum subscription clause
Que. No. 14] Distinguish between: Red-herring Prospectus & Abridged Prospectus
Ans.: Following are the main points of distinction between Red-herring Prospectus & Abridged Prospectus:
Points Red-herring Prospectus Abridged prospectus
Meaning Red-herring prospectus means a prospectus Abridged prospectus means a memorandum

which does not include complete particulars of containing such salient features of a
the quantum or price of the securities offered. prospectus as may be specified by the SEBI by
making regulations in this behalf.

Act, 2013. Act, 2013.
Applicability Provisions of red herring prospectus are Provisions of abridged prospectus are
applicable to all companies except those are applicable to all companies.
covered under shelf prospectus. The provision
is mainly applicable for book building. ,
Filing A company proposing to issue a red herring Abridged prospectus is not required to be filed
prospectus shall file it with the ROC at leas` 3 with ROC.
days prior to the opening of the subscription
list and the offer.
Scope A red herring prospectus shall carry the same No form of application for the purchase of any
obligations as are applicable to a prospectus of the securities of a company shall be issued
and any variation between the red herring unless such form is accompanied by an
prospectus and a prospectus shall be abridged prospectus.
highlighted as variations in the prospectus.
Que. No. 15] Write a short note on: The golden rule or golden legacy
Ans.: It is the duty of those who issue the prospectus to be truthful in all respects. This golden rule was pronounced
in New Brunswick and Canada Railway & Land Co. v. Muggeridge (1860) 3 LT 651, and has come to be known as
the "golden legacy".
80
Those who issue a prospectus must state all the facts and information with strict and scrupulous accuracy. Nothing
should be stated as a fact which is not so and no fact should be purposefully omitted.
In short, the true nature of the company's venture should be disclosed and there should not be concealment of
any material fact.
Thus, even if every specific statement is literally true, the prospectus may be false if by reason of the suppression
of other material facts, it conveys a false impression.
All statements in the prospectus were literally true but it failed to disclose that the dividends stated in it as paid,
were not paid out of trading profits, but out of realized capital profits (secret reserves). The statement that the
company had paid dividends for a number of years was true. But the company has incurred losses for all those
years (1921-27) and no disclosure was made of this fact. The prospectus was held to be false in material
particulars and the managing director and chairman, who knew that it was false, were held guilty of fraud. [R.
V. Kylsant (1932) K.B. 442]
Que. No. 16] A company has issued a prospectus to the public stating that the company has paid dividend
regularly and the prospectus is silent relating to the sources of profits, i.e., whether trading profits or capital
profits. The fact is that the company has incurred losses for all the las` 5 years, but the dividend is paid out of
realized capital profits (i.e., secret reserves). Y, a shareholder, claimed that the prospectus is false. Whether Y's
contention is correct? Discuss. CS (Executive) - June 2014 (4 Marks)
Ans.: It is the duty of those who issue the prospectus to be truthful in all respects. This is known as golden rule.
Those who issue a prospectus must state all the facts and information with strict and scrupulous accuracy. Nothing
should be stated as a fact which is not so and no fact should be purposefully omitted.
The facts the given case is similar to R. V. Kylsant (1932) K.B. 442, wherein it was held that if prospectus states that
the company is paying dividend for last five years but fails to disclose the source of profit for paying such dividend,
such prospectus is false and misleading and the managing director and chairman, who knew that it was false, were
held guilty of fraud.
Que. No. 17] What is an Untrue Statement? CS (Inter) - June 1999 (4 Marks)
Ans.: Inclusion of untrue statement in prospectus is liable to penalty u/s 447. Thus, it is necessary to know what is
meant by 'untrue statement'.
Whether a.statement is untrue or not is to be judged by the context in which it appears and the totality of
impression it would create.
A statement included in a prospectus shall be untrue, if the statement is misleading in the form and context in
which it is included.
If the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect
of such omission, to be a prospectus in which an untrue statement is included.
Even if every word included in the prospectus is true, the suppression of material facts may cause the prospectus
to be fraudulent.
Que. No. 18] What are the remedies available for misrepresentation in prospectus:
- Against the company?
- Against Directors or Promoters?
State the consequences of false and misleading statements in a prospectus.
Ans.: Remedies available against the company: A company is responsible for a statement in prospectus only if it
is shown that the prospectus was issued by the company or by someone with the authority of the company, e.g.,
the board of directors. The company is also liable for misstatement in prospectus even though the prospectus is
issued by the promoters & the Board ratifies and adopts the issue of prospectus.
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(1) To rescind the contract: A person who takes shares on the faith of a prospectus containing false statements,
may apply to the Court/Tribunal for setting contract aside, and striking off his name from the register of members.
He may also claim his money back. But the allottee must act within a reasonable time.
(2) To sue for damages for deceit: The allottee may recover damages from the company for any loss he may have
suffered if the invitation to take shares is emanating from the company and the persons making it on behalf of the
company have fraudulently, misrepresented material facts. In actual practice, however, suits for damages against
the company are rarely filed. Damages are generally claimed from the directors, promoters and other persons who
authorized the issue of the prospectus.
Remedies against directors or promoters: A person who subscribed for shares on the faith of a false prospectus
may claim from directors or promoters:
(i) Damages for fraudulent misrepresentation.
(ii) Compensation under the Act.
(iii) Damages for non-compliance with the requirements of Section 26.
Que. No. 19] Write a short note on: Civil liability for misstatements in prospectus
Ans.: Civil liability for misstatements in prospectus [Section 35(1)]: If any person sustains any loss or damage due
inclusion or exclusion of any statement or if prospectus contains any untrue statement, he can claim the
compensation from the following persons:
(a) Person who is a director of the company at the time of the issue of the prospectus.
(b) Person who has authorized himself to be named in the prospectus as a director of the company.
(c) Person who is a promoter of the company.
(d) Person who has authorized the issue of the prospectus.
(e) Person who is an expert referred to in Section 26(5).
Que. No. 20] When civil liability for misstatements in prospectus of a director or any other person can be
avoided?
Ans.: No civil liability for misstatements in prospectus [Section 35(2)]: No person shall be liable for civil liability
for misstatements in prospectus, if he proves-
(a) That he withdrew his consent before issue of prospectus, and that prospectus was issued without his
authority or consent or
(b) That the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue,
he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
(c) That, as regards every misleading statement purported to be made by an expert or contained in what
purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair
representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation;
and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the
person making the statement was competent to make it and that the said person had given the consent required
by Section 26(5) to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of
the prospectus for registration or, to the defendant's knowledge, before allotment thereunder.
Que. No. 21] Write a short note on: Criminal liability for misstatement in prospectus
Ans.: Criminal liability for misstatement in prospectus [Section 34]: Where a prospectus includes any statement
which is untrue or misleading or where inclusion or omission of any matter is likely to mislead, every person who
authorizes the issue of such prospectus shall be liable under Section 447.
However, a person shall not be liable to penalty, if he proves that such statement or omission was immaterial or
that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the
statement was true or the inclusion or omission was necessary.
Punishment for Fraud [Section 447]: Without prejudice to any liability including repayment of any debt, any person
who is found to be guilty of fraud involving an amount of at least ` 10 lakh or 1% of the turnover of the company,
whichever is lower shall be punishable -
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- With imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and
- With fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the
amount involved in the fraud.
However, where the fraud in question involves public interest, the term of imprisonment shall not be less than 3
years.
Where the fraud involves an amount less than ` 10 lakh or 1% of the turnover of the company, whichever is lower,
and does not involve public interest, any person guilty of such fraud shall be punishable
- With imprisonment for a term which may extend to 5 years or
- With fine which may extend to ` 20 lakh or
- With both.
Que. No. 22] Who is entitled to remedies for misstatement in prospectus?
Ans.: The right to claim compensation for any loss or damage sustained by reason of any untrue statement in a
prospectus is available only to a person who has "subscribed" for shares or debentures on the faith of the
prospectus containing untrue statement.
The word "subscribed" denotes that the shares were acquired directly from the company by allotment. A
subsequent purchaser of shares in the open market has no remedy against the company or the directors or
promoters.
If, however, a prospectus is issued with the object of inducing persons to buy shares in the open market, any person
who buys on the strength of the false representation made in it, has a right of action for fraudulent
misrepresentation against the company. But the purchaser must have been directly induced by the false statement
in the prospectus and nothing else.
Also, a subscriber to the memorandum cannot seek relief, as the company cannot be said to be in existence when
he signed the memorandum, and he cannot be said to have been influenced by any statement, in the prospectus.
Judicial Views:
♦ A deceitful prospectus was issued by the directors on behalf of the company. P received a copy of it but did
not take any shares originally in the company. The allotment of shares to applicants was completed, and several
months afterwards he bough` 2,000 shares on the stock exchange. His action against the directors for deceit was
rejected. It was observed by the Court that the office of a prospectus is to invite persons to become allottees, and,
allotment having been completed, such office is exhausted and liability to allottees does not follow the shares into
the hands of subsequent transferees. [Peek v. Gurney (1873) 43 L.J. Ch. 19]
♦ The directors sent to A, a prospectus of the company which they knew would be a sham in order to induce
A to purchase shares therein. A did not subscribe for the shares at that time. The prospectus, having produced but
a scanty subscription for shares, the directors thereupon fraudulently published a telegram in newspaper. A
believing in the truth of the telegram was induced to purchase shares in the open market. The directors were held
liable for the systematic fraud. "The function of the prospectus was not exhausted, and the false telegram was
brought into play by defendants to reflect back upon and countenance the false statements in the prospectus."
[Andrews v. Mockford (1869) I.Q.B. 372]
Que. No. 23] Amar subscribed shares issued by Fast-track Ltd. The prospectus of Fast-track Ltd. included a
statement which was misleading in the forms and contents. On the faith of the prospectus believing it to be true,
Amar subscribed for shares and sustained loss. Can Amar sue compensation of loss? If so, who will be sued for
such loss? CS (Inter) - June 2000 (8 Marks)
Ans.: The allottee may recover damages from the company for any loss he may have suffered if the invitation to
take shares is emanating from the company and the persons making it on behalf of the company have fraudulently
mis-represented material facts.
In actual practice, however, suits for damages against the company are rarely filed. Damages are generally claimed
from the directors, promoters and other persons who authorized the issue of the prospectus.
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Que. No. 24] A deceitful prospectus was issued by the directors on behalf of company. Pavan received a copy of
it, but did not take any shares in the company. The allotment of shares to applicants was completed. Several
months later, Pavan bought shares from stock market. He proceeded with suit against the directors of the issue
of deceitful prospectus. Will he succeed?
Ans.: The right to claim compensation for any loss or damage sustained by reason of any untrue statement in a
prospectus is available only to a person who has "subscribed" for shares or debentures on the faith of the
prospectus containing untrue statement.
The word "subscribed" denotes that the shares were acquired directly from the company by allotment. A
subsequent purchaser of shares in the open market has no remedy against the company or the directors or
promoters.
Mr. X has purchased the shares form the stock exchange and he has not acquired shares directly from the company;
hence he cannot claims damages from the company for the loss suffered on the ground the prospectus issued by
the company contained a false statement.
Que. No. 25] Write a short note on: Punishment for personation for acquisition of securities
Ans.: Punishment for personation for acquisition of securities [Section 38(1)]: A person shall be liable for action
u/s 447 for the following acts:
(a) If he makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing
for, its securities.
(b) If he makes or abets making of multiple applications to a company in different names or in different
combinations of his name or surname for acquiring or subscribing for its securities.
(c) If he otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him,
or to any other person in a fictitious name,
The provisions of Section 38(1) shall be prominently reproduced in every prospectus issued by a company and in
every form of application for securities. [Section 38(2)]
Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made
by, and seizure and disposal of the securities in possession of such person. [Section 38(3)]
The amount received through disgorgement or disposal of securities shall be credited to the Investor Education
and Protection Fund. [Section 38(4)]
Note: Intention of Section 38 is to discourage benami applications and to avoid multiple applications in issues
where demand is very high.
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CHAPTER
5
ALLOTMENT & ISSUE OF CERTIFICATES
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Share Capital & Debentures) Rules,
2014.
ALLOTMENT OF SHARES
Que. No. 1] What do you mean by allotment of shares? State the general principles regarding allotment.
Ans.: "Allotment of shares" means the act of appropriation by the board of directors of the company out of the
previously un-appropriated capital of a company of a certain number of shares to persons who have made
applications for shares. It is on allotment that shares come into existence.
Notice of Allotment: An allotment is the acceptance of an offer to take shares by an applicant, and like any other
acceptance it must be communicated. Thus, a binding contract between the company and the applicant could
emerge only when the allotment is made by a resolution of the Board of directors and notice of such allotment has
been given to the allottee.
General principles regarding allotment: The following are the general principles should be observed with regard
to allotment of shares:
- The allotment should be made by proper authority.
- Allotment of shares must be made within a reasonable time.
- The allotment should be absolute and unconditional.
- The allotment must be communicated.
- Allotment against application only.
- Allotment should not be in contravention of any other law.
Que. No. 2] Discuss the statutory provisions regarding allotment of securities.
Write a short note on: Return of allotment
Ans.: Allotment of securities by company [Section 39(1)]: Allotment of any securities of a company offered to the
public for subscription shall not be made unless the amount stated in the prospectus as the minimum subscription
has been subscribed and minimum application money have been received by the company.
Minimum Application Money [Section 39(2)]: The amount payable on application on every security shall not be
less than 5% of the nominal amount of the security or such other percentage or amount, as may be specified by
the SEBI.
As per SEBI (Disclosure & Investor Protection) Regulations, 2009, application money should not be less than 25%
of the issue price.
Money to be returned if minimum application money is not received [Section 39(3)] & Rule 11 Companies
(Prospectus & Allotment of Securities) Rules, 2014]: If the stated minimum amount has not been subscribed and
the sum payable on application is not received within a period of 30 days from the date of issue of the prospectus,
or such other period as may be specified by the SEBI, the amount so received shall be returned within 15 days from
the closure of the issue. If any such money is not so repaid, the directors of the company who are officers in default
shall jointly and severally be liable to repay that money with interest at 15% p.a.
Return of allotment [Rule 12 of the Companies (Prospectus & Allotment of Securities) Rules, 2014]:
(1) Whenever a company having a share capital makes any allotment of its securities, the company shall file with
the ROC a return of allotment in Form PAS-3 within 30 days.
(2) There shall be attached to the Form PAS-3 a list of allottees stating their names, address, occupation, and
number of securities allotted to each of the allottees and the list shall be certified as being complete and correct
as per the records of the company.
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(3) In the case of securities allotted as fully or partly paid up for consideration other than cash, there shall be
attached to the Form No. PAS. 3 a copy of the contract, duly stamped, together with any contract of sale if relating
to a property or an asset, or a contract for services or other consideration.
(4) Where a contract is not reduced to writing, the company shall furnish along with the Form PAS-3 complete
particulars of the contract stamped as per the Indian Stamp Act, 1899.
(5) A report of a registered valuer in respect of valuation of the consideration shall also be attached along with
the contract.
(6) In the case of issue of bonus shares, a copy of the resolution passed in the general meeting authorizing the
issue of such shares shall be attached to the Form PAS-3.
(7) In case of right issue of shares by a company other than a listed company, there shall be attached to Form
PAS-3, the valuation report of the registered valuer.
Judicial Views:
The Supreme Court held that the exchange was not liable to file any return of the forfeited shares when the same
were reissued. The Court observed that when a share is forfeited and re-issued, there is no allotment, in the sense
of appropriation of shares out of the authorized and un-appropriated capital. [Sri Gopal jalan & Co. v. Calcutta
Stock Exchange Association Ltd. 1963-(033)-Com Cases-0862- SC]
Allotment of shares against promissory notes shall not be valid. [Chokkalingam v. Official Liquidator AIR 1944 Mad.
87]
Que. No. 3] On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Ltd. allotted
200 shares to Ranjit and the money was deposited in a scheduled bank. Later on, it was revealed that 40% of the
amount withdrawn was for acquisition of fixed assets for the company. Ranjit, knowing these facts, refused to
accept the allotment contending that the allotment was irregular under the provisions of the Companies Act,
2013. As an expert on company law advise Ranjit.
Ans.: As per Section 39, no allotment of any securities of a company offered to the public for subscription shall be
made unless -
(i) The amount stated in the prospectus as the minimum amount has been subscribed and
(ii) The sums payable on application for the amount so stated have been paid to and received by the company
by cheque or other instrument.
As per SEBIICDR Regulation, the minimum subscription for public company issuing shares to public is 90%.
Minimum subscription received must be 90% of the public issue. If the subscription is less than 90%, shares cannot
be allotted and application money received must be refunded as stated below:
(a) Non-underwritten issue: Within 15 days from the date of closure of the issue.
(b) Underwritten Issue: Within 70 days from the date of closure of the issue if underwriters fail to make up shortfall
within 60 days of the closure of issue.
If application money is not refunded within the period stated above, interest is payable for the delay.
Thus, allotment of shares to Ranjit is void and he can refuse to accept the shares.
Que. No. 4] What is a share certificate? Also state the provisions relating to issue of share certificate.
Ans.: A share certificate is a certificate issued to the members by the company under its common seal, if any,
specifying the number of shares held by him and the amount paid on each share.
Issue of share certificate [Section 46(1)]: A share certificate has to be issued under the common seal, if any, of the
company or signed by 2 directors or by a director and the Company Secretary, specifying the shares held by any
person which shall be prima facie evidence of the title of the person to such shares.
The certificate is the only documentary evidence of title in the possession of the shareholder. But it is not a
warranty of title by the company issuing it.
Certificate of shares [Rule 5]:
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(1) Where a company issues any share capital, share certificates shall be issued -
(a) in pursuance of a resolution passed by the Board and
(b) on surrender to the company of the letter of allotment or fractional coupons of requisite value (except in
case of issues against letters of acceptance or of renunciation, or in cases of issue of bonus shares)
However, if the letter of allotment is lost or destroyed, the Board may impose reasonable terms to seek supporting
evidence and indemnity and the payment of out-of-pocket expenses in investigating evidence.
(2) Every certificate of share or shares shall be in Form SH-1 or as near thereto as possible and shall specify the
names of the persons in whose favour the certificate is issued, the shares to which it relates and the amount paid-
up thereon.
(3) Every share certificate shall be issued under the common seal, if any, of the company, which shall be affixed
in the presence of, and signed by-
(a) Two directors (one of whom should be person other than managing director or whole time director) duly
authorized by the Board of Directors and
(b) The Company Secretary or any person authorized by the Board for the purpose
However, if company does not have a common seal, the share certificate shall be signed by two directors or by a
director or the Company Secretary, whenever the company has appointed a Company Secretary.
In case of a OPC, every share certificate shall be issued under the seal, if any, of the company, which shall be affixed
in the presence of and signed by one director or a person authorized by the Board of Directors and the Company
Secretary or any other person authorized by the Board. If OPC does not have common seal, the share certificate
shall be signed by the persons in the presence of whom the seal is required to be affixed.
Explanation: A director shall be deemed to have signed the share certificate if his signature is printed as a facsimile
signature by means of any machine, equipment or other mechanical means such as engraving in metal or
lithography, or digitally signed, but not by means of a rubber stamp. The director shall be personally responsible
for permitting the affixation of his signature and the safe custody of any machine, equipment or other material
used for the purpose.
(4) The particulars of every share certificate issued shall be entered in the Register of Members.
Que. No. 5] The authorized signatory of a company issued a share certificate in favour of X, which apparently
complied with the company's article as it purported to be signed by two directors and the secretary and it had
the company's common seal affixed to it. In fact, the secretary had forged the signatures of the directors and
affixed the seal without any authority. Will the share certificate be binding upon the company?
Ans.: According to Rule 5 of the Companies (Share Capital & Debentures) Rules, 2014, every share certificate shall
be issued under the common seal, if any, of the company, which shall be affixed in the presence of, and signed by-
(a) Two directors (one of whom should be person other than managing director or whole time director) duly
authorized by the Board of Directors and
(b) The Company Secretary or any person authorized by the Board for the purpose
However, if company does not have a common seal, the share certificate shall be signed by two directors or by a
director or the Company Secretary, if any.
If the signatures of directors are forged then share certificate will not be binding upon the company because
forgery is nullity at law. Thus, if forged the signatures of the directors appears on share certificate it will not be
binding upon the company.
Que. No. 6] When can a company issue 'renewed or duplicate' share certificate?
Ans.: Issue duplicate share certificate [Section 46(2)]: A duplicate certificate of shares may be issued, if such
certificate:
(a) is proved to have been lost or destroyed or
(b) has been defaced, mutilated or torn and is surrendered to the company.
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Issue of renewed or duplicate share certificate [Rule 6]:
(1) In respect of share certificates which are defaced, mutilated, torn or old, decrepit, worn out share certificates
new share certificates can be exchanged if original share certificates are surrendered to the company. Similarly,
new share certificates on sub-division or consolidation can be obtained only if old share certificates are
surrendered to the company.
The company may charge a fee up to ` 50 per certificate issued on splitting or consolidation or in replacement of
share certificates that are defaced, mutilated, tom or old, decrepit or worn out.
Where a certificate is issued in any of the circumstances specified above, the company shall be stated on the face
of it and be recorded in the Register maintained for the purpose, that it is "Issued in lieu of share certificate No
sub-divided/replaced/on consolidation".
A company may replace all the existing certificates by new certificates upon sub-division or consolidation of shares
or merger or demerger or any reconstitution without requiring old certificates to be surrendered.
(2) If share certificates are lost or destroyed, duplicate share certificates can be issued by Board's consent and
on payment of fees up to ` 500 per certificate. While issuing such duplicate share certificate the company may
require supporting evidence and indemnity and the payment of out-of-pocket expenses in investigating the
evidence produced.
Where duplicate share certificates are issued, it shall be stated prominently on the face of it and be recorded in
the Register maintained for the purpose, that it is "duplicate issued in lieu of share certificate No". and the word
'duplicate' shall be stamped or printed prominently on the face of the share certificate.
In case unlisted companies, the duplicate share certificates shall be issued within a period of 3 months and in case
of listed companies such certificate shall be issued within 15 days, from the date of submission of complete
documents with the company respectively.
(3) The particulars of every duplicate share certificate issued shall be entered forthwith in a Register of Renewed
& Duplicate Share Certificates maintained in Form SH-2 indicating against the name of the person to whom the
certificate is issued, the number and date of issue of the share certificate in lieu of which the new certificate is
issued, and the necessary changes indicated in the Register of Members by suitable cross-references in the
"Remarks" column.
The register shall be kept at the registered office of the company or at such other place where the Register of
Members is kept and it shall be preserved permanently and shall be kept in the custody of the Company Secretary
of the company or any other person authorized by the Board for the purpose.
All entries made in the Register of Renewed & Duplicate Share Certificates shall be authenticated by the Company
Secretary' or such other person as may be authorized by the Board.
Issuing duplicate share certificates to defraud [Section 46(5)]: If a company with intent to defraud issues a
duplicate certificate of shares, the company shall be punishable with fine which shall not be less than 5 times the
face value of the shares involved in the issue of the duplicate certificate but which may extend to ten times the
face value of such shares or ` 10 Crores whichever is higher and every officer of the company who is in default shall
be liable for action u/s 447, for fraud.
Que. No. 7] What are the provisions relating to maintenance of share certificate forms and related books
and documents under the Companies (Share Capital & Debentures) Rules, 2014?
Ans.: Maintenance of share certificate forms and related books and documents [Rule 7]:
(1) All blank forms to be used for issue of share certificates shall be printed and the printing shall be done only
on the authority of a resolution of the Board.
The blank form shall be consecutively machine numbered and the forms and the blocks, engravings, facsimiles and
hues relating to the printing of forms shall be kept in the custody of the Company Secretary or such other person
as authorized by the Board.
(2) The following persons shall be responsible for the maintenance, preservation and safe custody of all books
and documents relating to the issue of share certificates, including the blank forms of share certificates namely:
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(a) The committee of the Board, if so authorized by the Board or where the company has a Company Secretary,
the Company Secretary or
(b) Where the company has no Company Secretary, a Director specifically authorized by the Board for such
purpose.
(3) All books shall be preserved in good order not less than 30 years and in case of disputed cases, shall be
preserved permanently, and all certificates surrendered to a company shall immediately be defaced by stamping
or printing the word 'CANCELLED' in bold letters and may be destroyed after the expiry of 3 years from the date
on which they are surrendered, under the authority of a resolution of the Board and in the presence of a person
duly appointed by the Board in this behalf.
Que. No. 8] Write a short note on: Time of issue of certificate of securities
Ans.: Time limit for issuance of share certificates [Section 56(4)]: Every company must deliver the certificates of
all securities allotted, transferred or transmitted:
(a) Within a period of 2 months from the date of incorporation, in the case of subscribers to the memorandum.
(b) Within a period of 2 months from the date of allotment, in the case of any allotment of any of its shares.
(c) Within a period of 1 month from the date of receipt by the company of the instrument of transfer or the
intimation of transmission
(d) Within a period of 6 months from the date of allotment in the case of any allotment of debenture. However,
where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities
to depository immediately on allotment of such securities.
Que. No. 9] Write a short note on: Split Certificate
Ans.: A split certificate means a separate certificate claimed by a shareholder for a portion of his holding. The
advantages of a split certificate are that the shareholder may benefit in case of a transfer by way of sale or
mortgage in small lots and the right to multiply the certificates into as many shares held by the shareholder.
Que. No. 10] A share certificate of the company is an official publication?
Ans.: The question whether a share certificate is an official publication was considered by the Ministry of Corporate
Affairs and has clarified vide its Circular as follows:
"The shares in a company are movable property transferable in the manner provided in the articles of the company".
Section 44 provides that a certificate under the common seal of the company specifying any share held by any
member shall be prima facie evidence of the title of the member to such share. Thus, shares are movable property
transferable in the manner provided in the articles of the company and that the share certificates are certificates
of title and are movable property but are not publications in the nature of prospectus, balance sheet, profit and
loss account, notice or advertisement.
The conclusion reached, therefore, is that the share certificate is not an official publication.
Ans.: A share certificate is prima facie evidence to the title of the person whose name is entered on it. It means
that the share certificate is a statement by the company that the moment when it was issued, the person named
in it was the legal owner of the shares specified in it, and those shares were paid-up to the extent stated. It does
not constitute title but it is merely evidence of title. It is, however a statement of considerable importance, for it
is made with the knowledge that other persons may act upon it in the belief that it is true and this fact brings into
operation the doctrine of estoppel. As a result, a share certificate once issued by the company binds it in two ways,
namely:
(a) by estoppel as to title, and
(b) by estoppel as to payment.
Estoppel as to Title: A share certificate once issued binds the company in two ways. In the first place, it is a
declaration by the company to the entire world that the person in whose name the certificate is made out and to
whom it is given is a shareholder in the company. In other words the company is estopped from denying his title
to the shares.
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Estoppel as to Payment: If the certificate states that on each of the shares full amount has been paid, the company
is estopped as against a bona fide purchaser of the shares, from alleging that they are not fully paid.
If a person knows that the statements in a certificate are not true, he cannot claim an estoppel against the
company.
Despite everything, a certificate must be issued by someone who has the authority. For example, where the
secretary forged the signature of two directors in a company, the company had refused to register the holder of
shares as a member. Further a certificate is not evidence as to the equitable interest in shares. Also, where an
individual is aware of the false statements in a certificate, he will not be entitled to claim an estoppel.
Que. No. 12] Write a short note on: Personation of Shareholder
Ans.: Punishment for personation of shareholder [Section 57]: If any person deceitfully personates as owner of
any security or interest or receive money due to owner, he shall be punishable:
- with imprisonment for a term which shall not be less than 1 year but which may extend to 3 years and
- with fine which shall not be less than ` 1 lakh but which may extend to ` 5 lakhs.
CALLS & FORFEITURE
Que. No. 13] Write a short note on: Requisites of a valid call
Ans.: Following are the requisites of a valid call:
(1) Board of Directors to make calls on shares: The power to make calls is exercised by the Board in its meeting
by means of a resolution. In making a call the Board, must observe the provisions of the articles, otherwise the call
will be invalid, and the shareholder is not bound to pay. A proper notice must be given, and the notice must specify
the amount called up and manner i.e. the date for payment and place and to whom it is to be paid. It may be
emphasized that the time and place at which the call is to be paid are essential ingredients of a valid call.
(2) Calls to be made bona fide in the interest of the company: The power to make call is in the nature of trust
and must be exercised only for the benefit of the company, and not for the private ends of the directors. If the call
is made for the personal benefit of directors, the call will be invalid. In Alexander v. Automatic Telephone Co.,
(1900) 2 Ch. 56, the directors of the company paid nothing on their shares but did not disclose this fact to the
shareholders and called on them to pay certain amount partly as allotment money and partly as call money. The
directors were held guilty of breach of trust and the call was held invalid.
(3) Calls must be made on uniform basis [Section 49]: Calls on same class of shares must be made on a uniform
basis. Hence, a call cannot be made only on some of the members unless they constitute a separate class. In other
words, there cannot be any discrimination between shareholders of the same class as regards amount and time of
payment of call.
(4) Notice of calls: The notice of call must specify the exact amount and time of payment.
(5) Time limitations for receiving the call money: If the issuer proposes to receive subscription monies in calls,
it shall ensure that the outstanding subscription money is called within 12 months from the date of allotment of
the issue.
Usually Articles of association of companies provide for the manner in which calls should be made. They follow the
pattern set out in Regulations 13 to 18 of Table-F of Schedule-I appended to the Companies Act, 2013:
(a) For each call at least 14 days notice must be given to members.
(b) An interval of 1 month is required between two successive calls and not more than l/4th of the nominal value
of shares can be called at one time. However, companies may have their own articles and raise the limit.
(c) The Board of directors has the power to revoke or postpone a call after it is made.
(d) Joint shareholders are jointly and severally liable for payment of calls.
(e) If a member fails to pay call money he is liable to pay interest not exceeding the rate specified in the articles
or terms of issue or such lower rate, as the Board may determine. The directors are free to waive the payment of
interest wholly or in part.
(f) If any member desires to pay the call money in advance, the directors may at their discretion accepted any
interest not exceeding the rate specified in the articles.
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(g) A defaulting member will not have any voting right till call money is paid by him.
Que. No. 14] Well-done Ltd. wants to make a first call of ` 30 on equity share of nominal value of ` 100 each on
16th October, 2016. Can it do so? Further, if the company proposes to make second call on 7th November, 2016,
will it be permitted to do so? CS (Executive) - Dec 2011 (4 Marks)
Ans.: Usually Articles of association of companies provide for the manner in which calls should be made. They
follow the pattern set out in Regulations 13 to 18 of Table-F of Schedule-I appended to the Companies Act, 2013.
Table F make the following provisions in this regard -
(a) For each call at least 14 days notice must be given to members.
(b) An interval of 1 month is required between two successive calls and not more than 1 /4th of the nominal value
of shares can be called at one time. However, companies may have their own articles and raise the limit.
If Well-done Ltd. has adopted provisions of Table F then, first call of ` 30 cannot be made as it exceeds l/4th of the
nominal value of shares. Further, it cannot make second call on 7th November, 2016 as interval between two
successive calls will be less than 1 month.
If Well-done Ltd. has its own article then it has to observe the provisions contained it its article.
Que. No. 15] Write a short note on: Calls-in-Arrear
Ans.: When calls are made upon shares allotted, the shareholders holding the shares are bound to pay the call
money within the date fixed for such payment. If a shareholder makes a default in sending the call money within
the appointed date, the amount thus failed is called calls-in-arrear.
Interest on calls-in-arrear [Regulation 16 of Table F]: If a call is not paid before or on the day appointed for
payment, the shareholder shall pay interest from the day appointed for payment thereof to the time of actual
payment at 10% p.a. or at such lower rate, as the Board may determine. The Board shall be at liberty to waive
payment of any such interest.
Que. No. 16] Write a short note on: Calls-in-Advance
Ans.: A company may receive from a shareholder the amount remaining unpaid on shares. This is known as calls-
in-advance.
Company to accept unpaid share capital, although not called up [Section 50]: The company may, if so authorized
by its articles, accept from any member, calls-in-advance i.e. the amount remaining unpaid on any
shares. However, person paying calls-in-advance have voting right in respect of amount paid-up on shares only.
Interest on calls-in-advance [Regulation 18 of Table F]: The Board may receive from any member calls in advance
and may pay interest at a rate not exceeding 12% p.a. The Company is liable to pay interest on the amount of calls-
in-advance from the date of receipt of the amount till the date when the call is due for payment. No dividend can
be paid on calls-in-advance.
Que. No. 17] Distinguish between: Calls-in-Advance & Calls-in-Arrear
Ans.: Following are the main points of distinction between calls-in-advance & calls-in-arrear:
Point Calls-in-Advance Calls-in-Arrear
Meaning A company may receive from a shareholder the When calls are made upon shares allotted, the
amount remaining unpaid on shares. This is shareholders holding the shares are bound to
known as calls-in-advance. pay the call money within the date fixed for
such payment. If a shareholder makes a default
in sending the call money within the appointed
date, the amount thus failed is called calls-in-
arrear.
Interest Regulation 18 of Table F of the Companies Act, Regulation 16 of Table F of the Companies Act,
2013 provides that the Board may receive from 2013 provides that, if a call is not paid before
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any member calls in advance and may pay or on the day appointed for payment, the
interest at such rate not exceeding 12% p.a. shareholder shall pay interest from the day
The Company is liable to pay interest on the appointed for payment to the time of actual
amount of calls-in- advance from the date of payment at 10% p.a. or at such lower rate, as
receipt of the amount till the date when the the Board may determine.
call is due for payment.
Nature Interest on calls-in-advance is expenses and Interest on calls-in-arrear is income and

debited to profit & loss account. credited to profit & loss account.
Que. No. 18] What is 'forfeiture of shares'? State the procedure for forfeiture of shares.
What are the important rules relating to forfeiture of shares? CS (Executive) - Dec 2010 (4 Marks) * 1
Ans.: Forfeiture of shares means taking back of shares by the company from the shareholders for default in
payment of calls-in-arrear. For a valid forfeiture, satisfaction of following conditions is necessary:
(1) AOA must authorize the forfeiture of shares: Where power is given in the articles, it must be exercised in
accordance with the regulation regarding notice, procedure and manner stated therein; otherwise the forfeiture
will be void. If Articles authorize, the forfeiture shall include forfeiture of all dividends declared in respect of the
forfeited shares.
(2) Resolution for forfeiture: If the defaulting shareholder does not pay the amount within the specified time
as required by the notice, the directors may pass a resolution forfeiting the shares.
(3) Proper notice: Before the shares of a member are forfeited, a proper notice to that effect must have been
served. A notice shall name a further 14 days from the date of service of the notice on or before which the payment
is to be made. The notice must also mention that in the event of non-payment, the shares will be liable to be
forfeited.
(4) Power of forfeiture must be exercised bona fide and for the benefit of the company: The power to forfeit
be exercised bona fide and for the benefit of the company. The power of forfeiture cannot be exercised to relieve
unwilling shareholders from the liability of making the payment. Such a shareholder continues to be responsible
for the unpaid part of the shares.
(5) Forfeiture of fully paid shares: The clauses of Table F on forfeiture do not make specific provision for
forfeiture of fully paid up shares. On the other hand in Shyam Chand v. Calcutta Stock Exchange Association [1945]
21.L.R. Cal 313, it was held that fully paid up shares could be forfeited in cases like expulsion of members where
the articles authorize.
Ans.: If a shareholder fails to pay the allotment money and/ or calls made on him his shares are liable to be
forfeited. Forfeiture of shares may be said to be the compulsory termination of membership by way of penalty for
non-payment of allotment and/or any call money.
Table F permits the directors to forfeit shares for non-payment of calls. Regulations 28 to 34 contains the following
provisions in relation to forfeiture of shares:
(1) If a member fails to pay any call on the day appointed for payment, the Board may serve a notice requiring
payment of the call, together with any interest which may have accrued.
(2) The notice shall name a further period of 14 days from the date of service of the notice for payment of call.
(3) If amount is not paid even after such notice then shares in respect of which the call was made shall be liable
to be forfeited by passing board resolution.
(4) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks
fit. At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks
fit.
(5) A person whose shares have been forfeited shall cease to be a member in but shall remain liable to pay
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to the company all monies which were payable by him in respect of the shares. The liability of such person shall
cease if and when the company shall have received payment in full of all such monies in respect of the shares.
(6) A duly verified declaration in writing by a director, the manager or the secretary that a share has been duly
forfeited shall be conclusive evidence of the facts of such forfeiture. The company may receive the consideration,
if any, given for the share on any sale or disposal thereof and may execute a transfer of the share in favour of the
person to whom the share is sold or disposed of. The transferee shall thereupon be registered as the holder of the
share.
Que. No. 20] A public limited company incorporated under the Companies Act, 2013 may amend its articles of
association so as to confer upon it power to forfeit the shares of those members who have defaulted in the
payment of calls made by the company. CS (Executive) - Dec 2015 (5 Marks)
Ans.: A company may if authorized by its articles, forfeit shares for non-payment of calls and the same will not
require confirmation of the Court. Where power is given in the articles, it must be exercised strictly in accordance
with the regulations regarding notice, procedure and manner stated therein, otherwise the forfeiture will be void.
Forfeiture will be effected by means of Board resolution. The power of forfeiture must be exercised bona fide and
in the interest of the company.
Thus, a company may amend its article of association so as to confer it power to forfeit the shares of those
members who have defaulted in payment of calls made by the company.
Que. No. 21] Write a short note on: Re-issue of forfeited shares
Ans.: Re-issue of forfeited shares [Regulation 31 of Table F]: Forfeited share may be sold or otherwise disposed of
on such terms and in such manner as the Board thinks fit. Thus, even though originally shares cannot be issued at
discount, but forfeited shares can be issued at discount.
Some important points relating to re-issue of forfeited shares:
♦ The amount receivable on re-issue of such shares together with the amount already received from the
defaulting member shall not be less than the face value of the shares.
♦ If forfeited shares are re-issued at a discount, the amount of discount can, in no case, exceed the amount
credited to "shares forfeited account".
♦ Discount allowed on re-issue should be less than the forfeited amount
♦ After reissue of forfeited shares amount left in 'shares forfeited account' which will be transferred to 'capital
reserve account' which will appear under the head "Reserves & Surplus".
Que. No. 22] A public limited company forfeited 80 equity shares and re-issued the same which resulted in
earning a surplus of ` 2,000. The company did not file return of allotment with the Registrar of Companies in
respect of re-issued shares. Explain whether the company has contravened any provision of the Companies Act,
2013 by non-filing of the return. CS (Inter) - Dec 2007 (4 Marks)
Ans.: Shares forfeited by a company may either be cancelled or re-issued to another person at the discretion of
the Board. Generally, such shares are re-issued at a discount which cannot exceed the amount already paid on
such shares. This is done by a Board resolution.
If the shares are re-issued at a price more than the face value, the excess of the proceeds of sale is not payable to
the former owner, if the articles provide otherwise. The excess of the proceeds so retained shall constitute a
premium and must therefore be transferred to the securities premium account.
A listed company for reissuing forfeited shares should comply with the relevant clause of the listing agreement and
due approval of the regional stock exchange and others as well.
No return of allotment in respect of re-issue of forfeited shares: No return of allotment of the shares reissued
need to be filed with the Registrar. Such re-issue, in fact, cannot be called allotment.
Que. No. 23] Write a short note on: Surrender of shares
Ans.: The Companies Act, 2013 does not contain any provision on surrender of shares. Table F of the First Schedule
also does not give power to a company to accept surrender of its shares as it does not contain provision on this
subject.
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But, articles usually empower the companies to accept surrender of shares.
It is not open to a shareholder to surrender his shares at will, especially when he has to meet future calls, and it is
not open to the company to accept a surrender of shares unless the act of the company can be brought within the
rule relating to forfeiture of shares.
A surrender of shares releasing the shareholder from further liability in respect of the shares, is equivalent to a
purchase of the shares by the company, and is therefore illegal and null and void. Thus, a surrender of shares is not
valid merely because the articles of the company authorize the Board to accept surrender of shares, unless it can
be shown that the surrender took place in circumstances, which would have justified forfeiture.
There can be no valid surrender of shares that are not fully paid except where shares are lawfully forfeited, as it
involves reduction of capital requiring the sanction of the Court.
Que. No. 24] A company has forfeited shares of a defaulting shareholder for non-payment of call money.
However, the defaulting shareholder approaches the Board after forfeiture of shares to cancel the said
forfeiture. What should the Board do? Give your advice. CS (Executive) - June 2010 (4 Marks)
Ans.: In case, the defaulting shareholder approaches the board after forfeiture to cancel the forfeiture, the board
is empowered to cancel such forfeiture and claim due amount with interest.
Que. No. 25] Distinguish between: Forfeiture of shares & Surrender of shares
Ans.: Following are the main points of distinction between forfeiture & surrender of shares:
Points Forfeiture of Shares Surrender of Shares
Meaning Forfeiture of shares means taking back of Surrender of shares means giving back shares
shares by the company from the shareholders to the company by the shareholder.
for default in payment of calls on shares.
Initiative In case of forfeiture, the company takes the In case of surrender of shares initiative is taken
initiative. by shareholder.
Reason Shares can be forfeiture for default in payment Shares can be surrendered for other reason
of calls-in-arrear. also e.g. for exchange into new shares.
Object The object of forfeiture is to penalize a The object of surrender of shares is to hand
member for non-payment of call. over the shares due non-payment of call or
other reasons.
Points Forfeiture of Shares Surrender of Shares
Proper notice Before the shares of a member are forfeited, a No notice is required in case of surrender of
proper notice to that effect must have been shares.
served. Regulation 29 of Table F provides that
a notice shall name a further 14 days from the
date of service of the notice on or before which
the payment is to be made. The notice must
also mention that in the event of non-
payment, the shares will be liable to be
forfeited.
Que. No. 26] Write a short note on: Lien on a share CS (Inter) - June 2000 (5 Marks)
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Ans.: Lien means to withhold the property of another for the lawful debts. A lien, like a mortgage or pledge, is a
form of security. It is equitable charge on the shares to secure any debts due from member of the company. A
company can enforce its lien on shares by the sale of those shares after giving 14 days notice in case the member
defaults in payment of amount due against him. The proceeds of the sale shall be applied in payment of such part
of the amount in respect which the lien exists. The residue, if any, shall be paid to the person entitled to the shares
at the date of the sale.
As per Regulation 9 of the Table F, the company shall have a first and paramount lien on partly paid up shares only.
Company cannot exercise lien on fully paid up shares. A company can excise lien on every partly paid up share for
all monies payable in respect of such partly paid up shares. However, the Board of directors may at any time declare
any share to be wholly or in part exempt from the provisions of this clause.
The company's lien on a share shall also extend to all dividends payable and bonuses declared from time to time
in respect of partly paid up shares.
A company cannot enforce its lien by forfeiting the shares. By virtue of this lien, the company has prior right to the
shares over any creditor to whom they are given as security for a loan, unless the company was given prior notice
of an existing mortgage or pledge of these shares.
Que. No. 27] Distinguish between: Lien & Forfeiture
Ans.: The following are the main points of distinction between lien and forfeiture:
Points Lien Forfeiture
Meaning Lien means to withhold the property of If a shareholder fails to pay the allotment
another for the lawful debts. A lien, like a money or calls made on him his shares are
mortgage or pledge, is a form of security. It is liable to be forfeited. Forfeiture of shares may
equitable charge on the shares to secure any be said to be the compulsory termination of
debts due from member of the company. membership by way of penalty for non-
payment of allotment and/ or any call money.
Nature Lien is a form of security for a debt. Forfeiture is a penal proceeding.
Reduction of Lien never involves a reduction of capital Forfeiture involves reduction of capital if
capital because the shares are sold if the member forfeited shares are not reissued.
makes defaults in payments.
Amount of sale In case of lien, the shareholder is entitled to In case of forfeiture noting is payable to
proceeds of receive the excess amount than the amount shareholder.
shares due.
Que. No. 28] Kailash, an employee of Sweetwill Ltd. met with an accident and died. The accident occurred when
Kailash was on company's duty. He held 100 shares partly paid. Normally the company has a first and permanent
lien on the shares. The Board of Directors however, relaxed the said provision with regard to these shares as a
goodwill gesture on the part of the company. Is the action of the company valid? State the reasons.
Whether company's lien can be extended to dividends payable on such shares?
Ans.: A company cannot have lien on shares unless provided in the AOA. As per Regulation 9 of Table F, the
company has first and paramount lien on every partly paid up share for all moneys payable to the Company.
However the Board of Directors may at any time exempt from the said provision.
Hence, the decision of the Board of Directors of Sweetwill Ltd. to relax the provisions of lien in respect of shares
held by Kailash is in order and valid as per Regulation 9 of Table F.
Further the company's lien is extended to all dividends payable on such shares.
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CHAPTER
6
TRANSFER & TRANSMISSION OF SECURITIES
TRANSFER OF SECURITIES
Que. No. 1] State the provision under the Companies Act, 2013 regulating transfer of securities. What is 'transfer
of shares'? CS (Inter) - June 2000 (2 Marks)
Ans.: Transfer of securities [Section 58(2)]: The securities or other interest of any member in a public company
shall be freely transferable. The Board of directors or the concerned depository has no discretion to refuse oi
withhold transfer of any security. The transfer has to be effected automatically and immediately.
Any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable
as a contract.
Instruments of transfer to be presented to the company [Section 56(1)]: A company, shall not register a transfer
of securities unless a proper instrument of transfer in Form No. SH. 4 duly stamped, dated and executed by oi on
behalf of the transferor and the transferee has been delivered to the company by the transferor or transferee
within a period of 60 days from the date of execution along with the certificate relating to the securities or letter
of allotment of securities.
Registration of partly paid up shares - Notice to the transferee [Section 56(3)]: Where an application is made by
the transferor for transfer of partly paid shares, the company shall give the notice of the application, in Form No.
SH. 5 to the transferee. Such partly paid shares can be transferred if the transferee gives no objection to the
transfer within 2 weeks from the receipt of notice.
Time limit for delivery of certificates [Section 56(4)]: Every company shall deliver the certificates of securities
allotted, transferred or transmitted, within a period of 1 month from the date of receipt of the instrument ol
transfer or the intimation of transmission, in case of transfer or transmission of shares. This restriction as to time
will not apply if transfer or transmission is prohibited by any provision of law or any order of Court, Tribunal or
other authority.
Transfer of securities by legal representative [Section 56(5)]: The transfer of any security or other interest of a
deceased person in a company made by his legal representative shall be valid as if he had been the holder at the
time of the execution of the instrument of transfer.
Que. No. 2] Dinesh, one of the joint holders of shares of a company, sent a requisition to the company to split
the shares equally amongst him and the other joint holders, by issuing fresh share certificates. State whether
the company is bound to comply with this requisition. CS (Inter) - Dec 2007 (4 Marks)
Ans.: Where the shares of the company are held in joint names and one of these joint holders makes a request to
the company to split the shares among the joint holders, the company shall not be bound to do so unless the
transfer deed duly executed jointly by the all the joint holders duly stamped and executed are lodged with the
company together with relevant share certificates in terms of Section 56 of the Companies Act, 2013.
Que. No. 3] Anant buys 20 shares of a public company from Basant through a stock broker. Anant receives the
share certificate and the blank transfer deed countersigned by Basant but does not lodge the transfer deed for
registration. Examine the legal effect of unregistered transfer between the transferor and the transferee.
Ans.: There is binding contract and the title of the transferee is complete and he became equitable beneficial owner
of the shares even though the transfer has not been lodged with the company. However, it was held that the
transferee becomes the member of a company only when the transfer of shares is registered by the company.
Pending registration, the transferor is trustee of the shares for the transferee and the transferor continues to be
the holder of the shares until his name is struck off the register of member and the name of the transferee entered
in his place. [Hardoon v. Belilios]
Que. No. 4] Write a short note on: Transfer of Share Warrants
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Layman is a holder of a share warrant in Ontime Fliers Ltd., a public limited company. Unfortunately, Layman is
unaware of any of the formalities to be complied with for transferring the said share warrant. Advise him about
the formalities to be completed in this regard. CS (Executive) - June 2010 (4 Marks)
Ans.: A share warrant is transferable by mere delivery of the warrants without execution of any written instrument
of transfer being registered by the company. The bearer of a share warrant is not a member of the company unless
otherwise so provided in the articles of the company.
Que. No. 5] Write a short note on: Loss of Transfer Deed
Sudesh sent an envelope to Nova Technology Ltd. on 6th June 2015. The envelope contained a duly executed
transfer deed along with relevant share certificate. On an enquiry, it was learnt that the envelope has not been
delivered to the company and the same may have been lost in postal transit. Sudesh seeks your advice as a
Company Secretary, as to how to obtain a duplicate share certificate from the company in lieu of the lost one.
Ans.: It is sometimes found that the transfer documents sent to companies are lost in transit or otherwise. In such
a case, the company may receive a request from the transferee by way of an application carrying adequate stamp
duty.
The procedure in above case is as under:
(1) An application in writing should be made by the transferee, which should bear required stamp duty for an
instrument of transfer.
(2) The board of directors of the company should be satisfied that the instrument of transfer signed by the
transferor and by the transferee has been lost. The proof may be in the form of an affidavit from the transferor or
the transferee and supported by the purchase or sale note of the broker and the registration receipt issued by the
postal authorities.
(3) In addition, the company can take an indemnity to safeguard its position.
After getting all the above stated condition complied with, the company may issue a duplicate share certificate
from the company in lieu of the lost one.
Que. No. 6] Can a private or public company refuse to transfer shares? What are the remedies available against
refusal under the Companies Act, 2013?
Directors have uncontrolled and unfettered powers to refuse registration of transfer of shares. Comment.
Ans.: Refusal of registration by private company [Section 58 (1)]: If a private company limited by shares refuses
to register the transfer or the transmission of any securities or interest of a member, it shall, within a period of 30
days from the receipt of transfer deed send notice of the refusal to the transferee and the transferor or to the
person giving intimation of transmission giving reasons for such refusal.
Refusal of registration by public company [Section 58 (4)]: A public company may on sufficient cause, refuse, to
register the transfer of securities within a period of 30 days from the date on which the instrument of transfer, or
the intimation of transmission, is delivered to the company. In such a case the public company may send an
intimation of the refusal.
Remedy against refusal [Section 58 (3), (4) & (5)]: If a private company limited by shares refuses to register the
transfer or transmission, the transferee may appeal to the Tribunal against the refusal within 30 days from the
date of receipt of the notice or in case no notice has been sent by the company, within 60 days from the date on
which the instrument of transfer or the intimation of transmission, was delivered to the company.
If a public company without sufficient cause refuses to register the transfer of securities within 30 days from the
date on which the instrument of transfer or the intimation of transmission, is delivered to the company, the
transferee may, within 60 days of such refusal or where no intimation has been received from the company, within
90 days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
The Tribunal, while dealing with an appeal, after hearing the parties, either dismiss the appeal, or by order-
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(ia) Direct that the transfer or transmission shall be registered and the company shall comply with order within 10
days of the receipt of the order or
(b) Direct rectification of the register and also direct the company to pay damages sustained by any party
aggrieved.
Judicial Views:
♦ Refusal to register share transfer on suspicion that the employee if admitted as a member will attend general
meetings of the company and may create nuisance by raising irrelevant issues and also obtain access to the records
to the company as a shareholder is not a valid reason. [Appeal to the CLB No. 27, of 1975 dated 17th August, 1976,
Shri Nimwl Kumar v. Jaipur Metal and Electrical Limited]
♦ The mere attempts of a person to wind up a company more than once cannot be a ground for refusing to
register transfer by the directors. [Rangpur Tea Association Ltd. v. Makkan Lai Samaddar (1979), 43 Com Cases 58].
♦ Where the appellant transferee and respondent company were in the same line of business and were rivals,
the refusal on the ground of rivalry will be justified in terms of the decision rendered by the Supreme Court in the
Bajaj Auto Case. Under these circumstances, the investment cannot be considered to have been made bona fide
with the intention of making profits. The respondent company is entitled to refuse the registration even in the
absence of an enabling provision in articles in view of the provisions of Section 111(2) [Corresponds to section
58(3) and 58(4) of the Companies 2013] [Modi Carpets Ltd. v. Trans-Asia Carpets Ltd., Appeal No. 2 of 1980 decided
on 26.12.1981 (CLB)].
♦ The appeal against the refusal by the respondent company to register transfer of shares was allowed by the
CLB (Now Tribunal) on the ground that the refusal of the respondent to register transfer of shares in favour of the
appellant was based on the decision of the Transfer Committee, a sub-committee of the Board of directors and not
that of the Board of directors as such, and, therefore, the said decision was not a valid and legal decision, [Shri T.N.
Kuriakos v. Premier Tyres Ltd., decided on 13.6.1983 (CLB)]
Que. No. 7] An employee of a company purchased certain shares of his company through a member of a stock
exchange and lodged with the company an application for transfer of shares in his (employee's) name. The
company refused to execute the transfer on the suspicion that the employee, if admitted as a member of the
company, will create nuisance in general meetings and seek access to the records of the company. Decide giving
reasons:
(/) Whether the company's contention shall be tenable and
(ii) What is the remedy available to the employee in the given case?
Ans.: As per Section 58 (4), a public company may on sufficient cause, refuse, to register the transfer of securities
within a period of 30 days from the date of receipt of instrument of transfer. In such a case the public company
may send an intimation of the refusal.
However, in Shri Nirmal Kumar v. Jaipur Metal and Electrical Limited it was held that refusal to register share
transfer on suspicion that the employee if admitted as a member will attend general meetings of the company and
may create nuisance by raising irrelevant issues and also obtain access to the records to the company as a
shareholder is not a valid reason.
Thus, the company's contention is not tenable.
Remedy: If a public company without sufficient cause refuses to register the transfer of securities within 30 days
from the date of receipt of instrument of transfer, the transferee may, within 60 days of such refusal or where no
intimation has been received from the company, within 90 days of the delivery of the instrument of transfer appeal
to the Tribunal.
Que. No. 8] Write a short note on: Forged Transfer A forged transfer is nullity. Comment.
Ans.: It may happen that a forged instrument of transfer is presented to the company for registration. In order to
avoid the consequences which will follow a forged transfer, companies normally write to the transferor about the
lodgment of the transfer instrument so that he can object if he wishes.
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The company informs him that, if no objection is made by him before a day specified in the notice, it would register
the transfer. The consequences of a forged transfer are detailed hereunder:
(1) A forged transfer is a nullity and, therefore, the original owner of the shares continues to be the shareholder
and the company is bound to restore his name on the register of members. A forged document never has any legal
effect. It can never move ownership from one person to another, however, genuine it may appear. Thus, a forged
instrument of transfer leaves the ownership of the shares exactly where it always was in the so-called transferor.
(2) It follows that if a company registers a forged transfer, the true owner can apply so as to be replaced on the
register and his name will be restored. But, the company does not incur any liability in damages by putting the
name on the register.
(3) However, if the company issues a share certificate to the transferee and he sells the shares to an innocent
purchaser, the company is liable to compensate such a purchaser, if it refuses to register him as a member, or if
his name has to be removed on the application of the true owner.
(4) If the company is put to loss by reason of the forged transfer, as it may have paid damages to an innocent
purchaser, it may recover the same independently from the person who lodged the forged transfer.
Que. No. 9] Arun buys 300 shares of a company from Barun on the faith of a share certificate issued by the
company. Arun submits to the company a transfer deed, duly executed, along with Barun's share certificate for
transferring the shares in his name. The company discovers that the certificate in the name of Barun has been
fraudulently obtained and refuses to register the transfer. Is Arun entitled to get the shares transferred in his
name? CS (Inter) - June 2001 (6 Marks), June 2005 (6 Marks)
Smart, a registered shareholder of Dowitt Ltd. left his share certificate with his broker. A forged transfer deed in
favour of Ramesh, accompanied by these share certificates were lodged with the company for registration. The
Company Secretary, who had certain doubts, wrote to Smart informing him of the proposed transfer and in the
absence of a reply within the stipulated time, registered Ramesh as a shareholder by endorsing the share
certificate. Subsequently, Ramesh sold the said shares to John and John's name was placed in the register of
shareholder. Later on, Smart discovered that forgery has taken place. What remedy does Smart have? Advice
Smart. CS (Inter) - June 2002 (6 Marks), Dec 2002 (5 Marks) * 1 2 3
Ans.:
(1) A forged transfer is a nullity and, therefore, the original owner of the shares continues to be the shareholder
and the company is bound to restore his name on the register of members. A forged document never has any legal
effect. It can never move ownership from one person to another, however, genuine it may appear. Thus, a forged
instrument of transfer leaves the ownership of the shares exactly where it always was in the so-called transferor.
(2) However, if the company issues a share certificate to the transferee and he sells the shares to an innocent
purchaser, the company is liable to compensate such a purchaser, if it refuses to register him as a member, or if
his name has to be removed on the application of the true owner.
(3) If the company is put to loss by reason of the forged transfer, as it may have paid damages to an innocent
purchaser, it may recover the same independently from the person who lodged the forged transfer.
As per the facts given in the case, since there is forged transfer in the name of Barun, company can refuse to
transfer the shares in favour of Arun who is innocent purchaser. The company is liable to compensate a purchaser
i.e. Arun, if it refuses to register him as a member and any such compensation or damages paid to Arun can be
removed by the company from Barun.
Que. No. 10] How you will deal as Company secretary with the situation where death of transferor or transferee
takes place before registration of transfer?
Ajay sold his shares and executed a transfer deed in favour of Vijay. The documents were lodged for transfer
with the company. However, before effecting and registering the transfer by the company, Ajay, the transferor
passed away. What is the impact of the death of Ajay on the registration of transfer of shares in favour of Vijay,
if the death of Ajay is:
(j) Intimated to the company before the registration; and
(ii) Intimated to the company after registration of the transfer of the shares in favour of Vijay?
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If Vijay dies before registration of the transfer of shares, what will be the consequences:
(i) If the death of Vijay is intimated to the company before registration of transfer and
(ii) If the death of Vijay is not intimated to the company before the registration of transfer?
Ans.:
(A) Where the transferor dies:
- If the company has no notice of his death the company would obviously register the transfer.
- But, if the company has notice of his death, the proper course is not to register until the legal representative
of the transferor has been referred to.
(B) Where the transferee dies:
- If the company has no notice of his death the company would obviously register the transfer.
- If the company has notice of his death, a transfer of shares cannot be registered in the name of the deceased.
With the consent of the transferor and the legal representatives of the transferee, the transfer may be registered
in the names of the later. But if there is a dispute, an order of Court will have to be insisted upon.
Que. No. 11] Examine the validity of transfer and transmission of shares in favour of a minor under the provisions
of the Companies Act, 2013. CS (Executive) - Dec 2015 (4 Marks)
Ans.: Transfer and transmission of shares in favour of minor: A person who is not competent to contract e.g., a
minor cannot become a member of a company. Consequently, an agreement by a minor to take shares is void ab-
initio. However, it has been held that an agreement in writing for a minor to become a member may be signed on
behalf of the minor by his lawful guardian and the registration of transfer of shares in the name of the minor, acting
through his or her guardian, especially where the shares are fully paid cannot be refused on the ground of the
transferee being a minor. [Miss Nandita Jain v. Bennett Coleman & Co. Ltd. Appeal No. 27 of 1972, dated 17.2.78]
Thus, if shares are fully paid-up, such shares can be transferred in name of minor.
Similarly, if shares fully paid-up, such shares can be transmitted in name of minor. [Saroj v. Britannia Industries
Ltd., Appeal No. 5/80 decided on 14.12.81 by CLB]
Que. No. 12] A transfer deed was executed by a mother of a minor as his natural guardian and the company had
registered the transfer of shares covered by the transfer deed. Now, the minor's father requests the company
to substitute the name of mother with his name. The company expresses its inability. What is the remedy
available to the father of the minor? CS (Inter) - Dec 2002 (3 Marks)
Ans.: Where a transfer was effected by a mother of a minor as his natural guardian, a petition by the father of the
minor that he alone could be regarded as natural guardian and transfer must be set aside was rejected. The CLB
pointed out that if there was anything wrong done by the petitioner's wife, he should seek his remedy against her
in an appropriate Court, so far as the company was concerned when properly executed transfer deed under the
signature of minor's mother submitted to the company and transfer effected, the petitioner
could not make a grievance that the entries made in the register of members were without sufficient cause.
[Jonas Hemant Bhutta v. Surgiplast Ltd.]
Que. No. 13] Write a short note on: Blank Transfer
Ans.: When a shareholder sign's the transfer form without filling in the name of the tr ansferee and the date of
execution and hands it over with the share certificate to the transferee to enable him to deal with the shares, he
is said to have made a 'blank transfer'.
Shares are usually transferred in blank when a shareholder borrows money on its security, e.g., by pledging the
shares; the pledgor make default in payment of the amount due at the time appointed for repayment, the pledgee
or the holder of the share certificate and the blank transfer instrument has implied power to fill up the blanks in
the instrument by inserting the date and his own name as transferee and to get himself registered as a member of
the company. The pledgor is under an implied obligation not to prevent or delay such registration.
Que. No. 14] Write a short note on: Transposition of names
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A, B & C are joint holders of shares of Carehead Ltd. The joint holders now ask the company for altering or
rearranging the serial order of their names in the register of members of the company. In reply, the company
intends to ask the joint holders to execute a transfer deed for transposition of names in the register of members.
Advice the company on the course of action. CS (Executive) - Dec 2012 (4 Marks)
Ans.: In the case of joint shareholders, one or more of them may require the company to alter or rearrange the
serial order of their names in the register of members of the company. In this process, there will be need to make
changes in the share certificates issued to them. If the company provides in its articles that the senior-most among
the joint holders will be recognized for all purposes like service of notice, a copy of balance sheet, profit and loss
account, voting at a meeting etc., the request of transposition may be duly considered and approved by the Board
or other authorized officer of the company.
Since, no transfer of any interest in the shares takes place on such transposition, the question of insisting on filling
transfer deed with the company, may not arise. Transposition does not also require stamp duty. The Stock
Exchange Division of the Department of Economic Affairs has clarified that there is no need of execution of transfer
deed for transposition of names if the request for change in the order of names was made in writing, by all the
joint holders. If transposition is required in respect of a part of the holding, execution of transfer deed will be
required.
■ ■■ TRANSMISSION OF SHARES
Que. No. 15] What do you understand by 'Transmission of Shares'?
Ans.: Transmission of shares refers to those cases where a person acquires an interest in property by operation of
law, such as by right of inheritance or succession or by reason of the insolvency or lunacy of the shareholder or by
purchase in a Court-sale. Transmission of shares takes place when the registered shareholder dies or is adjudicated
as an insolvent, or if the shareholder is a company, it goes into liquidation.
For transmission, instrument of transfer is not required and merely an application addressed to the company by
the legal representative is sufficient.
Articles of companies generally provide for formalities to be observed for transmission of shares. In the absence
of such provision in the articles of the company Table F Regulations 23 to 27 of the Schedule I will govern the
procedure for transmission.
According to these regulations, the legal representatives are entitled to the shares held by deceased member and
the company must accept the evidence of succession e.g., a succession certificate or letter of administrations or
probate or any other evidence properly required by the Board of directors. He is, however, not a member of the
company by reason only of being the legal owner of the shares. But he may apply to be registered as a member.
On the contrary, instead of being registered himself as a member, he may make such transfer of the shares as the
deceased or insolvent member could have made. The Board of directors also has the same right to decline
registration as they would have had in the case of transfer of shores before death. But, if the company
unduly refuses to accept a transmission, the same remedies are available to the legal representative as in the case
of a transfer namely, an appeal to the Tribunal under Section 58.
Que. No. 16] Distinguish between: Transfer of Shares & Transmission of Shares
Ans.: Following are the main points of distinction between transfer & transmission of shares:
Points Transfer of Shares Transmission of shares
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Meaning Transfer of shares means the transfer of the Transmission of shares refers to those cases
ownership of the shares from one person to where a person acquires an interest in property
another person. by operation of law, such as by right of
inheritance or succession or by reason of the
insolvency or lunacy of the shareholder or by
purchase in a Court-sale.
How it is done Transfer takes place by a voluntary act of the Transmission is the result of the operation of
transferor. law.
instrument of An instrument of transfer is required in case of No instrument of transfer is required in case of

transfer transfer. transmission.
Nature T ransfer is a normal course of transferring Transmission takes place on death or

property. insolvency of a shareholder.
Consideration Transfer of shares is generally took place for Transmission of shares is generally took place
some Consideration. without any consideration.
Stamp duty Stamp duty is payable on transfer of shares by No stamp duty is payable on transmission of
a member. shares.
Que. No. 17] Grace Ltd., a public limited company has received an application from Rosy for transmission of
certain shares in her name. Rosy, being a widow of a shareholder, applies for transmission of the shares standing
in the name of her deceased husband without producing a succession certificate. Can the company transfer the
shares of the deceased member? Discuss.
Ans.: If a widow applies for transmission of the shares standing in the name of her deceased husband without
producing a succession certificate and if the AOA of the company so authorizes, the directors may dispense with
the production of succession certificate, probate or letter of administration upon such terms as to indemnity as
the directors may consider necessary, and transmit the shares to the widow of the deceased by obtaining an
indemnity bond.
Thus, Grace Ltd. can transmit the shares of deceased husband to a widow without producing a succession
certificate.
Que. No. 18] Write a short note on: Transmission of joint holdings
1,000 shares of Astro Ltd. are registered in the name of the three persons P, Q & R jointly. Interestingly, the
articles of the company provide that the survivors shall be the person to be recognized by the company as having
any title to the shares of the company. Unfortunately, P & Q died in an air crash. In these circumstances, R, being
the survivor claims to be the full owner of the said shares. However, the legal heirs of P & Q are also making
counter claims. Who will succeed? Explain.
Ans.: In case some shares are registered in joint names and the articles of the company provide that the survivor
shall be the only person to be recognized by the company as having any title to the shares, the company is justified
in refusing to register the transmission of title by operation of law in favour of the son of the deceased holder even
though he may obtain succession certificate from the Court.
DEPOSITORY
Que. No. 19] Discuss briefly the regulatory framework for a depository system in India.
Ans.: The legal framework for a depository system has been laid down by the Depositories Act, 1996 and is
regulated by SEBI. The depository business in India is regulated by -
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♦ The Depositories Act, 1996
♦ The SEBI (Depositories and Participants) Regulations, 1996
♦ Bye-laws of Depository
♦ Business Rules of Depository
Apart from the above, Depositories are also governed by certain provisions of:
♦ Companies Act, 2013
♦ Indian Stamp Act, 1899
♦ SEBI Act, 1992
♦ Securities Contracts (Regulation) Act, 1956
♦ Benami Transaction (Prohibition) Act, 1988
♦ Income-tax Act, 1961
♦ Bankers Books Evidence Act, 1891
Que. No. 20] Write a short note on: Transfer of shares in depository mode
Ans.: Depository system maintains the ownership records of securities in the book entry form while in physical
mode, every share transfer is required to be accomplished by physical movement of share certificates to, and
registration with the company concerned. The process of physical movement of share certificates often involves
long delays and a significant portion of transactions end up as bad deliveries due to the faulty completion of
paperwork, or signature differences with the specimens on record with the companies, or for other procedural
lapses. Investors also face problems on account of loss of share certificates, forgery and mutilation. The significant
time involved in effecting ownership changes also impounds a substantial volume of shares at any given time
leading to lower trading volumes. As part of capital market reform, the Government introduced Depositories Act,
1996 to provide for legal framework for setting up of depositories to record the ownership details in book entry
form.
Que. No. 21] The depository system functions very much like the banking system. Comment.
Ans.: The Depository system functions very much like the banking system. Following points are given in support of
this statement.
♦ A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
♦ A bank transfers funds between accounts whereas a depository transfers securities between accounts.
♦ Both the bank and the depository are accountable for the safe keeping of funds and securities respectively.
A depository is a system which holds shares in the form of electronic account. A Depository performs the functions
of holding safe-keeping, transferring and allowing withdrawal of securities like bank performs functions of holding,
safe-keeping, transferring and withdrawal of money. When you deposit money your money, your account is
credited. When you withdraw cash, your account is debited. The currency notes paid to you will be different from
the once you deposited. Thus, serial number of currency notes deposited and withdrawn will never be the same -
same will be the situation in depository scheme. The depository participant with whom you have opened demat
account gives you periodic statement of your account just like bank give you statement/passbook regarding your
deposit and withdrawal of funds from the accounts.
Bank - Depository (Similarities)
Bank Depository
Holds funds in an account Holds securities in an account
Transfers funds between accounts on the instruction of Transfers securities between accounts on the
the account holder. instruction of the beneficial owner account holder.
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Facilitates transfer without having to handle money. Facilitates transfer of ownership without having to
handle securities.
Facilitates safekeeping of money Facilitates safekeeping of securities.
Que. No. 22] Securities in depositories shall be in fungible form. Comment.

Write a short note on: Fungibility CS (Executive) - June 2013 (4 Marks)
Ans.: As per Section 9 of the Depositories Act, 1996 all securities held in a depository are fungible. That is all
certificates of the same security are inter-changeable in the sense that investors lose the right to obtain the exact
certificate they surrender at the time of entry into depository. It is like withdrawing money from the bank without
bothering about the distinctive number of the currencies.
Que. No. 23] Depository is a boon to capital market and investor both. Elucidate the statement and bring out
the advantage of the depository scheme.
Explain the term 'demat'. State the benefits of demat securities.
What are the benefits of 'depository system'? CS (Executive) - Dec 2010 (8 Marks), Dec 2012 (4 Marks)
Ans.: 'Demat' refers to dematerialization which is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form.
The main aim of depositories is to introduce paperless trading and smooth functioning of settlement of security
transactions. Following are the advantages of the depository scheme/ demat:
(1) No stamp duty: In case of transfer of physical shares, stamp duty is payable on the market value of shares
being transferred. However, for transfer of securities in the electronic form no stamp duty is payable.
(2) Immediate transfer and registration of securities: Physical transfer of shares was lengthy process as process
usually takes around three to four months. Since, depository is a system works in electronic environment, there is
immediate transfer of securities.
(3) Elimination of bad deliveries: In case of transfer of physical shares, transfers could be withheld for bad
deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does
not arise i.e. they cannot be held "under objection".
(4) Elimination of all risks associated with physical certificates: All risks associated with physical certificates
such as delays, loss-in-transit, theft, mutilation etc. eliminated. This problem does not arise in the depository
environment.
(5) No "odd lot": In traditional system, shares are required to be transferred in lost say 50 or 100. Now, with the
introduction of depository scheme, the concept of an "odd lot" in respect of dematerialized shares stands
abolished, i.e. in the demat mode, market lot becomes one share.
(6) Faster disbursement of non cash corporate benefits: Depository system provides for direct credit of non-
cash corporate benefits like bonus, right issue & dividend to an investors account, thereby ensuring faster
disbursement and avoiding risk of loss in transit.
(7) Reduction in transactions cost: In physical transfer of shares transaction cost like brokerage and handling
charges was high. Further courier/postal charges for sending share certificates/transfer deeds are also required to
be incurred. But in depository scheme brokerage charges are get reduced and other charges like courier/postal
charges are required at all.
(8) Elimination of problems related to change of address of investor, transmission, etc.: In case of change of
address or transmission of demat shares, investors are saved from undergoing the entire change procedure with
each company or registrar. Investors have to only inform their DP with all relevant
documents and the required changes are effected in the database of all the companies, where the investor is a
registered holder of securities.
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(9) Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required
to take court approval for selling demat securities on behalf of a minor.
Que. No. 24] What is dematerialization (DEMAT) and Rematerialization (REMAT)?
What do you understand by dematerialization of securities?
Ans.: Dematerialization is the process by which physical certificates of an investor are converted to an equivalent
number of securities in electronic form.
An investor will have to first open an account with a Depository Participant and then request for the
dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings
can be credited into that account. This is very similar to opening a Bank Account.
Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has
to demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor
purchases shares from the Stock Exchange, he/ she will get delivery of the shares in demat form.
Rematerialization is the process of converting securities held in electronic form in a demat account back in physical
certificate form.
Que. No. 25] Distinguish between: Dematerialization & Rematerialization
Ans.: Following are the main points of distinction between dematerialization & rematerialization:
Points Dematerialization Rematerialization
Meaning Dematerialization is the process by which Rematerialization is the process of converting

physical certificates of an investor are securities held in electronic form in a d emat
converted to an equivalent number of account back in physical certificate form.
securities in electronic form.
Sequence Firstly, share in physical form are In rematerialization electronic shares are again
dematerialized, so it's primary. converted in to physical shares, so it's
secondary.
Form Investor use Dematerialization Request Form Investor use Rematerialization Request Form
(DRF) (RRF)
Stamp duty When shares are held in dematerialized, When shares are rematerialized, further
further transfer of shares does not attract transfer of shares attracts stamp duty.
stamp duty.
Que. No. 26] Distinguish between: Shares in physical form and Shares in dematerialized form
Ans.: Following are the main points of distinction between 'Shares in physical form' and 'Shares in dematerialized
form':
Points Shares in physical form Shares in dematerialized form
Nature Share certificates are issued in physical form. No physical scrips are in existence. Only
electronic record is maintained by depository.
Account No necessity of opening accounts. It is necessary to open a demat account.
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Time in Transfer of shares takes longer time due to Since there is electronic transfer, it takes effect
transfer physical movement of documents. immediately.
Stamp duty To transfer shares in held in physical form, No stamp duty is payable for transferring the
stamp duty has to be paid. share in dematerialized form.
Theft & forgery There are chances of theft and forgery. The chance of theft and forgery are remote.
Bad delivery There are chances of bad delivery. There are no chances of bad delivery.
Que. No. 27] Distinguish between: Beneficial owners under depository mode and Registered owners under
depository mode CS (Inter) - June 2008 (4 Marks)
Ans.: Registered Owner & Beneficiary Owner
All the public limited companies are required by the Companies Act, 2013 to maintain an index of members,
wherein they are required to keep a record or the owners of the company. With the concept of dematerialization
of securities and transfer of shares through book entry system coming up, registered owners are NSDL & CDSL only.
So, in the index of members of any company, there are only two registered owners, i.e. the two depositories. The
depositories keep a track of all the clients through the depository participants.
Therefore, the registered owners are the depositories whereas the beneficiary owners are the people who are
holding the securities at any given point of time.
Whenever a company declares a bonus issue, the securities are transferred in the name of the two depositories
and they further transfer it to the clients through their participants. Therefore, the depositories are known as the
registered owners and the investors are known as the beneficiary owners as they get the benefits of all the
corporate actions.
Further, if a company declares a cash dividend, then the details of the holdings by the investors is given by the
respective depository participants to the depository so that the details can further be given to the RTA (Registrar
& Transfer Agents) which would facilitate them to directly transfer the amount to the bank account of the
investor/holder through the ECS (Electronic Clearing System) system.
For having a security of a company in demat form, first a company has to opt for the same. A company can do so
by getting itself registered with at least one of the depositories.
For this, the company has to transfer all its shares to the depository.
For differentiating among all the companies, International Securities Identification Number (ISIN) is assigned to
them which are unique in nature.
Que. No. 28] Dematerialization and immobilization are distinct terms.
Ans.: Following are the main points of distinction between dematerialization & immobilization:
Points Dematerialization Immobilization
Meaning Dematerialization is the process by which Immobilization is the process where physical
physical certificates of an investor are share certificates are kept in vaults with the
converted to an equivalent number of depository for safe custody.
Withdraw of Physical share certificate surrendered at the The actual owner has the right to withdraw his
original share time of dematerialization cannot be original share certificate are kept in vaults with
certificate withdrawn but investor can ask for fresh the depository.
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certificate by adopting rematerialization
process.
Cost This model is simple and cost effective. This model is not popular as it is complex and
expensive.
Que. No. 29] Distinguish between: Depository & Custodian CS (Inter) - Dec 2006 (2 Marks)
Ans.: Following are the main points of distinction between Depository & Custodian:
Points Depository Custodian
Meaning Dematerialization is the process by which A Custodian is a person who carries on the
physical certificates of an investor are business of providing custodial services to the
converted to an equivalent number of client.
Transfer of Depository can legally transfer beneficial Custodian cannot transfer legally ownership.
ownership ownership.
Regulation Depositories are governed by the SEBI Custodian are governed by the SEBI (Custodian
(Depositories & Participants) Regulations, of Securities) Regulations, 1996
1996.
Points Depository Custodian
Net wroth Depository must have a net worth of a Custodian must have a net worth of a
minimum of ` 100 Crores. minimum of ` 50 Crores.
Numbers There are only two depositories registered There are many custodians registered with the
with SEBI. SEBI.
Que. No. 30] State the procedure for dematerialization of shares by the shareholder.
Ans.: Procedure for dematerialization of shares by the shareholder:
(1) For the purpose of Dematerialization of the shares of a registered shareholder of a company, the shareholder
has to enter into an agreement with a depository through a participant in the manner specified by the bye-laws,
for availing of its services.
(2) A person shall surrender the certificate of the shares, for which he seeks to avail the services of a depository,
to the company in the manner specified in the SEBI (Depositories and Participants) Regulations, 1996.
(3) The company, on receipt of the share certificate from shareholder, shall cancel the certificate, and substitute
in its records, the name of the depository as the registered owner in respect of those shares and accordingly inform
the depository.
(4) On receipt of the information from the company, the depository shall enter the name of the shareholder in
its records as the beneficial owner of the shares and inform the company, who shall in turn inform the shareholder
that his shares have been dematerialized and his name has been entered in the depository's electronic records.
(5) A Dematerialization Request Form (DRF) issued by the Depository Participant is to be filled and deposited
with the concerned DP together with certificates after writing "Surrendered for Dematerialization" on the face of
each certificate.
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(6) The DP will send DRF along with the certificates to the concerned company for confirmation of its
genuineness simultaneously to Share Transfer Agents electronically through the Depository (NSDL or CDSL as the
case may be).
(7) After checking the genuineness of the certificates and DRF the company/Share Transfer Agents destroy the
certificates and send a confirmation to the NSDL or CDSL which, in turns, confirm the dematerialization of securities
to DPs:
(8) DPs on receipt of such confirmation should inform the investor accordingly.
Que. No. 31] State the procedure for dematerialization of shares by the company.
Ans.: Procedure for dematerialization of shares by the company:
A company proposing to have its shares dematerialized is required to take the following procedural steps:
(1) It should be ensure that its AO A do contain an article which authorizes the company to have its securities
dematerialized. If the AOA of the company do not contain such a provision, it shall be required to alter its articles
by passing a special resolution in general meeting so as to include such a provision and thereafter comply with the
provisions of the Depositories Act, 1996 and the SEBI (Depositories and Participants) Regulations, 1996 for
dematerialization of its securities.
(2) The company, which is desirous of dematerializing any of its above-detailed securities, after having altered
its AOA to incorporate an article to authorize the company to dematerialize its securities, will have to approach a
depository for the purpose. The depository shall enter into an agreement with the company in respect of securities
that are to be declared as eligible to be held in dematerialized form. Further, no such agreements shall be required
to be entered into where the State or the Central Government is the issuer of such securities.
(3) If the company has appointed a Registrar to the issue, in case of a new issue, or a share transfer agent for
transfer/transmission of its existing shares, who has been granted certificate of registration by SEBI, the depository
shall enter into a tripartite agreement with the company and the registrar to the issue or
share transfer agent, as the case may be, in respect of the securities to be declared by the depository as eligible to
be held in dematerialized form.
(4) Thereafter, the shareholders may surrender their share certificates to the company and the company shall
inform the depository accordingly. The company, on receipt of the share certificates from its shareholders, shall
cancel the certificates and substitute in its records, the name of the depository as the registered owner in respect
of all those shares and accordingly inform the depository.
(5) On receipt of the information from the company, the depository shall enter the names of the shareholders
in its records as the beneficial owners of the shares and inform the company, who shall in turn inform the
shareholders that their shares have been dematerialized and their names have been entered in the depository's
electronic records as beneficial owners of the shares.
Que. No. 32] Write a short note on: Rematerialization of securities
Ans.: Rematerialization is conversion of electronic securities into physical certificates of such securities. This can
be done in the following manner:
(1) Beneficial owner sends request to DP.
(2) DP intimates Depository (NSDL or CDSL) of such request electronically.
(3) Depository confirms rematerialization request to the company's Share Transfer Agents.
(4) Share Transfer Agent updates accounts, prints certificates and confirms the Depository.
(5) Depository updates accounts and downloads the details to the DP.
(6) Share Transfer Agent dispatches certificates to holder thereof.
(7) The DP also sends intimation about rematerialization to its client.
Que. No. 33] Write a short note on: Pledging of securities in dematerialized form
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Ans.: Securities held in demat mode can be pledged. A Beneficial Owner (BO) can, not only pledge his demat
securities, but, may also be able to obtain higher loan amounts, with lower rate of interest. Moreover, procedure
for pledging securities in demat form is very convenient, both, for the pledgor and the pledgee.
Procedure for pledging securities:
♦ The pledgor and the pledgee must have BO accounts with CDSL. These accounts can be with the same DP or
with different DPs.
♦ The pledgor has to fill up the Pledge Request Form (PRF) in duplicate available with his DP.
♦ On receipt of the PRF, the pledgor's DP shall verify that the securities can be pledged.
♦ The DP then sets up a pledge request in the depository system and a unique Pledge Sequence No. (PSN) will
be generated. The PSN number should be recorded on the PRF.
♦ Authorized official of the DP should sign the PRF and stamp it. A copy of the PRF is then given to the pledgor.
♦ One copy of PRF (with the PSN) should be sent to the pledgee by the Pledgor. The Pledgee will then
countersign the PRF for acceptance/rejection of the pledge request and submit the PRF to his DP.
♦ The pledgee's DP has the facility to access the request. Based on copy of PRF the pledgee's DP either accepts
or rejects the pledge request.
When dematerialized securities are pledged, they remain in the pledgor BOs demat account but they are blocked
so that they cannot be used for any other transaction.
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CHAPTER
7
MEMBERSHIP
Que. No. 1] In what manner 'membership' in a company can be sought?
CS (Inter) - June 2000 (4 Marks),
CS (Inter) - Dec 2003 (4 Marks) CS (Executive) - June 2009 (8 Marks)
Write a short note on: Modes of acquiring membership CS (Inter) - June 2007 (3 Marks)
Ans.: As per Section 2(55), a person may acquire the membership of a company:
(1) By subscribing to the MOA (deemed membership) or
(2) By agreeing in writing to become a member:
♦ By making an application for allotment of shares or
♦ By executing an instrument of transfer of shares or
♦ By consenting to the transfer of share of a deceased member in his name or
♦ By acquiescence or estoppel.
(3) Every person holding equity share capital of the company and whose name is entered as beneficial owner in
the records of the depository shall be deemed to be the member of the concerned company.
The person desirous of becoming a member of a company must have the legal capacity of entering into an
agreement in accordance with the provisions of the Indian Contract Act, 1872. Section 11 of the said Act lays down
that, every person is competent to contract who:
(a) Is of the age of majority according to the law to which he is subject.
(b) Is of sound mind.
(c) Is not disqualified from contracting by any law to which he is subject.
Que. No. 2] The name of Akhil is found entered in the register of member of a company. But Akhil contends that
he is not a member of the company. The company maintains that Akhil has orally agreed to become a member
and, hence, his name was entered in the register of members. Is the contention of Akhil valid?
Ans.: Contention of Akhil is valid. As per Section 2(55), a person may acquire the membership of a company by
agreeing in writing to become a member. Oral agreement is not valid.
Que. No. 3] RSP Ltd., allotted 500 fully paid-up shares of ` 100 each to Z, a minor, in response to his application
without knowing that he was a minor and entered his name in the Register of Members. Later on, the company
came to know of this fact. The company cancelled the allotment and struck-off his name from the Register of
Members and also forfeited his entire share money. He filed a suit against the action of the company. Decide
whether Z would be given any relief by the Court under the provisions of the Companies Act, 2013.
Ans.: A minor being incompetent to contract, cannot be member of a company. It is true that the Companies Act,
2013 prescribes no qualification for membership but membership entails an agreement and this agreement can
be enforced in the Court. Therefore, the contractual capacity as envisaged by the Indian Contract Act, 1872 should
be taken into consideration. It has been held in Mohri Bibi v. Dharmadas Ghose (1930) that since a minor has no
contractual capacity, the agreement with a minor is void. Therefore, a minor or a lunatic cannot enter into an
agreement to become a member of a company.
In the case Palaniappa v. Official Liquidator AIR 1942, it was observed that if the directors allot share to a minor in
response to his application, without knowing that he was a minor and enter his name in the Register of Members,
the company can eschew the allotment and strike the name of the minor off the Register of Members. But the
company must refund the entire money to the minor, which it obtained in relation to the shares allotted.
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On the basis of above decision the contention of Z is not valid. The company is empowered to cancel the allotment
and strike the name of Z off the Register of Member. But the decision of the company to forfeit the entire share
money of Z is wrong. The company must refund the money to the Z.
Que. No. 4] Subscribers to memorandum are deemed to be members of the company. Comment.
Ans.: In the case of a subscriber, no application or allotment is necessary to become a member. By virtue of his
subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto
member on the incorporation of the company and is liable for the shares he has subscribed.
A subscriber to the memorandum cannot rescind the contract for the purchase of shares even on the ground of
fraud by the promoters. [Re. Metal Constituents Co., (1902) l.Ch. 707.]
Money payable by member under memorandum or article [Section 10 (2)]: All monies payable by any member
to the company under the memorandum or articles shall be debt due from him to the company.
Further, a subscriber to the memorandum must pay for his shares in cash even if the promoters have promised
him the shares for services rendered in connection with the promotion of the company. Again, he must take the
shares directly from the company, and not through transfer from other member. When a person signs a
memorandum for any number of shares he becomes absolutely bound to take those shares and no delay will
relieve him from that liability unless he fulfils the obligation. His liability remains right up to the time when the
company goes into liquidation and he is bound to bring the money for which he is liable to pay to the creditors of
the company.
Que. No. 5] All the shareholders of a company are members and all the members of a company are shareholders.
Comment. CS (Executive) - Dec 2008 (5 Marks)
Ans.: The members of a company are the persons who constitute the company. In the case of a company limited
by shares, the shareholders are the members.
The terms 'members' & 'shareholders' are usually used interchangeably as there can be no membership except
through the medium of shareholding. Thus, generally speaking every shareholder is a member and every member
is a shareholder.
However, there may be exceptions to this statement, which are explained below:
(1) A person may be a holder of shares by transfer but will not become its member until the transfer is registered
in the books of the company in his favour and his name is entered in the register of members.
(2) Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to
be member of the company until the transfer is registered and his name is removed from the register of members.
(3) In a company limited by guarantee, the persons who are liable under the guarantee clause in its MOA are
members of the company.
(4) In an unlimited company, the members are the persons who are liable to the company, each in proportion
to the extent of their interests in the company, to contribute the sums necessary to discharge in full, the debts and
liabilities of the company, in the event of its being wound-up.
Que. No. 6] Who may become a member?
Can following become member of company?
♦ A partnership firm
♦ A private limited company
Four types of persons, viz., a Section 8 company, an insolvent individual, a trade union and a pawnee, apply for
membership in your public limited company. Will you accept them as members of your company? Why? CS
(Executive) - June 2010 (4 Marks)
A Limited Liability Partnership can become member in a company incorporated under the provisions of the
Companies Act, 2013. CS (Executive) - June 2017 (5 Marks)
Ans.: Subject to the MOA & AO A, any person who is competent to contract can become a member of a company.
However, it is important to note the following points in relation:
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(1) Company as a member of another company: A company can become a member of any other company.
However, it must be authorized by its MOA to invest in the shares in other companies. A subsidiary company cannot
become a member of its holding company. Where a subsidiary company had become the member of the holding
company before it became the subsidiary, it can continue to be a member of holding company. But subsidiary
company shall not have any voting rights in respect of shares held in the holding company. [Section 19]
(2) Partnership firm as a member: A partnership firm is not a legal person and cannot become a member of a
company. However partnership firm can become member of Section 8 company i.e. non-profit making company.
(3) Limited liability partnership: Being an incorporated body under the statute, LLP can become a member of a
company.
(4) Section 8 company: A non-profit making company licensed u/s 8 can become a member of another company
if it is authorized by its MOA to invest into shares of the other company.
(5) Foreigners as members: A foreigner may take shares in an Indian company and become a member subject
to the provisions of the Foreign Exchange Management Act, 1999, but in the event of war with his country, he
becomes an alien enemy and his power of voting and his rights to receive notices are suspended.
(6) Minor as member: A member who is not competent to contract e.g., a minor cannot become a member of
a company. Consequently, an agreement by a minor to take shares is void ab-initio. It has been held that an
agreement in writing for a minor to become a member may be signed on behalf of the minor by his lawful guardian
and the registration of transfer of shares in the name of the minor, acting through his or her guardian, especially
where the shares are fully paid cannot be refused on the ground of the transferee being a minor. [Miss Nandita
Jain v. Benett Coleman & Co. Ltd. Appeal No. 27 of 1972 dated 17.2.78]
(7) Insolvent as member: An insolvent may be a member of a company as long as he is on the register of
members. He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on
his shares to the Official Assignee or Receiver.
(8) Pawnee: A pawnee cannot be treated as the holder of the shares pledged in his favour, and the pawner
continues to be a member and can exercise the rights of a member.
(9) Receiver: A receiver whose name is not entered in the register of members cannot exercise any of the
membership rights attached to a share unless in a proceeding to which company is a party and an order is made
therein.
(10) Persons taking shares in fictitious names: A person who takes shares in the name of a fictitious person,
becomes liable as a member besides incurring criminal liability under Section 38, wherein punishment provided is
imprisonment up to 5 years.
(11) Trade union as member: A trade union registered under the Trade Union Act, 1926 can be registered as a
member and can hold shares in a company in its own corporate name.
Que. No. 7] Whether holder of Global Depository Receipts can be treated as member of the company?
Ans.: As per Section 2(55) (i) & (ii) of the Companies Act, 2013 a person is a member of the company, who is a
subscriber to the Memorandum or whose name has been entered in the register of members. Since, holder of
Global Depository Receipts is neither the subscriber to the Memorandum nor a holder of the shares, his name
cannot be entered in the Register of Members. Therefore, a holder of Global Depository Receipts cannot be called
a member of the company.
Que. No. 8] Fortune Ltd. refused to enter the name of the minor son of a deceased member in the register of
members on the ground that the minor cannot enter into a contract as per Section 11 of the Indian Contract Act,
1872. The shares are fully paid-up. Comment on the decision of the company.
Ans.: A member who is not competent to contract e.g., a minor cannot become a member of a company.
Consequently, an agreement by a minor to take shares is void ab-initio.
It has been held that an agreement in writing for a minor to become a member may be signed on behalf of the
minor by his lawful guardian and the registration of transfer of shares in the name of the minor, acting through his
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or her guardian, especially where the shares are fully paid cannot be refused on the ground of the transferee being
a minor. [Miss Nandita Jain v. Benett Coleman & Co. Ltd. Appeal No. 27 of 1972 dated 17.2.78]
Que. No. 9] John, who is a member of Alex Ltd., is of unsound mind. Can the shareholder of unsound mind
exercise his voting rights in respect of his membership in the said company? Give your advice.
Ans.: The person desirous of becoming a member of a company must have the legal capacity of entering into an
agreement in accordance with the provisions of the Indian Contract Act, 1972. Section 11 of the said Act lays down
that, every person is competent to contract who
(a) Is of the age of majority according to the law to which he is subject.
(b) Is of sound mind
(c) Is not disqualified from contracting by any law to which he is subject.
Since, John is person of unsound mind he cannot exercise his voting rights in respect of his membership in the said
company.
Que. No. 10] Rahees, who is a member of Vivek Ltd., a public company, has very recently become an insolvent.
Can the insolvent Rahees continue as a member of the company?
Ans.: An insolvent may be a member of a company as long as he is on the register of members. He is entitled to
vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official
Assignee or Receiver.
Que. No. 11] ABC & Co., a partnership firm applied for shares in XYZ Ltd. The company allotted the shares
required by the partnership firm. In the given context, what is the liability of the partners and the partnership
firm? CS (Executive) - Dec 2013 (4 Marks)
Ans.: A partnership firm is not a legal person and cannot become a member of a company. However partnership
firm can become member of Section 8 company i.e. non-profit making company.
Hence, on the given case the allotment of shares made by the XYX Ltd. to the ABC & Co., a partnership firm is
invalid and void. Hence, there is no liability of partners and the partnership firm.
Que. No. 12] Write a short note on: Joint Members
Ans.: If more than one person apply for shares in a company and shares are allotted to them, each one of such
applicant becomes a member.
♦ Joint members can insist on having their names registered in any order they may require.
♦ They may also have their holding split into several joint holdings with their names in different orders so that
all of them may have a right to vote as first named holding in one or the other joint holdings.
♦ Each of the joint holders of share is a member of the company, but joint holders are counted as one member
for the purpose of determining the maximum number of members.
♦ Notices and other documents required to be served by the company will be deemed to be properly served if
the service is effected on the first named joint-holder.
♦ Unless instructions in writing have been received to the contrary, the company, can pay dividend to the first
named shareholder.
♦ Unless the Articles otherwise provide, any joint shareholder is entitled to be present in any general meeting
and take part in the proceedings and vote on resolutions on show of hands.
♦ In the event of poll, voting right can be exercised only by one of the joint shareholders.
♦ Joint members are liable jointly and severally to pay calls on the shares held by them.
♦ Proxy form to be valid must be signed by all joint shareholders.
Que. No. 13] Explain when a person ceases to be a member of the company.
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Ans.: A person ceases to be a member of a company when his name is removed from its register of members,
which may occur in any of the following situations:
♦ He transfers his shares to another person.
♦ His shares are forfeited.
♦ His shares are sold by the company to enforce a lien.
♦ He dies (his estate, however, remains liable for calls)
♦ He is adjudged insolvent and the Official Assignee disclaims his shares.
♦ His redeemable preference shares are redeemed.
♦ He rescinds the contract of membership on the ground of fraud or misrepresentation or a genuine mistake.
♦ His shares are purchased either by another member or by the company itself under an order of the Tribunal.
♦ The member is a company which is being wound-up in India, and the liquidator disclaims the shares.
♦ The company is wound up.
Though one ceases to be a member, he remains liable as a contributory and is also entitled to share in the surplus,
if any.
Que. No. 14] Can member be expelled from company? Discuss with reference to a case law.
Thrive Ltd. is a public limited company, incorporated under the Companies Act, 2013. The Board of directors of
the said company has recently decided to insert an article in its articles of association relating to expulsion of a
member by the Board of directors of the company where the directors were of the view that the activities or
conduct of such a member was detrimental to the interests of the company. Is the Board's decision valid in the
eye of law? CS (Executive) - June 2011 (4 Marks)
Ans.: A controversy had arisen as to whether a public limited company had powers to insert an article in its AOA
relating to expulsion of a member by the Board of Directors of the company where the directors were of the view
that the activities or conduct of such a member was detrimental to the interests of the company.
The MCA clarified that an article for expulsion of a member is opposed to the fundamental principles of the
Company Jurisprudence and is ultra vires the company, the reason being that such a provision against the
provisions of the Companies Act relating to the rights of a member in a company.
According to Section 6, the Act overrides the MOA and AOA and any provision contained in these documents
repugnant to the provisions of the Companies Act, 2013 is void.
Thus, any assumption of the powers by the Board of Directors to expel a member by alteration of Articles of
Association shall be illegal and void.
The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1, has laid down the law as to
the conditions on the basis of which directors could refuse a person to be admitted as a member of the company.
The principles laid down by the Supreme Court in this case, even though pertain to the refusal by a company to
the admission of a person as a member of the company, are applicable even with greater force to a case of
expulsion of an existing member. As, under Article 141 of the Constitution, the law declared by the Supreme Court
is binding on all Courts within the territory of India, any provision pertaining to the expulsion of a member by the
management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra
vires. In the light of the aforesaid position, it is clarified that assumption by the Board of directors of a company of
any power to expel a member by amending its articles of association is illegal and void.
Que. No. 15] Write a short note on: Register of Members
The register of members is a prima facie evidence of membership. Comment.
Ans.: Register of Members [Section 88]:
(1) Every company shall keep and maintain the following registers:
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(a) Register of members indicating separately for each class of equity and preference shares held by each
member residing in or outside India.
(b) Register of debenture holders and
(c) Register of other security holders.
(2) Every register maintained as above shall include an index of the names included therein. The register and
index of beneficial owners maintained by a depository u/s 11 of the Depositories Act, 1996, shall be deemed to be
the corresponding register and index for the purposes of this Act.
(3) Foreign Register
Provisions of the Companies (Management & Administration) Rules, 2014 Register of Members [Rule 3]:
(1) Every company limited by shares shall from the date of its registration maintain a register of its members in
Form MGT-1.
(2) In the case of a company not having share capital, the register of members shall contain the following
particulars, in respect of each member:-
(a) Name of the member; address (registered office address in case the member is a body corporate); e-mail
address; Permanent Account Number or CIN; Unique Identification Number, if any; Father's/Mother's/Spouse's
name; Occupation; Status; Nationality; in case member is a minor, name of the guardian and the date of birth of
the member; name and address of nominee;
(b) Date of becoming member
(c) Date of cessation
(d) Amount of guarantee, if any
(e) Any other interest if any and
(f) Instructions, if any, given by the member with regard to sending of notices etc.
Maintenance of the Register of members etc. u/s 88 [Rule 5]:
Every company shall maintain the registers u/s 88 in the following manner namely:
(1) The entries in the registers of members shall be made within 7 days after the Board of Directors or its duly
constituted committee approves the allotment or transfer of shares, debentures or any other securities.
(2) The registers shall be maintained at the registered office of the company unless a special resolution is passed
in a general meeting authorizing the keeping of the register at any other place within the city, town or village in
which the registered office is situated or any other place in India in which more than l/10th of the total members
entered in the register of members reside.
(3) An entry in the register has to be made within 7 days after approval by the Board or committee.
(4) If any change occurs in the status of a member or debenture holder or any other security holder whether
due to death or insolvency or change of name or due to transfer to Investor Education Protection Fund or due to
any other reason, entries thereof explaining the change shall be made in the respective register.
(5) If any rectification is made in the register of members by the company pursuant to any order passed by the
competent authority, the necessary reference of such order shall be indicated in the respective register.
(6) If any order is passed by any judicial or revenue authority or by SEBI or Tribunal attaching the shares,
debentures or other securities and giving directions for remittance of dividend or interest, the reference of such
order shall be indicated in the respective register.
(7) In case of listed companies, the particulars of pledge, charge, lien or hypothecation created by the promoters
on their holdings shall be entered in the register within 15 days from such an event.
(8) If promoters of any listed company, which has formed a joint venture company with another company have
pledged or hypothecated or created charge or lien in respect of any security of the listed company in connection
with such joint venture company, the particulars shall be entered in the register within 15 days from such event.
Authentication [Rule 5]:
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(1) The entries in the registers maintained u/s 88 and index included therein shall be authenticated by the
Company Secretary or by any other person authorized by the Board, and the date of the board resolution
authorizing the same shall be mentioned.
(2) The entries in the foreign register shall be authenticated by the Company Secretary or person authorized by
the Board.
Register of debenture holders or any other security holders [Rule 4]: Every company which issues or allots
debentures or any other security shall maintain a separate register of debenture holders or security holders, as the
case may be, for each type of debentures or other securities in Form MGT-2.
Que. No. 16] Write a short note on: Index of Members * 1
Ans.: Every register of shareholder and other security holder shall include an index of the names included therein.
[Section 88 (2)]
Index of names to be included in Register [Rule 6 of the Companies (Management & Administration) Rules,
2014]:
(1) Every register of members shall include an index of the names entered in the respective registers and the
index shall, in respect of each folio, contain sufficient indication to enable the entries relating to that folio in the
register to be readily found.
However, the maintenance of index is not necessary in case the number of members is less than 50.
(2) The company shall make the necessary entries in the index simultaneously with the entry for allotment or
transfer of any security in such Register.
Inspection must be allowed of the Index in the same manner as applicable to the register of members.
Ans.: Place of keeping of registers & returns [Section 94(1)]: The registers required to be kept and maintained by
a company u/s 88 (i.e. Register of Members and Register of debenture holders and other securities holders) and
copies of the annual return shall be kept at the registered office of the company.
However, such registers or copies of return may also be kept at any other place in India where more than l/10th of
the total members reside. Such decisions should be approved by a special resolution. [Rule 15(6)]
Inspection of registers & returns [Section 94(2)]: The registers and their indices except when they are closed and
the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder
or beneficial owner, during business hours (2 hours on every working day) without payment of any fees and by any
other person on payment of prescribed fees. (` 50 for each inspection) [Rule 14(1)]
Copies of registers & returns [Section 94 (3)]: Any member, debenture-holder, other security holder or beneficial
owner or any other person may:
(a) Take extracts from any register, or index or return without payment of any fee or
(b) Require a copy of any such register or entries therein or return on payment of prescribed fees. (` 10 for each
page) [Rule 14(2)]
Consequences if inspection is refused [Section 94(5): If any inspection or the making of any extract or copy
required under this section is refused, the company and every officer of the company who is in default shall be
liable, for each such default, to a penalty of ` 1,000 for every day subject to a maximum of ` 1,00,000 during which
the refusal or default continues.
Remedy [Section 94(5): The Central Government may also, by order, direct an immediate inspection of the
document, or direct that the extract required shall forthwith be allowed to be taken by the person requiring it.
Que. No. 18] The register of members is a prima facie evidence of membership. Comment.
Ans.: Registers, etc., to be evidence [Section 95]: The registers, their indices and copies of annual returns
maintained u/ss 88 & 94 shall be prima facie evidence of any matter directed or authorized to be inserted therein
by or under this Act.
A register of members is prima facie evidence of the truth of its contents. Accordingly, if a person's name, to his
knowledge, is there in the register of members of a company, he shall be deemed to be a member and onus lies
116
on him to prove that he is not a member. He must promptly appeal to the Tribunal or a competent Court outside
India specified by the Central Government by notification, in respect of foreign members or debenture holder
residing outside India for rectification of the register u/s 59 to take his name off the register, failing which the
doctrine of holding out will apply.
The plaintiff applied for 4,000 shares in a company but no allotment was made to him. Subsequently 4,000 shares
were transferred to him without his request and his name was entered in the register of members. The plaintiff
knew it but took no steps for rectification of the register of members. The company went into liquidation and he
was held liable as a contributory. The Court held "when a person knows that his name is included in the register of
shareholders and he stands by and allows his name to remain, he is holding out to the public that he is a
shareholder and thereby he loses his right to have his name removed". [Re. M.F.R.D. Cruz, A.l.R. 1939 Madras 803]
Que. No. 19] Explain the circumstances under which register of members may be rectified and state the
procedure therefore. CS (Inter) - Dec 1998 (8 Marks), Dec 2004 (8 Marks)
Ans.: Rectification of register of members [Section 59]: Register of members can be rectified in following cases:
♦ If the name of any person is entered in the register of members without sufficient cause or
♦ If the name of any person is omitted from register of members without sufficient cause or
♦ If a default is made, or unnecessary delay takes place in entering in the register
In such case aggrieved person or any member of the company, or the company may appeal in prescribed form to
the Tribunal, or to a competent Court outside India for rectification of the register.
The Tribunal will hear the parties to the appeal. The Tribunal may by order, either dismiss the appeal or direct that
the transfer or transmission shall be registered by the company within a period of 10 days of the receipt of the
order. The Tribunal may also direct rectification of the records of the depository or the register and direct the
company to pay damages, if any, sustained by the party aggrieved.
Que. No. 20] Mohan applied for 4,000 shares in a company but no allotment was made to him. Subsequently
4,000 shares were transferred to him without his request and his name was entered in the register of members.
Mohan knew it but took no steps for rectification of the register of members. Subsequently, the company went
into liquidation and he was held liable as a contributory. Now Mohan wants to apply the Court for rectification
of register of members. Can he do so? Explain.
Ans.: When a person knows that his name is included in the register of shareholders and he stands by and allows
his name to remain, he is holding out to the public that he is a shareholder and thereby he loses his right to have
his name removed". [Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803]
Thus, Mohan's application will be refused by the Court.
Que. No. 21] X had applied for the allotment of 1,000 shares in a company. No allotment of shares was made to
him by the company. Later on, without any further application from X, the company transferred 1,000 partly-
paid shares to him and placed his name in the Register of Members. X, knowing that his name was placed in the
Register of Members, took no steps to get his name removed from the Register of members. The company later
on made final call. X refuses to pay for this call. Referring to the provisions of the Companies Act, 2013, examine
whether his (X's) refusal to pay for the call is tenable and whether he can escape himself from the liability as a
member of the company.
Ans.: According to Section 95, the register of member is a prima facie evidence of the truth of its contents. The
contents of the register of members are of decisive importance in determining as to who were the shareholders of
the company at a crucial time. Accordingly, if a person's name, to his knowledge, is entered in the register, he shall
be deemed to be a member. In the given case X knows that his name is included in the register of shareholders
and stands by and allows his name to remain, he is holding out to the public that he is shareholder and thereby he
will be liable as shareholder.
Que. No. 22] A finance company lent a certain sum of money to Modern Garments Ltd., a company
manufacturing garments, at an agreed rate of interest, to be repaid as per the schedule attached to loan
agreement. The borrowing company made payments of the firs` 3 instalments contained in the schedule and
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thereafter could not make any payment due to its working capital problem. The lending company sent registered
letters demanding the payments. It is contended by the borrowing company that the lending company agreed
in a meeting to accept shares of the borrowing company in settlement of unpaid balance of the loan and accrued
interest. Thereupon the borrowing company allotted shares to the lending company and share certificate to that
company register post. The lending company seeks to get register of member of Modern Garments Ltd. rectified
and contends that it never applied for any shares in the borrowing company and it was just unilateral allotment.
Will the lending company succeed?
Ans.: The facts of the given case are similar to Indglobal Investment & Finance Ltd. v. Rajasthan Breweries Ltd.,
where in it was held that there was not written application for allotment of shares. Section 2 (55) stipulates that a
person to become member should agree in writing for allotment of shares. Non-compliance with provisions of law
is a sufficient cause to order rectification of register of members.
Thus, in above case, the borrowing company was directed to rectify the register of members by cancelling the
shares allotted and effect reduction of shares capital to that extent.
Que. No. 23] Write a short note: Foreign Register
Ans.: Foreign Register [Section 88(4)]: A company may, if so authorized by its articles, keep in any country outside
India, a part of the register called " foreign register" containing the names and particulars of the members,
debenture holders, other security holders or beneficial owners residing outside India.
Foreign register of members, debenture holders, other security holders or beneficial owners residing outside
India. [Rule 7 of the Companies (Management & Administration) Rules, 2014]: The company shall, within 30 days
from the date of the opening of any foreign register, file with the Registrar notice of the situation of the office in
Form MGT-3 along with the fee where such register is kept; and in the event of any change in the situation of such
office or of its discontinuance, shall, within 30 days from the date of such change or discontinuance, as the case
may be, file notice in Form MGT-3 with the Registrar of such change or discontinuance.
A foreign register is deemed to be a part of the company's principal register and it should be kept in the same
manner as the principal register and be likewise open to inspection.
A duplicate of such register should be maintained at the registered office in India and all entries made in the foreign
register should be made in the duplicate register at the registered office as soon as possible.
A company may discontinue a foreign register at any time but all the entries made in it must be transferred to the
principal register.
The decision of a competent Court in the State or Country in which a foreign register is kept, with regard to its
rectification, shall be as effective as if it were a decision of a competent Court in India, if the Central Government,
by notification in the Official Gazette, so directs.
Que. No. 24] Register of Members can be closed by the company at any time. Comment.
Ans.: Power to close register of members or debenture holders or other security holders [Section 91]: A
company may close the register of members or the register of debenture holders or the register of other security
holders for any period or periods not exceeding in the aggregate 45 days in each year, but not exceeding 30 days
at any one time, subject to giving of previous notice of at leas` 7 days or such lesser period as may be specified by
SEBI for listed companies.
Closure of register of members or debenture holders or other security holders [Rule 10 of the Companies
(Management & Administration) Rules, 2014]:
A company closing the register of members or the register pf debenture holders or the register of other security
holders shall give at leas` 7 days previous notice as specified by SEBI by advertisement at least once in a vernacular
newspaper in the vernacular language and at least once in English language at the place where the registered office
of the company is situated and publish the notice on the website as may be notified by the Central Government
and on the website of the Company.
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The above provisions shall not be applicable to a private company provided that the notice has been served on all
members of the private company not less than 7 days prior to closure of the register of members or debenture
holders or other security holders.
Que. No. 25] A2Z Management Services Ltd. is a listed company quoted at Bombay Stock Exchange Ltd. The
company closed its register of debenture holders in June and August 2016 for 12 and 21 days respectively. The
Chief Financial Officer (CFO) of the company has informed the Secretary of the company to consider closing the
register in December for another 15 days for some strategic reasons. Referring to the provisions of the
Companies Act, 2013, examine the validity of the above action of the company.
CS (Executive) - June 2017 ( Marks)
Ans.: As per Section 91, a company may close the register of members or the register of debenture holders or the
register of other security holders for any period or periods not exceeding in the aggregate 45 days in each year,
but not exceeding 30 days at any one time, subject to giving of previous notice of at leas` 7 days or such lesser
period as may be specified by SEBI for listed companies.
As per facts given in case A2Z Management Service Ltd. has already closed its register of debenture holder for two
times for 12 days and 21 days aggregating i.e. for 33 days.
As per advice of Chief Financial Officer, register of debenture holder can be closed for further 12 days and not for
15 days so that aggregate period of closing should not exceed 45 days.
Ans.: Preservation of register of members etc. and annual return [Rule 15 of the Companies (Management &
Administration) Rules, 2014]:
(1) The register of members along with the index shall be preserved permanently and shall be kept in the
custody of the Company Secretary of the company or any other person authorized by the Board for such purpose;
and
(2) The register of debenture holders or any other security holders along with the index shall be preserved for
a period of 8 years from the date of redemption and shall be kept in the custody of the Company
Secretary of the company or any other person authorized by the Board for such purpose.
(3) Copies of all Annual Returns and copies of all certificates and documents required to be annexed thereto
shall be preserved for a period of 8 years from the date of filing with the Registrar.
(4) The foreign register of members shall be preserved permanently, unless it is discontinued and all the entries
are transferred to any other foreign register or to the principal register. Foreign register of debenture holders or
any other security holders shall be preserved for a period of 8 years from the date of redemption of such
debentures or securities.
(5) The foreign register shall be kept in the custody of the Company Secretary or person authorized by the
Board.
Que. No. 27] Write a short note on: Rights of Members
Ans.: When a person becomes a member he is entitled to exercise all the rights of a member. So long a person's
name stands registered in the books as a member, even if he has sold the share and has given the share certificates
and the blank transfer deed duly signed, he alone is entitled to exercise the rights of membership.
Individual Rights: Members of a company enjoy certain rights in their individual capacity, which they can enforce
individually. These rights are contractual rights and cannot be taken away except with the written consent of the
member concerned. These rights can be categorized as under:
(1) Right to receive copies of the following documents from the company:
♦ Abridged balance-sheet and profit & loss account
♦ Report of the Cost Auditor
♦ Contract for the appointment of the managing director/manager
♦ Notices of the general meetings
(2) Right to inspect statutory registers/returns and get copies thereof on payment of prescribed fee. The
members have been given right to inspect the following registers etc.:
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♦ Debenture trust deed
♦ Register of charges
♦ Register & index of members and debenture holders
♦ Annual Returns
♦ Minutes Book
♦ Register of Contracts, Companies and Firms in which directors are interested
♦ Register of directors
♦ Register of Directors Shareholdings
(3) Right to attend meetings of the shareholders and exercise voting rights at these meetings either personally
or through proxy.
(4) Other Rights: Over and above the rights enumerated at Item Nos. 1 to 3 above, the members have the
following rights:
♦ To receive share certificates
♦ To transfer shares
♦ To receive dividend
♦ To have rights shares
♦ To appoint directors
♦ To share the surplus assets on winding up
♦ Right of dissentient shareholders to apply to court
Collective Membership Rights: Members of a company have certain rights which can be exercised by members
collectively i.e. by majority of members.
♦ Right to be exercised collectively in respect of making application to the Central Government for investigation
of the affairs of the company and for appointment of Government directors.
♦ Right to make application collectively to the Tribunal for oppression & mismanagement.
Que. No. 28] Write a short note on: Variation of Members Rights
Write a short note on: Rights of Dissentient Members CS (Executive) - Dec 2013 (4 Marks)
Ans.: Member's rights are determined by the Companies Act, 2013, MOA & AOA of the company and the terms of
issue of shares.
Rights attached to a class of shares are known as "class rights".
Member's rights relate to dividend, voting at members' meetings and return of capital. Preference shareholders
may have rights to a fixed amount or a fixed rate of dividend or to cumulative dividend.
Variation of Shareholders Rights [Section 48(1)]: The rights attached to the shares of any class can be varied with
the consent in writing of the holders of not less than 3/4th of the issued shares of that class or with the sanction
of a special resolution passed at a separate meeting of the holders of the issued shares of that class. Further, the
variation of rights of shareholders Can be effected only:
(z) If provision with respect to such variation is contained in the MOA of the company or
(ii) In the absence of any such provision in a MOA or AOA of the company, if such a variation is not prohibited by
the terms of issue of the shares of that class.
However, if variation by one class of shareholders affects the rights of any other class of shareholders, the consent
of 3/4th of such other class of shareholders shall also be obtained and the provisions of this section shall apply to
such variation.
Rights of Dissentient Members [Section 48(2)]: Where the rights of any class of shares are varied, the holders of
not less than 10% of the issued shares of that class can apply to the Tribunal to have the variation cancelled.
Where any such application is made to the Tribunal, the variation will not be effective unless and until it is
confirmed by the Tribunal.
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The above application shall be made within 21 days after the date on which the consent was given or the resolution
was passed.
Que. No. 29] Write a short note on: Nomination of Shares/Debentures CS (Inter) - June 2000 (4 Marks)
Ramesh, a shareholder in Mod Ltd., desires to nominate his wife Radha as a nominee in respect of his
shareholdings. Can Mod Ltd. accept the nomination so made? Advise the company.
Ans.: Power to nominate [Section 72]: Every holder of securities of a company may, at any time, nominate, in the
prescribed manner, any person to whom his securities shall vest in the event of his death.
When the securities of a company are held by more than one person jointly, the joint holders may together
nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of
death of all the joint holders.
Where a nomination has been made, the nominee will be entitled to all the rights in respect of shares in the event
of death of the shareholder as against the legal representative/legal heirs of the deceased member.
When the nominee is a minor, it shall be lawful for the holder of the securities, making the nomination to appoint,
in the prescribed manner, any person to become entitled to the securities of the company, in the event of the
death of the nominee during his minority.
Nomination by securities holders [Rule 19 of the Companies (Share Capital & Debentures) Rules, 2014]:
(1) Any holder of securities of a company may, at any time, nominate, in Form No. SH.13, any person as his
nominee in whom the securities shall vest in the event of his death.
(2) On the receipt of the nomination form, a corresponding entry shall forthwith be made in the relevant register
of securities holders, maintained u/s 88.
(3) Where the nomination is made in respect of the securities held by more than one person jointly, all joint
holders shall together nominate in Form No.SH.13 any person as nominee.
(4) The request for nomination should be recorded by the Company within a period of 2 months from the date
of receipt of the duly filled and signed nomination form.
(5) In the event of death of the holder of securities or where the securities are held by more than one person
jointly, in the event of death of all the joint holders, the person nominated as the nominee may upon the
production of such evidence as may be required by the Board, elect, either-
(a) to register himself as holder of the securities or
(b) to transfer the securities, as the deceased holder could have done.
(6) If the person being a nominee, so becoming entitled, elects to be registered as holder of the securities
himself, he shall deliver or send to the company a notice in writing signed by him stating that he so elects and such
notice shall be accompanied with the death certificate of the deceased share or debenture holder(s).
(7) All the limitations, restrictions and provisions of the Act relating to the right to transfer and the registration
of transfers of securities shall be applicable to any such notice or transfer as aforesaid as if the death of the share
or debenture holder had not occurred and the notice or transfer were a transfer signed by that shareholder or
debenture holder, as the case may be.
(8) A nominee will be entitled to the same dividends or interests and other advantages to which he would have
been available to deceased shareholder.
(9) A nomination may be cancelled, or varied by nominating any other person in place of the present nominee
by giving a notice to the company in Form SH-14.
(10) The cancellation or variation shall take effect from the date on which the notice of variation or cancellation
is received by the company.
(11) When the nominee is a minor, the holder of the securities, may appoint a person in Form SH-14, who shall
become entitled to the securities of the company, in the event of death of the nominee during his minority.
Que. No. 30] Write a short note on: Liability of Members
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Ans.: The liability of a member depends on the nature of the company. If the company is registered with unlimited
liability, every member is liable in full for all the debts of the company contracted during the period of his
membership. Where the company is limited by guarantee, each member will be bound to contribute in the event
of winding up a sum specified in the liability clause of the memorandum of association. In case of company limited
by shares, each member is bound to contribute the full nominal value of shares and his liability ends there. If before
the full nominal value of the shares is paid, the company goes into liquidation, the member becomes liable as
contributory to pay the balance when called upon to pay, by the liquidator of the company.
Where a company has been got incorporated by furnishing any false or incorrect information or representation or
by suppressing any material fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being
satisfied that the situation so warrants, direct that liability of the members shall be unlimited. [Section 7(7)]
If a member ceased to be member of a company within one year prior to the commencement of the winding up of
the company he is liable to pay on the shares which he held to the extent of the amount unpaid thereon, if:
(i) on the winding up, debts exist which were incurred while he was a member, and
(ii) it appears to the Tribunal that the present members are not able to satisfy the contribution required from them
in respect of their shares.
A person is liable as member in spite of a valid transfer of shares by him, if the name of the transferee is not placed
on the register of members, in place of the transferors' name. If a person applies for shares in the name of a
fictitious person or a person not in existence or uses another person's name for himself, or uses an alias, and shares
are allotted in that name or alias, he will be liable as a member.
■ ■■ BENEFICIAL INTEREST IN ANY SHARE
Que. No. 31] Write a detailed note on: Declaration in respect of beneficial interest in any share Ans.:
Sometime shares are held in trust i.e. for beneficial ownership of others e.g. (a) a guardian of minor or lunatic holds
shares for benefit of minor or lunatic (b) Partners hold shares for the benefit of partnership (c) Karta of HUF holds
for benefit of the HUF.
Company will recognize only an absolute right of shares to the entirety thereof in the registered holder. Thus, as
far as company is concerned, the individuals who are in its records are treated as the members or owners of the
shares.
Though a company cannot take notice of any trust, Section 89 provides that person who is not beneficial owner
should submit a declaration in prescribed form, specifying details of the person who holds the beneficial interest
in such shares.
Similarly, the person who are beneficial owners of such shares are (though the shares not held in their name)
should submit a declaration specifying the nature of interest, particulars of persons in whose names the shares are
registered in the books of the company and other prescribed particulars.
On receipt of such declaration, the company should make a note of such entry it its register of members and file
returns electronically to ROC within 30 days along with prescribed fees.
Even if the notice of beneficial interest is noted in Register of Members as far as company is concerned, the person
whose name appears in the Register of Members is alone entitled to obtain all corporate benefits like dividend,
bonus shares etc. He alone can attend the general meeting of the company.
The company merely has to act as post office and file the forms received from members. The company has not
authority or responsibility to obtain such declaration from members.
Purpose of notice: These provisions were made to stop practice of holding ‘beiiami shares' i.e. investment is reallv
made by another person in the name of the person who is a 'member' as per records of the company. Such ‘benami
holdings' are common in black money transactions. However, the effect was that partnership firms, guardian of
minors, lunatics came under the preview of this section, though really this was not the intention.
Declaration in respect of beneficial interest in any share [Section 89]: Where the name of a person is entered in
the register of members of a company as the holder of shares in that company but who does not hold the beneficial
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interest in such shares, such person shall make a declaration within 30 days in Form MGT-4 to the company
specifying the name and other particulars of the person who holds the beneficial interest in such shares.
Declaration by the person who are beneficial owners [Section 89(2)]: Every person who holds or acquires a
beneficial interest in share of a company shal 1 make a declaration within 30 days in Form MGT-5 to the company
specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the
books of the company.
Declaration in case of change occurs in the beneficial interest [Section 89(3)]: Where any change occurs in the
beneficial interest in such shares, the person referred to in Section 89(1) and the beneficial owner specified in
Section 89(2) shall, within a period of 30 days from the date of such change, make a declaration to the company in
Form MGT-4.
Power of Central Government to make rules [Section 89(4)]: The Central Government may make rules to provide
for the manner of holding and disclosing beneficial interest and beneficial ownership under this section.
Penalty [Section 89(5)]: If any person fails, to make a declaration as stated above, without any reasonable cause,
he shall be punishable with fine which may extend to ` 50,000 and where the failure is a continuing one, with a
further fine which may extend to ` 1,000 for every day after the first during which the failure continues.
Company to file return to ROC [Section 89(6)]: Where any declaration is made to a company, the company shall
make a note of such declaration in the register concerned and shall file, within 30 days from the date of receipt of
declaration by it, a return in Form MGT-6 with the ROC in respect of such declaration with prescribed fees.
Penalty to company for failure to file return [Section 89(7)]: If a company fails to file a return, the company and
every officer of the company who is in default shall be punishable with fine which shall not be less than ` 500 but
which may extend to ` 1,000 and where the failure is a continuing one, with a further fine which may extend to
one thousand rupees for every day after the first during which the failure continues.
Rights cannot be enforced if declarations are not filed [Section 89(8)]: No right in relation to any share in respect
of which a declaration is required to be made under this section but not made by the beneficial owner, shall be
enforceable by him or by any person claiming through him.
Dividend to be paid to person in whose name shares are held [Section 89(9): Nothing in this section shall be
deemed to prejudice the obligation of a company to pay dividend to its members under the Act and the said
obligation shall, on such payment, stand discharged.
Meaning of beneficial interest in a share [Section 89(10)]: For the purposes of this section and Section 90,
beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the
right or entitlement of a person alone or together with any other person to -
(i) Exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) Receive or participate in any dividend or other distribution in respect of such share.
Que. No. 32] Write a detailed note on: Register of significant of beneficial owners in a company
Ans.: Register of significant of beneficial owners in a company [Section 90]:
(1) Every individual, who acting alone or together, or through one or more persons or trust, including a trust and
persons resident outside India, holds beneficial interests, of not less than 25% or such other percentage as may be
prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control
as defined in Section 2(27), over the company (z.e. "significant beneficial owner"), shall make a declaration to the
company, specifying the nature of his interest and other particulars, in such manner and within such period of
acquisition of the beneficial interest or rights and any change thereof, as may be prescribed. However, the Central
Government may prescribe a class or classes of persons who shall not be required to make declaration under this
sub-section.
(2) Every company shall maintain a register of the interest declared by individuals and changes therein which
shall include the name of individual, his date of birth, address, details of ownership in the company and such other
details as may be prescribed.
(3) The register shall be open to inspection by any member of the company on payment of such fees as may be
prescribed.
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(4) Every company shall file a return of significant beneficial owners of the company and changes therein with
the Registrar containing names, addresses and other details as may be prescribed within such time, in such form
and manner as may be prescribed.
(5) A company shall give notice, in the prescribed manner, to any person (whether or not a member of the
company) whom the company knows or has reasonable cause to believe —
(ii) to be a significant beneficial owner of the company;
(b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such
knowledge; or
(c) to have been a significant beneficial owner of the company at any time during the three years immediately
preceding the date on which the notice is issued, and who is not registered as a significant beneficial owner with
the company as required under this section.
(6) The information required by the notice shall be given by the concerned person within a period not exceeding
30 days of the date of the notice.
(7) The company shall -
(a) where that person fails to give the company the information required by the notice within the time specified
therein; or
(b) where the information given is not satisfactory, apply to the Tribunal within a period of fifteen days of the
expiry of the period specified in the notice, for an order directing that the shares in question be subject to
restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other
matters as may be prescribed.
(8) On any application made, the Tribunal may, after giving an opportunity of being heard to the parties
concerned, make such order restricting the rights attached with the shares within a period of 60 days of receipt of
application or such other period as may be prescribed.
(9) The company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal
for relaxation or lifting of the restrictions placed.
(10) If any person fails to make a declaration, he shall be punishable with fine which shall not be less than `
1,00,000 but which may extend to ` 10,00,000 and where the failure is a continuing one, with a further fine which
may extend to ` 1,000 for every day after the first during which the failure continues.
(11) If a company, required to maintain register and file the information, fails to do so or denies inspection as
provided therein, the company and every officer of the company who is in default shall be punishable with fine
which shall not be less than ` 10,00,000 but which may extend to ` 50,00,000 and where the failure is a continuing
one, with a further fine which may extend to ` 1,000 for every day after the first during which the failure continues.
(12) If any person wilfuly furnishes any false or incorrect information or suppresses any material information of
which he is aware in the declaration made under this section, he shall be liable to action u/ s 447.
■ ■■ SHAREHOLDERS AGREEMENTS
Que. No. 33] What do you understand by 'Shareholders Agreement'? Whether such agreement are enforceable
in India?
Ans.: Shareholders Agreements (SHA) are quite common in business. In India shareholder's agreement have gained
popularity lately with bloom in newer forms of businesses. There are numerous situations where such agreements
are entered into - family companies, JV companies, venture capital investments, private equity investments,
strategic alliances, and so on. Shareholders' agreement is a contractual arrangement between the shareholders of
a company describing how the company should be operated and the defining inter-se shareholders' rights and
obligations. SHAs are the result of mutual understanding among the shareholders of a company to which, the
company generally becomes a consenting party. Such agreements are specifically drafted to provide specific rights,
impose definite restrictions over and above those provided by the Companies Act. SHA creates personal obligation
between the members signing such agreement however, such agreements do not become a regulation of the
company in the way the provisions of Articles are.
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Enforceability of the Shareholders Agreement: Though the international view is split but to a large extent courts
are inclined towards favouring SHA as long as they are not found to be detrimental to the minority stakeholder's
rights. In the leading case of Russell v. Northern Bank Development Corporation Ltd. [1992] BCC 578; [1992] 1 WLR
588, the House of Lords found that though a company cannot deprive itself of its power to alter its constitution,
the members of the company could agree in a shareholders' agreement as to how they will exercise their voting
rights on a resolution to alter the articles/constitution. The US Courts have largely accepted shareholder
agreements. [Blount v. Taft [246 S.E. 2d 763 at 769 (1978)]
While shareholders agreements are enforceable in England regardless of whether they have been incorporated in
the articles of association of the company, in India Courts have either refused to recognize clauses in shareholders
agreements or, even when consistent with company legislation, enforced such clauses only if they have been
incorporated in the articles of association of the company. There is a series of rulings where the Courts have upheld
that in case of any conflict between the Articles and the SHA, the former will always prevail.
It was held by the Supreme Court that a restriction which is not specified in the AOA is not binding either on the
company or on the shareholders. [V.B. Rangaraj v. V,B. Gopalakrishnan, AIR 1992 SC 453]
It was held by the Bombay High Court that such clauses are to hamper the free transferability of shares and in
violation of the Companies Act and hence, are not enforceable. [Western Maharashtra Development Coiporation
Ltd. v. Bajaj Auto Ltd. [(2010) 154 Company Cases 593 (Bom)]
Subsequently in the case of Messer Holdings Limited v. Shyam Madanmohan Ruia and Ors [(2010) 98 CLA 325] the
Division Bench of Bombay High Court overruled its judgment in Western Maharashtra Development Corporation
Ltd. and provided a more liberal interpretation and recognized the rights inter se among shareholders in case of
restrictions on transfer of shares.
In Indian context, while the landmark decision of the Supreme Court in V.B. Rangaraj case mentioned above is
often cited in the context of shareholders' agreements, most other decisions have been rendered by the High
Courts in various states especially the Bombay High Court. The decisions on shareholders' agreements are not
uniformly inclined in a direction. The High Court decisions are limited in their applicability as they are susceptible
to disagreements by other High Courts, thereby conferring limited precedential value. It is difficult to come to clear
and crisp answers as to enforceability of shareholders' agreements.
■ ■■ VETO POWER/RIGHTS
Que. No. 34] Write a short note on: Veto Power/Rights
Ans.: A veto - Latin for "I forbid" - is the power to unilaterally stop an official action, especially the enactment of
legislation. A veto may give power only to stop changes, thus allowing its holder to protect the status quo.
The Companies Act, 2013 introduced various provisions to essentially bridge the gap towards protection and
welfare of the minority shareholders. Shareholder's having majority of shares rule the company. This majority
principle is recognized in a land mark case Foss v. Harbottle. The decision taken by the majority shareholders was
binding on the minority. Now this principal has been replaced and minority shareholders have been given greater
power under Companies Act, 2013.
Veto Power or Rights: Shareholders rights refer to rights enshrined in the constitutional document of the company
or as provided by the law. A power has its genesis under the provisions of law.
As per the provisions of the Companies Act, 2013 there are some resemblance where the management can take
decisions own their own, by virtue of law. However, there are some instances where the consent of the
shareholders is mandatory to approve any decision or transaction which is said to be as the veto power or veto
right of shareholders of the company.
For instance in case of related party transactions, promoters, who are majority shareholders, cannot vote in special
resolutions in cases of related-party transactions.
As per Section 188, any related-party transaction that is not done in the ordinary course of business and is not at
an arm's length will need approval of minority shareholders by way of a special resolution.
The other instance where the law provides veto power to shareholders is in case of class action suits. Section 245
provides for class action to be instituted against the company as well as the auditors of the company.
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As per Section 245(3), in the case of a company having a share capital, not less than 100 members of the company
or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or
any member or members holding not less than such percentage of the issued share capital of the company as may
be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums
due on his or their shares.
Veto Power and Casting Vote: Veto power is different than casting vote of Chairman. Casting vote is applicable on
in case of equality of votes in favour and against. In case of equality the Chairman may give vote either in favour
or against the resolution and it can be carried accordingly. Veto power has not been defined in Companies Act.
However, dictionary meaning of veto power is: "to refuse to admit or approve; specifically: to refuse assent to (a
legislative bill) so as to prevent enactment or cause reconsideration."
Shareholders Agreement and Articles of Association of a company may provide for certain rights to the minority
shareholder who has invested funds in the company. Such powers may include power to refuse capital expenditure
over certain specified limit. In case the representative of the minority group is not in favour of the
capital expenditure proposed by the company, he can exercise his right under the Articles which in common
terminology is referred to as "veto powers".
Veto Rights and Control: The introduction of the concept of'control' in the Companies Act, 2013 has implications
for investors in Indian companies.
Under the Companies Act, 2013, 'control' is understood to include the right to:
(i) appoint a majority of directors; or
(ii) control the management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding
agreements or voting agreements, or in any other manner.
The definition is similar to the definition of 'control' under the SEBI (Substantial Acquisition of Shares & Takeovers)
Regulations, 2011.
The definition of 'control' and the jurisprudence surrounding the same under the Takeover Regulations has been
developed with the objective of protecting minority shareholders and providing an exit to them in the event of
change in its control.
The definition of 'control' is linked closely with the definition of 'promoter'. The Companies Act, 2013 provides that
a person having control over the affairs of the company would be regarded as its 'promoter'.
Given the similarity in the definition of 'control' under the Takeover Regulations and the Companies Act, 2013 and
its linkage to the definition of 'promoter' it is likely that the jurisprudence of control under the Takeover
Regulations would be applied under the Companies Act, 2013 as well.
But, the scope of the term 'control' under the Takeover Regulations itself is not clear. The uncertainty around the
interpretation of control would impact negotiation of shareholder agreements. Affirmative vote rights in favour of
investors under a shareholder's agreement are meant to be an effective tool for safeguarding investment or the
interest of the investors. These rights are negotiated and decided in the shareholders' agreement, which are
subsequently incorporated into the articles of association of a target company.
Accordingly, an investor or shareholder who has secured for itself certain rights which enable a degree of control
over 'management or policy decisions', whether by way of board representation or veto rights, may be regarded
as having 'control' of the company and therefore be classified as a 'promoter'. Investors would need to carefully
consider the obligations and liabilities associated with the position of a promoter under the Companies Act, 2013
when negotiating rights and powers in a company under the shareholders agreement.
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CHAPTER
8
DEBT CAPITAL
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Share Capital & Debentures) Rides,
2014.
BORROWINGS
Que. No. 1] Explain the nature and extent of the borrowing powers of public limited company.
Ans.: The power of the company to borrow is exercised by its directors, who cannot borrow more than the sum
authorized. The powers to borrow money and to issue debentures whether in or outside India can only be exercised
by the directors at a duly convened meeting.
Directors have to pass resolution at a duly convened board meeting to borrow moneys. [Section 179(3)]
The power to borrow monies can be delegated by a resolution passed at a duly convened meeting of the directors
to a committee of directors, managing director, manager or any other principal officer of the company.
The resolution must specify the total amount up to which the moneys may be borrowed by the delegates.
Limits on borrowings [Section 180(1) (c)]: The Board of directors of a company cannot borrow a sum which
together with the monies already borrowed exceeds the aggregate of the paid-up share capital of the company
and its free reserves apart from temporary loans obtained from the company's bankers in the ordinary course of
business unless they have received the prior sanction of the company by a special resolution in general meeting.
Exception: The acceptance by a banking company, in the ordinary course of its business, of deposits of money from
the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not
be deemed to be borrowing of monies by the banking company.
Debts incurred in excess of the limit fixed by Section 180(1) (c) shall not be valid unless the lender proves that he
lent his money in good faith and without knowledge of the limit imposed by Section 180(l)(c) being exceeded.
[Section 180(5)]
Que. No. 2] Balance sheet of Duck Ltd. shows a paid-up capital of ` 5 Crore and free reserve of ` 2 Crore. Due to
heavy financial requirements of the company, it plans to apply for a loan of ` 8 Crore with XYZ Bank Ltd. advice
the company on the formalities to be fulfilled. Also advise on the alternative course of action, if any.
CS (Executive) - Dec 2013.(4 Marks)
Ans.: As per Section 180(1) (c), the Board of directors of a company cannot borrow a sum which together with the
monies already borrowed exceeds the aggregate of the paid-up share capital of the company and its free reserves
apart from temporary loans obtained from the company's bankers in the ordinary course of business unless they
have received the prior sanction of the company by a special resolution in general meeting.
As per the facts given in case, total paid-up capital and its free reserves of the Duck Ltd. is ` 7 Crores and company
intend to apply for loan of ` 8 Crores which exceeds the aggregate of the paid-up share capital of the company and
its free reserves; hence sanction by a special resolution in general meeting is necessary.
Alternatively, the Duck Ltd. can take loan up to ` 7 Crore by passing board resolution and complying with the
provisions of its article and approval of shareholder by way of special resolution will not be necessary.
Ans.: Where a company borrows without the authority conferred on it by the articles it is an ultra vires borrowing.
Any act which is ultra vires the company is void. In such a case the contract is void and the lender cannot sue the
company for the return of the loan. The securities given for such ultra vires borrowing are also void and inoperative.
Ultra vires borrowings cannot even be ratified by a resolution passed by the company in general meeting. However,
equity assists the lender where the common law fails to do so. If the lender has parted with his money to the
company under an ultra vires borrowing, he has, in equity, the following remedies:
(1) Injunction & Recovery: Under the equitable doctrine of restitution he can obtain an injunction provided he
can trace and identify the money lent, and any property which the company has bought with it. Even if the monies
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advanced by the lender cannot be traced, the lender can claim repayment if it can be proved that the company has
been benefited thereby.
(2) Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful debts of the
company, he would be subrogated to the position of the creditor paid off and to that extent would have the right
to recover his loan from the company.
(3) Suit against directors: In case of ultra vires borrowing, the lender may be able to sue the directors for breach
of warranty of authority, especially if the directors deliberately misrepresented their authority.
Que. No. 4] Write a short note on: Intra vires borrowing
Ans.: Where the directors borrowed money beyond their authority and the borrowing is not ultra vires the
company, such borrowing is called Intra vires borrowing but outside the scope of agents authority. The company
will be liable to such borrowing if the borrowing is within the directors ostensible authority and the lender acted
in good faith or if the transaction was ratified by the company.
Where the borrowing is intra vires the company but outside the authority of the directors e.g. where the articles
provide that the directors shall have the power only up to ` 500 lakhs and prior approval of the shareholders would
be required to borrow beyond ` 500 lakhs; any borrowing beyond ` 500 lakhs without shareholders approval i.e.
ultra vires the directors can be ratified by the company and become binding on the company. The company would
be liable, particularly if the money has been used for the benefit of the company.
Here the legal position is quite dear. The company has power or capacity to borrow, but the authority of the
directors is restricted either by the articles of the company or by the statute, and they have exceeded it. The
company may, if it wishes, ratify the agent's act in which case the loan binds the company and the lender as if it
had been made with company's authority in the first place.
Judicial Views:
♦ Where the directors mortgaged the company’s property exceeding the limits of their authority, it was held
that the lending bank was entitled to retain possession and to claim institution before it could be compelled to
surrender possession [Deotiarayan Prasad Bhadani v. Bank ofBaroda Ltd. (1957) 27 Com Cases 223,239 Bom.]
♦ If the borrowing is unauthorized, the company will be liable to repay, if it is shown that the money had gone
into the company's coffers. [Lakslvni Ratan Cotton Mills Co, Ltd. v. J.K. Jute Mills Co. Ltd. (1957) 27 Com Cases 660:
AIR 1957 All 311]
Que. No. 5] Gomez, the Chairman of a company, borrowed ` 5 lakh from the State Bank of India, Patna under a
promissory note. A suit was filed for the recovery of debts on the basis of the pro-note executed by the chairman.
The company refused to accept the liability on the plea that the Chairman had borrowed funds without
authorization from the company. Will the company succeed? Explain.
Ans.: The facts of the given case are similar to Krishnan Kumar Rohatgi & Others v. State Bank of India & Others
(1980) 50 Com Cases 722. In this case the company borrowed an amount of ` 5 lakhs from the Bank under a
Promissory Note. The repayment was guaranteed by a person by executing a guarantee in favour of the company.
The company used to make payments towards loan and the promissory note used to be renewed from time to
time. In the suit for recovery, the company contended that the pro-note was executed by the
Chairman without there being a resolution of the Board of directors authorizing the Chairman to execute the pro-
note. Rejecting these contentions the High Court held that in cases where the directors borrow funds without their
having authorization from the company and if the money has been used for the benefit of the company, the
company cannot repudiate its liability to repay. Under the general principles of law, when an agent borrows money
for a principal without the authority of the principal but the principal takes the benefit of the money so borrowed
or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to be paid by
the principal.
Thus, company will be held liable to repay the amount because the company, being principle had taken benefit of
the amount borrowed.
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Que. No. 6] Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated
the same. Later, when the lender demanded his money, the company refused to repay, contending that the
money borrowed by Managing Director was misappropriated by him and the company is not liable for
repayment. Decide, giving reasons, whether the lender would succeed in recovering the money from the
company. CS (Executive) - June 2015 (4 Marks)
Ans.: The facts of given case are similar to V.K.R.S.T Firm v. Oriental Investment Trust Ltd., AIR 1944 Mad 532
wherein it was held that under the authority of the company, its managing director borrowed large sums of money
and misappropriated it. The company was held liable stating that where the borrowing is within the powers of the
company, the lender will not be prejudiced simply because its officer have applied the loan to unauthorized
activities provided the lender had no knowledge of the intended misuse. Thus, lender would succeed in recovering
the money from the company.
Que. No. 7] Ajay Ltd. borrowed ` 100 Crore from Prem, without the authority conferred on it by the articles of
association. Later, the money borrowed by Ajay Ltd. was used by its Board of directors to pay off lawful debts
of the company. In this scenario, Prem, the lender seeks your advice for recovery of his money. Advise him.
Ans.: In T.R. Pratt. (Bom) Ltd. v. E.D. Sassoon and Co. Ltd., (1936) 6 Com Cases 90, it was held that if the directors
borrowed money from the plaintiff beyond their powers the company cannot repudiate its liability on the ground
that the agent had no authority from the company to borrow. The money having been borrowed and used for the
benefit of the principal either in paying its debts or for its legitimate business, the company cannot repudiate its
liability on the ground that the agent had no authority from the company to borrow.
It was also held that under the general principle of law when an agent borrows money for a principal without the
authority of the principal, but if the principal takes benefit of the money so borrowed or when the money so
borrowed have gone into the coffers of the principal, the law implies a promise to repay.
Thus, Prem can recover the money borrowed by the directors of Ajay Ltd. without any authority as money has been
used to pay off lawful debts of the company.
Que. No. 8] Write a short note on: Charge on uncalled capital
Ans.: A company does not have implied power of charging its uncalled share capital and a company may charge its
uncalled capital if its articles or memorandum authorize it to charge it. The memorandum may give an express
power to charge uncalled capital, or the power may be so wide that it can be inferred by implication.
In Newton v. Debenture holders of Anglo-Australian Investment Co. (1895) A.C. 224, the memorandum authorized
the company to borrow upon any security of the company. It was held that the power was wide enough to include
a charge on uncalled capital. However, a company cannot mortgage or charge any part of its reserve capital, i.e.,
such portion of its uncalled capital as is incapable of being called up except in the event of winding up of the
company.
■DEBENTURES
Bring out the distinguishing features of debentures as a source of finance.
Ans.: Debenture [Section 2(30)]: Debenture includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of the company or not. However, following
instruments shall not be treated as debenture:
(a) The instruments referred to in Chapter III-D of the RBI Act, 1934 and
(b) Such other instrument, as may be prescribed by the Central Government in consultation with the RBI, issued
by a company.
Characteristics of Debentures:
1. A debenture is usually in the form of a certificate issued under the common seal of the company, if any.
2. The certificate is an acknowledgement by the company of its indebtedness to a holder.
3. A debenture usually provides for the payment of a specified principal sum at a specified date.
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4. A debenture usually provides for payment of interest until the principal sum is paid back.
5. A debenture is, as a rule, one of a series, although a single debenture is not uncommon. There may be a
single debenture issued to one person.
6. A debenture generally contains a charge on an undertaking of the company, or on some class of its assets or
on some part of its profits. Again, this is not an essential element. A debenture which creates no such charge is
perfectly valid.
7. The debentures carry no voting rights at any meeting of the company. [Section 71(2)]
8. Fixed deposit is not debenture.
Que. No. 10] Write a short note on: Types of Debentures
Explain the term 'Naked Debentures'. CS (Executive) - June 2012 (2 Marks)
Distinguish between: Naked Debentures & Secured Debentures CS (Executive) - Dec 2009 (3 Marks)
Distinguish between: Perpetual Debentures & Bearer Debentures CS (Executive) - Dec 2009 (3 Marks)
Ans.: Various types of debentures are as follows:
(1) Naked or Unsecured Debentures: Debentures of this kind do not carry any charge on the assets of the
company. The holders of such debentures do not therefore have the right to attach particular property by way of
security as to repayment of principal or interest and thus called as naked or unsecured debentures.
(2) Secured Debentures: Debentures that are secured by a charge of the whole or part of the assets of the
company are called mortgage debentures or secured debentures. After creating charge on debentures, a charge is
required to be registered with ROC within 30 days of creation.
(3) Redeemable Debentures: Debentures that are redeemable on expiry of certain period are called redeemable
debentures.
(4) Perpetual Debentures: If the debentures are issued subject to redemption on the happening of specified
events which may not happen for an indefinite period, e.g. winding-up, they are called perpetual debentures.
(5) Bearer Debentures: Such debentures are payable to bearer and are transferable by mere delivery. The name
of the debenture holder is not registered in the books of the company, but the holder is entitled to claim interest
and principal as and when due. A bona fide transferee for value is not affected by the defect in the title of the
transferor.
(6) Registered Debentures: Such debentures are payable to the registered holders whose name appears on the
debenture certificate and is registered on the companies register of debenture holders maintained as per Section
88 of the Companies Act, 2013.
Aqua Portfolio Ltd. is contemplating to issue debenture to part finance their capital requirements. You
are to prepare a note explaining the category of debenture based on convertibility which may be issued?
Ans.: Based on convertibility, debentures can be classified under three categories:
(1) Fully Convertible Debentures (FCDs): These are converted into equity shares of the company with or without
premium as per the terms of the issue, on the expiry of specified period. If the conversion is to take place at or
after 18 months from the date of allotment but before 36 months, the conversion is optional on the part of the
debenture holders in terms of SEBI (ICDR) Regulations, 2009. Interest will be payable on these debentures up to
the date of conversion as per transfer issue.
(2) Non-Convertible Debentures (NCDs): These debentures do not carry the option of conversion into equity
shares and are therefore redeemed on the expiry of the specified period or periods.
(3) Partly Convertible Debentures (PCDs): These may consist of two kinds namely - convertible and non-
convertible. The convertible portion is to be converted into equity shares at the expiry of specified period.
However, the non-convertible portion is redeemed at the expiry of the stipulated period. If the conversion takes
place at or after 18 months, the conversion is optional at the discretion of the debenture holder.
(4) Optionally Convertible Debentures (OCDs): The investor has the option to either convert these debentures
into shares at price decided by the issuer/agreed upon at the time of issue.
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Que. No. 12] Distinguish between: Debentures & Shares
CS (Executive) - June 2009 (5 Marks), Dec 2014 (4 Marks)
Ans.: Following are the main points of distinction between debentures & shares:
Points Debentures Shares
Status Debenture holders are the creditors of the Shareholders are the owners of the company.
company.
Voting rights Debenture holders have no voting rights. Shareholders have voting rights.
Rate of income Debenture interest is paid at a pre-determined Dividend on equity shares is paid at a variable
fixed rate. rate.
Treatment Interest on debentures is the charge against Dividends are appropriation of profits.
against profit profits.
Types There are different kinds of debentures, such There are only two kinds of shares - equity
as Secured/Unsecured, shares and preference shares.
Redeemable/Irredeemable, Registered /
Bearer, Convertible / N on-convertible, etc.
Balance sheet In the company's balance sheet, debentures In the company's balance sheet, shares are
presentation are shown under head "Non-Current shown under head "Shareholders Funds".
Liabilities".
Conversion Debentures can be converted into shares as Shares cannot be converted into debentures in
per the terms of issue of debenture. any circumstances.
Forfeiture Debentures cannot be forfeited for non- Shares can be forfeited for non-payment of
payment of call moneys. allotment and call moneys.
Liquidation At the time of liquidation, debenture holders At the time of liquidation shareholders are paid
are paid-off before the shareholders. at last, after paying debenture holders,
creditors, etc.
Que. No. 13] Distinguish between: Debenture & Debenture Stock CS (Inter) - June 2004 (3 Marks) Distinguish
between: Debenture & Loan CS (Inter) - June 2004 (3 Marks), June 2007 (4 Marks)
Ans.: Instead of issuing debentures as separate and distinct debt, a company may raise one aggregate loan fund or
composite stock known as 'debenture stock'. Accordingly, a debenture stock is a borrowed capital consolidated
into one mass for the sake of convenience. Instead of each lender having a separate bond or
mortgage, he has a certificate entitling him to a certain sum being a portion of one large loan. It is generally secured
by a trust deed.
Debenture stock is the indebtedness itself, and the debenture stock certificate furnishes evidence of the title or
interest of the holder in the indebtedness. Debenture is the document which furnishes evidence of the debt.
Debenture stock must be fully paid, while debenture may or may not be fully paid.
Difference between debenture & debenture stock: Debenture is the description of an instrument, while
'debenture stock' is the description of a debt or sum secured by an instrument.
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Distinction between debenture & loan: A debenture means a document which creates or acknowledges a debt. A
loan creates a right in the creditor to demand repayment, and the substance of a debt is a liability upon the debtor
to repay the money.
Que. No. 14] What do you understand 'Pari Passu'? Can company issue debentures with pari passu clause?
Ans.: The expression pari passu implies with equal step, equally treated, at the same rate, or at par with.
Debentures are usually issued in a series with a pari passu clause and it follows that they would be on an equal
footing as to security and should the security be enforced, the amount realized shall be divided pro-rata, i.e. they
are be discharged rateably. In the event of deficiency of assets, they will abate proportionately. When it is said that
existing debentures shall be issued pari passu clause, it implies that no difference will be made between the old
and new debentures.
If the words pari passu are not used, the debentures will be payable according , to the date of issue, and if they are
all issued on the same day, they will be payable accordingly to their numerical order. However, a company cannot
issue a new series of debentures so as to rank pari passu with prior series, unless the power to do so is expressly
reserved and contained in the debentures of the previous series.
Que. No. 15] Explain the provisions of the Companies Act, 2013 relating to issue of debentures?
Ans.: Debentures [Section 71]:
(1) A company may issue debentures with an option to convert such debentures into shares, either wholly or
partly at the time of redemption. However, the issue of convertible debentures shall be approved by a special
resolution passed at a general meeting.
(2) No company shall issue any debentures carrying any voting rights.
(3) Secured debentures may be issued subject to prescribed terms and conditions.
(4) The company shall create a Debenture Redemption Reserve (DRR) Account out of the profits of the company
available for payment of dividend. The amount credited to DRR account can be utilized by the company only for
the redemption of debentures.
(5) Appointment of debenture trustees is mandatory if a company wants to issue prospectus or make an offer
to public or its members exceeding 500. Such appointment must be made before issue of debentures.
(6) A debenture trustee shall take steps to protect the interests of the debenture holders and redress their
grievances.
(7) Any provision in a trust deed or in any contract with the debenture holders, which against the duties of
trustees are void. However, the liability of the debenture trustee can be relaxed with the approval of debenture
holder holding 75% value of the total debentures at their meeting.
(8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of
their issue.
(9) If the debenture trustee comes to a conclusion that the assets of the company are insufficient to discharge
the principal amount, they may file a petition before the Tribunal. The Tribunal may, after hearing the company
and other interested persons may pass appropriate order.
(10) Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the
debentures when it is due, the Tribunal may order, the company to redeem the debentures forthwith on payment
of principal and interest due thereon. For this purpose application to Tribunal can be made by debenture holder(s),
or debenture trustee.
(11) A contract with the company to take up and pay for any debentures of the company may be enforced by a
decree for specific performance.
(12) The Central Government may prescribe the procedure, for securing the issue of debentures, the form of
debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies
thereof, quantum of debenture redemption reserve required to be created and such other matters.
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Que. No. 16] Explain the conditions laid down Companies (Shares & Debentures) Rules, 2014 relating to issue of
debentures?
KAJ Ltd., a company incorporated under the Companies Act, 2013 wants to go for issue of secured debentures.
Referring to relevant provisions and Rules, state the conditions to be satisfied before the company goes for such
issue of debentures. Will your answer be different in case such issue of debentures is by a Government company
where the Central Government has given a guarantee?
Ans.: As per Section 71, a company may issue secured debentures subject to prescribed terms and conditions.
Rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 makes the following provisions in this regard.
The company shall not issue secured debentures, unless it complies with the following conditions, namely: —
(a) Term of issue of debentures: An issue of secured debentures may be made, provided the date of its
redemption shall not exceed 10 years from the date of issue. However, following classes of companies may issue
secured debentures for a period exceeding 10 years but not exceeding 30 years —
(i) Companies engaged in setting up of infrastructure projects;
(ii) Infrastructure Finance Companies
(iii) Infrastructure Debt Fund Non-Banking Financial Companies
(iv) Companies permitted by a Ministry or Department of the Central Government or by RBI or by the NHB or by
any other statutory authority to issue debentures for a period exceeding 10 years.
(b) Creation of charge: Such an issue of debentures shall be secured by the creation of a charge on the properties
or assets of the company or its subsidiaries or its holding company or its associates companies, having a value
which is sufficient for the due repayment of the amount of debentures and interest thereon.
(c) Appointment of debenture trustee: The Company shall appoint the debenture trustee before the issue of
prospectus or letter of offer for subscription, of its debentures and not later than 60 days after the allotment of
the debentures, execute a debenture trust deed to protect the interest thereon.
(d) Creation of security in favour of debenture trustee: The security for the debentures by way of a charge or
mortgage shall be created in favour of the debenture trustee on:
(i) Any specific movable property of the company or its holding company or subsidiaries or associate companies or
otherwise.
(ii) Any specific immovable property wherever situate, or any interest therein.
However, in case of a non-banking financial company, the charge or mortgage may be created on any movable
property.
Relaxation to government companies from creation of charge: In case of any issue of debentures by a Government
company which is fully secured by the guarantee given by the Central Government or one or more State
Government or by both, the requirement for creation of charge shall not apply..
In case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage
may also be created on the properties or assets of the holding company.
Que. No. 17] What are the provisions of the Companies Act, 2013 and the rules made there under for creation of
security & debenture redemption reserve?
Ans.: Debenture Redemption Reserve [Section 71(4) & Rule 18(7)]: The Company shall create a Debenture
Redemption Reserve (DRR) for the purpose of redemption of debentures, in accordance with the conditions given
below —
(a) The DRR shall be created out of the profits of the company available for payment of dividend.
(b) The company shall create DRR in accordance with following conditions:
Class of Company Condition
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Debentures issued by All India Financial Institutions No DRR is required for debentures issued.
(AIFIs) regulated by RBI and Banking Companies for
both public as well as privately placed debentures.
Financial Institutions (FIs) within the meaning of Section Create DRR as applicable to NBFCs registered with RBI.
2 (72) of the Companies Act, 2013
For NBFCs registered with the RBI u/s 45-1A of the RBI DRR will be 25% of the value of outstanding debentures
Act and for housing finance companies registered with issued through public issue as per present SEBI (Issue &
the National Housing Bank Listing of Debt Securities) Regulations, 2008.
No DRR is required in the case of privately placed
debentures.
For other companies including manufacturing and DRR will be 25% of the value of outstanding debentures
infrastructure companies issued through public issue as per present SEBI (Issue &
Listing of Debt Securities) Regulations, 2008
Listed Companies 25% DRR is required in the case of privately placed

debentures.
Unlisted companies 25% of the value of outstanding debentures for issue of

debentures on private placement basis.
However, where a company intends to redeem its debentures prematurely, it may provide for transfer of such
amount in DRR as is necessary for redemption of such debentures even if it exceeds the limits specified.
(c) Every company required to create DRR shall on or before the 30th day of April in each year, invest or deposit,
as the case may be, a sum which shall not be less than 15%, of the amount of its debentures maturing during the
year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:
(i) in deposits with any scheduled bank, free from any charge or lien;
(ii) in unencumbered securities of the Central Government or of any State Government;
(iii) in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of Section 20 of the Indian Trusts
Act, 1882;
(iv) in unencumbered bonds issued by any other company which is notified u/s 20(f) of the Indian Trusts Act,
1882;
(v) the amount invested or deposited as above shall not be used for any purpose other than for redemption of
debentures maturing during the year referred above:
Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below
fifteen per cent of the amount of the debentures maturing during the year ending on the 31st day of March of that
year;
(d) In case of partly convertible debentures, DRR shall be created in respect of non-convertible portion of
debenture issue in accordance with this sub-rule.
(e) The amount credited to the DRR shall not be utilized by the company except for the purpose of redemption
of debentures.
Que. No. 18] "Save as provided under the Companies Act, 2013 a person cannot be appointed as debenture
trustee of a company". Comment. CS (Inter) - June 2004 (5 Marks)
Ans.: Appointment of debenture trustee [Section 71(5) & Rule 18(2)]: Appointment of debenture trustees is
mandatory if a company wants to issue prospectus or make an offer to public or its members exceeding 500. Such
appointment must be made before issue of debentures.
The company shall appoint debenture trustees, after complying with the following conditions:
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♦ Names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and
also in all the subsequent notices or other communications sent to the debenture holders.
♦ Before appointment a written consent form the debenture trustee shall be taken and a statement to that
effect shall appear in the letter of offer.
♦ The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the
remaining trustee may act. When such vacancy is caused by the resignation of the debenture trustee, the vacancy
shall only be filled with the written consent of the majority of the debenture holders.
♦ Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the
holders of not less than 3/4th (75%) in value of the debentures outstanding, at their meeting.
Que. No. 19] Write a short note on: Disqualification for appointment of debenture trustee
Ans.: Disqualification for appointment of debenture trustee [Rule 18(2)(c)]: Following persons cannot be
appointed as a debenture trustee —
(i) A person who beneficially holds shares in the company.
(ii) A promoter, director or KMP or any officer or an employee of the company or its holding, subsidiary or associate
company.
(iii) A person who is beneficially entitled to moneys which are to be paid by the company otherwise than as
remuneration payable to the debenture trustee.
(iv) A person who is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary
of such holding company.
(v) , A person who has furnished any guarantee in respect of the principal debts secured by the debentures
or interest thereon.
(vi) A person who has any pecuniary relationship with the company amounting to 2% or more of its gross
turnover or total income or ` 50 lakhs or such higher amount as may be prescribed, whichever is lower, during the
2 immediately preceding financial years or during the current financial year;
(vii) A person who is relative of any promoter or any person who is in the employment of the company as a director
or KMP.
Que. No. 20] What are the rights, powers and disabilities of debenture trustees?
Ans.: Rights & powers of debenture trustees: Debenture trustees have following rights & powers:
(i) To call for periodical reports from the body corporate, i.e., issuer of debentures.
(ii) To take possession of trust property in accordance with the provisions of the trust deed.
(iii) To enforce security in the interest of the debenture holders.
(iv) To ensure on a continuous basis that the property charged to the debenture is available and adequate at all
times to discharge the interest and principal amount payable in respect of the debentures and that such property
is free from any other encumbrances except those which are specifically agreed with the debenture trustee.
(v) To exercise due diligence to ensure compliance by the body corporate with the provisions of the Companies
Act, 2013 the listing agreement of the stock exchange or the trust deed.
(vi) To take appropriate measures for protecting the interest of the debenture holders as soon as any breach of
the trust deed or law comes to his notice.
(vii) To ascertain that the debentures have been converted or redeemed in accordance with the provisions and
conditions under which they are offered to the debenture holders.
(viii) To inform the Board immediately of any breach of trust deed or provision of any law.
(ix) To appoint a nominee director on the board of the body corporate when required.
Disqualification/disabilities for appointment of debenture trustee [Rule 18(2)(c)]: See answer of Question No. 19.
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Que. No. 21] Write a short note on: Duties of debenture trustee
Ans.: Duties of Debenture Trustee [Rule 18(3)]: It shall be the duty of every debenture trustee —
(a) To satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of
the issue of debentures or with the trust deed.
(b) To satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture
holders.
(c) To call for periodical status or performance reports from the company.
(d) To communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or
redemption of debentures and action taken by the trustee.
(e) To appoint a nominee director on the Board of the company in the event of
(i) two consecutive defaults in payment of interest to the debenture holders; or (z'z) default in creation of security
for debentures; or
(iii) default in redemption of debentures.
(f) To ensure that the company does not commit any breach of the terms of issue of debentures or covenants of
the trust deed and take such reasonable steps as may be necessary to remedy any such breach.
(g) To inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants
of the trust deed.
(h) To ensure the implementation of the conditions regarding creation of security for the debentures, if any, and
DRR.
(i) To ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to
discharge the interest and principal amount at all times and that such assets are free from any other encumbrances
except those which are specifically agreed to by the debenture holders.
(j) To do such acts as are necessary in the event the security becomes enforceable.
(k) To call for reports on the utilization of funds raised by the issue of debentures.
(l) To take steps to convene a meeting of the holders of debentures as and when such meeting is required to be
held.
(m) To ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of
debentures.
(n) To perform such acts as are necessary for the protection of the interest of the debenture holders and do all
other acts as are necessary in order to resolve the grievances of the debenture holders.
Que. No. 22] Write a short note on: Register of debenture holders
Explain the provisions relating to maintenance of register of debenture holder under the Companies Act, 2013?
Ans.: Every company must keep a register of debenture holders. [Section 88(1) (b)]
The register of debenture holders shall also include an index of the names included therein.
The Companies (Management & Administration) Rules, 2014 makes the following provisions for register of
debenture holders:
♦ Every company shall maintain a separate register of debenture holders for each type of debentures in Form
MGT-2. [Rule 4]
♦ The entries in the register of debenture holders shall be made within 7 days approval of the allotment or
transfer of debentures. [Rule 5(1)]
♦ The registers shall be maintained at the registered office of the company unless a special resolution is passed
in a general meeting authorizing the keeping of the register at any other place within the city, town or village in
which the registered office is situated or any other place in India in which more than l/10th of the total members
entered in the register of members reside. [Rule 5(2)]
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♦ If any change occurs in the status of debenture holder whether due to death or insolvency or change of name
or due to transfer to Investor Education Protection Fund or due to any other reason, entries thereof explaining the
change shall be made in the register.
♦ Index of denture holder is also required to be maintained. However, the maintenance of index is not
necessary in case the number of members is less than 50. [Rule 6]
♦ The entries in the register of debenture holders and index shall be authenticated by the Company Secretary
or by any other person authorized by the Board. [Rule 8(1)j
♦ A company closing the register of debenture holders shall give at leas` 7 days previous notice, as may be
specified by SEBI in case of listed company, by advertisement at least once in a vernacular newspaper in the
principal vernacular language and English newspaper and also publish the notice on the website notified by the
Central Government and on the company's website. [Rule 10]
Inspection [Section 94(2)]: The register of debenture holders and index is open to inspection by the members and
debenture holders, other security holder or beneficial owner during business hours without payment of any fees
and by any other person on payment of nominal charges.
Que. No. 23] Write a short note on: Remedies to debenture holders
A person holding secured or unsecured debentures have remedies for enforcing his rights. Comment.
Debenture holders are widely protected under the Companies Act, 2013 in case of defaults in making their
payments by the company. Discuss. CS (Inter) - June 2006 (5 Marks)
Ans.: The Company is bound to pay interest and redeem the debentures in accordance with the terms and
conditions of their issue. [Section 71(8)]
If a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures
when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee
and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on
payment of principal and interest due thereon. [Section 71(10)]
If any default is made in complying with the order of the Tribunal, every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less
than ` 2 lakh but which may extend to ` 5 lakh, or with both. [Section 71(11)]
This remedy is made available to the holders of debentures whether they are secured or unsecured. Any debenture
holder can apply to the Tribunal for passing an order of payment the company which has defaulted. The Tribunal
shall, while issuing order to the company, take into account the circumstances under which it has failed to redeem
the debentures and the order of the Tribunal shall mention about the ways and means for redemption of the
debentures by the company.
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CHAPTER
9
DEPOSITS
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Acceptance of Deposits) Rules, 2014.
PUBLIC DEPOSIT
Que. No. 1] How the acceptance of deposit by companies is regulated under the Companies Act, 2013?
Ans.: Sections 73 to 76 read with the Companies (Acceptance of Deposits) Rules, 2014 regulate the invitation and
acceptance of deposits. It prohibits acceptance of deposits except from the members through ordinary resolution
or acceptance deposits by "eligible company" being a public company, subject to conditions specified in the rules.
(Eligible company is defined under the rules based on net worth and turnover).
The act provides for stringent penalty for any violations in complying with the provisions in this regard.
Que. No. 2] Certain companies are exempted from the provisions of Section 73 of the Companies Act, 2013.
Comment. CS (Inter) - Dec 2007 (5 Marks)
Discuss the law relating to acceptance of deposits by non-banking non-financial companies.
Provisions of Section 73 are not applicable to guarantee companies and Section 8 companies (i.e., associations
not for profit). CS (Executive) - June 2009 (5 Marks)
Ans.: Proviso to Section 73(1) read with Rule 1(3) of the Companies (Acceptance of Deposits) Rules, 2014 excludes
following from the provisions relating to deposit—
(i) Banking Companies,
(ii) Non-banking financial companies as defined in the RBI Act, 1934 and registered with RBI,
(iii) A housing finance company registered with NHB established under the National Housing Bank Act, 1987 and
(iv) Any other company as may be specified by the government in this regard.
Que. No. 3] State the conditions subject to which companies can accept the deposit as provided in Companies
Act, 2013.
Ans.: A company may accept deposit subject to fulfilment of following conditions:
Conditions for acceptance of deposit [Section 73(2)]: A company may, subject to the passing of a resolution in
general meeting and subject to such rules as may be prescribed in consultation with the RBI, accept deposits from
its members on such terms and conditions, including the provision of security, if any, or for the repayment of such
deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of
the following conditions:
(a) The company should issue a circular to its members which should include following information —
- A statement showing the financial position of the company
- The credit rating obtained
- The total number of depositors and the amount due towards deposits in respect of any previous deposits
accepted by the company
- Other particulars prescribed in the Companies (Acceptance of Deposits) Rules, 2014.
(b) The company should file a copy of the circular with the ROC within 30 days before the date of issue of the
circular.
(c) The company should deposit on or before the 30th day of April each year, such sum which shall not be less
than 20% of the amount of its deposits maturing during the following financial year. Such amount should be kept
in a scheduled bank in a separate bank account to be called Deposit Repayment Reserve Account.
(d) The company should certify that the company has not committed any default in the repayment of deposits
accepted or payment of interest on such deposits and where a default had occurred, the company made good the
default and a period of 5 years had lapsed since the date of making good the default.
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(e) The company should provide security for the due repayment of the amount of deposit or the interest. Such
security may be provided by the creation of charge on the property or assets of the company.
In case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall
be termed as "unsecured deposits" and shall be so quoted in every circular, form, advertisement or in any
document related to invitation or acceptance of deposits.
Repayment of deposit [Section 73(3)]: Every deposit accepted by a company shall be repaid with interest in
accordance with the terms and conditions of the agreement.
Right to apply to Tribunal if company makes default in repayment of deposit [Section 74(4)]: Where a company
fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal
for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of
such non-payment and for such other orders as the Tribunal may deem fit.
Use of deposit repayment reserve account [Section 74(5)]: The deposit repayment reserve account shall not be
used by the company for any purpose other than repayment of deposits.
Que. No. 4] State the penalties for contravening the provisions relating to acceptance and repayment of deposit.
Ans.: Punishment for Contravention of Section 73 or Section 76 [Section 76A]: Where a company accepts or
invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention provisions
of Section 73/76 or Rules made thereunder or if a company fails to repay the deposit or part thereof or any interest
due thereon within the prescribed time or such further time as may be allowed by the Tribunal —
(a) The company shall, in addition to the payment of the amount of deposit or part thereof and the interest due,
be punishable with fine which shall not be less than ` 1 Crore or twice the amount of deposit
accepted by the company, whichever is lower but which may extend to ` 10 Crore.
(b) Every officer of the company who is in default shall be punishable with imprisonment which may extend to
7 years and with fine which shall not be less than ` 25 lakh but which may extend to ` 2 Crore.
However, if it is proved that the officer of the company, who is in default, has contravened such provisions
knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or
tax authorities, he shall be liable for action u/s 447.
Que. No. 5] Define the term 'Deposit' as per Companies (Acceptance of Deposits) Rules, 2014.
Ans.: Deposit [Section 2(31)]: Deposit includes any receipt of money by way of deposit or loan or in any other form
by a company, but does not include such categories of amount as may be prescribed in consultation with the RBI.
Inclusive definition of the word "Deposit" under Rule 2(l)(c) is as under:
Deposit [Rule 2(l)(c)]: Deposit includes any receipt of money by way of deposit or loan or in any other form, by a
company, but does not include:
(i) Any amount received from the Central or State Government, or any amount received from any other source
whose repayment is guaranteed by the Central or State Government or any amount received from a local authority,
or any amount received from a statutory authority constituted under an Act of parliament or a state legislature.
(ii) Any amount received from foreign Governments, foreign/international banks, multilateral financial
institutions (including, but not limited to, International Finance Corporation, Asian Development Bank,
Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction),
foreign government owned development financial institutions, foreign export credit agencies, foreign
collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India
subject to the provisions of FEMA Act, 1999 and rules and regulations made thereunder.
(iii) Any amount received as a loan or facility from any banking company or from the SBI or any of its subsidiary
banks or from a banking institution notified by the Central Government.
(iv) Any amount received as a loan or financial Assistance from Public Financial Institutions notified by the Central
Government in this behalf in consultation with the RBI, regional financial institutions, Insurance Companies,
Scheduled Banks as defined in the RBI Act, 1934.
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(v) Any amount received against issue of commercial paper or any other instrument issued in accordance with
the guidelines or notification issued by the RBI.
(vi) Any amount received by a company from any other company.
(vii) Any amount received and held pursuant to an offer made in accordance with the provisions of the Act
towards subscription to any securities, including share application money or advance towards allotment of
securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of
the securities applied for. If the securities for which application money or advance for such securities was received
cannot be allotted within 60 days from the date of receipt of the application money or advance for such securities
and such application money or advance is not refunded to the subscribers within 15 days from the date of
completion of 60 days, such amount shall be treated as a deposit under these rules. For the purpose of this rule
any adjustment of the amount for any other purpose will not be treated as refund.
(viii) Any amount received from a person who, at the time of the receipt of the amount, was a director of the
company or relative of director of company or relative of director of private company. The director from whom
money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect
that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from
others.
(ix) Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari
passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the
company or bonds/debentures compulsorily convertible into shares of the company within 10 years. If such bonds
or debentures are secured by the charge of any assets referred to in Schedule III of the Act excluding intangible
assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a
registered valuer.
(x) Any amount received from an employee not exceeding his annual salary, under a contract of employment
with the company in the nature of non-interest bearing security deposit.
(xi) Any non-interest bearing amount received or held in trust.
(xii) Any amount received in the course of or for the purposes of the business of the company:
(a) As an advance for the supply of goods or provision of services provided that such advance is appropriated
against supply of goods or provision of services within a period of 365 days from acceptance of such advance. In
case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of
365 days shall not apply.
(b) As advance, accounted for in any manner whatsoever, received in connection with consideration for
property under an agreement or arrangement, provided that such advance is adjusted against the property in
accordance with the terms of agreement or arrangement.
(c) As security deposit for the performance of the contract for supply of goods or provision of services.
(d) As advance received under long term projects or for supply of capital goods except those covered under item
(b) above. If the amount received under (a), (b) & (c) above becomes refundable (with or without interest) because
the company accepting the money does not have necessary permission or approval to deal in the goods or
properties or services for which the money is taken, the amount received shall be deemed to be a Deposit under
these rules.
(e) As an advance towards consideration for providing future services in the form of a warranty or maintenance
contract as per written agreement or arrangement, if the period for providing such services does not exceed the
period prevalent as per common business practice or 5 years, from the date of acceptance of such service
whichever is less.
(f) As an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or
State Government.
(g) As an advance for subscription towards publication, whether in print or in electronic to be adjusted against
receipt of such publications
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Explanation: For the purpose of this sub-clause the amount shall be deemed to be deposits on the expiry of 15
days from the date they become due for refund.
(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the
stipulation of any lending financial institution or a bank subject to fulfilment of the following conditions:
(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to
contribute such finance and
(b) The loan is provided by the promoters themselves or by their relatives or by both and
(c) The exemption under this sub-clause shall be available only till the loans of financial institution or bank are
repaid and not thereafter.
(xiv) Any amount accepted by a Nidhi Company in accordance with the rules made under Section 406 of the Act.
Explanation: For the purposes of this clause, any amount —
(a) Received by the company, whether in the form of installments or otherwise, from a person with promise or
offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier,
accounted for in any manner whatsoever, or
(,b) Any additional contributions, over and above the amount under item (a) above, made by the company as part
of such promise or offer,
shall be considered as deposits unless specifically excluded under this clause.
(xv) Any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the
company and listed on a recognized stock exchange as per applicable regulations made by Securities and Exchange
Board of India.
(xvi) Any amount received by way of subscription in respect of a chit under the Chit Fund Act.
(xvii) Any amount received by the company under any collective investment scheme in compliance with regulations
framed by the SEBI.
(xviii) An amount of ` 25 lakh or more received by a start-up company, by way of a convertible note (convertible
into equity shares or repayable within a period not exceeding 5 years from the date of issue) in a single tranche,
from a person.
Explanation:
"Start-up company" means a private company incorporated under the Companies Act, 2013 or Companies Act,
1956 and recognized as such by the Department of Industrial Policy and Promotion, Ministry of Commerce
and Industry.
"Convertible note" means an instrument evidencing receipt of money initially as a debt, which is repayable at the
option of the holder, or which is convertible into such number of equity shares of the start-up company upon
occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.
(xix) Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and
Mutual Funds registered with the SEBI in accordance with regulations made by it.
Que. No. 6] Whether following receipts by company amount to 'deposit' as per Rule 2(1) (c) under the Companies
(Acceptance of Deposits) Rules, 2014.
(1) Amount received from Central Government.
(2) Amount received as loan from baking company.
(3) Amount received on issue of commercial paper
(4) Deposits received from another company.
(5) Amount received from HUF.
(6) Amount received as share application money for 90 days or more and still no shares are allotted to the
applicant.
141
(7) Amount received from Mr. Neel, a director of company who in turn has borrowed amount from his
relative.
(8) Amount received on issue of secured debentures.
(9) Amount received on issue of convertible debentures which are to be converted in to shares after 12 years.
(10) Amount received as advance against supply of goods where goods is to be supplied after 15 months.
(11) Security deposit received from the employee ` 1,50,000. Salary of the employee is ` 10,000 p.m.
Ans.:
Particulars Deposit Reason

or not
Amount received from Central No Specially excluded under the definition of 'Deposit' as per Rule
Government 2(l)(c)(i).
Amount received as loan from No Specially excluded under the definition of' Deposit' as per Rule 2(1)
baking company. (c) (iii).
Amount received on issue of No Specially excluded under the definition of 'Deposit' as per Rule
commercial paper 2(l)(c)(v).
Deposits received from another No Specially excluded under the definition of 'Deposit' as per Rule
company. 2(l)(c)(vi).
Amount received from HUF Yes Not excluded under the definition of 'Deposit'.
Amount received as share Yes If the securities for which application money or advance for such
application money for 90 days or securities was received cannot be allotted within 60 days from the
more and still no shares are date of receipt of the application money or advance for such
allotted to the applicant. securities and such application money or advance is not refunded to
the subscribers within 15 days from the date of completion of 60
days, such amount shall be treated as a deposit under these rules.
Amount received from Mr. Neel, Yes Any amount received from director of the company does not to
a director of company who in 'deposit'. However, the director from whom money is received,
turn has borrowed amount from furnishes to the company at the time of giving the money, a
his relative. declaration in writing to the effect that the amount is not being given
out of funds acquired by him by borrowing or accepting loans or
deposits from others.
As director as deposited money with company by borrowing from
relative, it amounts to 'deposit' as per Rule 2(l)(c)(viii).
Amount received on issue of No Specially excluded under the definition of 'Deposit' as per Rule
secured debentures 2(l)(c)(ix).
Particulars Deposit Reason

or not
Amount received on issue of Yes Amount received on issue of convertible debentures which are to be
convertible debentures which converted with in a period of 10 years does not amount to 'deposit'.
are to be converted in to shares In given case conversion period is more than 10 years and hence it
after 10 years. amounts to 'deposit'.
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Amount received as advance Yes Amount received as advance against supply of goods up to 1 year
against supply of goods where does not amount to deposit. In given case advance is received for
goods is to be supplied after 15 period exceeding 1 year and hence it will amount to 'deposit'.
months
Security deposit received from Yes Security deposit received from an employee not exceeding his
the employee ` 1,50,000. Salary annual salary does not amount to deposit. In given case since
of the employee is ` 10,000 p.m. security deposit exceeds his annual salary it amounts to 'deposit'.
Que. No. 7] Prism Ltd. has accepted ` 10 lakhs as advance towards the supply of goods to certain parties. As per
the agreement, the company will supply the goods after two years from the date of deposit. Later on, internal
auditors qualified their report on the ground that the company has violated the provisions of the Companies
Act, 2013. Directors explained that this is required to complete the order. Examining the relevant provisions of
the Companies Act, 2013 state whether the explanation given by the directors is justified.CS (Executive) - June
2016 (4 Marks)
Ans.: As per Section 2(31), deposit includes any receipt of money by way of deposit or loan or in any other form
by a company, but does not include such categories of amount as may be prescribed in consultation with the RBI.
As per the Rule 2(1) (c)(xii)(d) of the Companies (Acceptance of Deposit) Rules, 2014, deposit does not include
any amount received in the course of or for the purposes of the business of the company as an advance for the
supply of goods or provision of services provided that such advance is appropriated against supply of goods or
provision of services within a period of 365 days from acceptance of such advance.
As per facts given in case Prism Ltd. has accepted ` 10 lakh as advance towards the supply of goods to certain
parties. As per the agreement, the company will supply the goods after two years from the date of deposit.
Thus, company has accepted advance for more than 365 days for the supply of goods and hence it is 'Deposit' as
per Section 2(31) read with Rule 2(l)(c)(xii)(d) of the Companies (Acceptance of Deposit) Rules, 2014. The Company
has defaulted in accepting deposit without complying the provision and hence remark passed by internal auditor
is correct and explanation given by the director is not sufficient.
Que. No. 8] Unsecured loans from promoters are always treated as exempt deposits. Comment.
Ans.: As per Rule 2(b) (xiii), deposit does not include any amount brought in by the promoters by way of unsecured
loans in pursuance of stipulations of financial institutions subject to the fulfilment of the following conditions,
namely:
(a) The loans are brought in pursuance of the stipulation imposed by the financial institutions in fulfilment of
the obligation of the promoters to contribute such finance;
(b) The loans are provided by the promoters themselves and/ or by their relatives, and not from their friends
and business associates; and
(c) The exemption under this sub-clause shall be available only till the loans of financial institutions are repaid
and not thereafter.
Thus, all unsecured loans from promoters are not exempt as deposit. Only those unsecured loans of promoters are
exempt which are provided after compliance of above stated conditions.
Que. No. 9] Specify the conditions subject to which the following are treated as exempt deposits:
(1) Unsecured loans from promoters.
(2) Debenture secured by secured by a first charge
(3) Deposit from directors of public company CS (Inter) - June 2001 (6 + 2 + 2 = 8 Marks)
CS (Inter) - June 2003 (2 + 2 = 4 Marks)
Ans.:
(1) Unsecured loans from promoters: See the answer of Question No. 4
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(2) Debenture secured by mortgaged property: As per Rule 2(b)(ix), deposit does not include any amount
raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first
charge on any assets referred to in Schedule III excluding intangible assets of the company or bonds/ debentures
compulsorily convertible into shares of the company within 10 years. If such bonds or debentures are secured by
the charge of any assets referred to in Schedule III of the Act excluding intangible assets, the amount of such bonds
or debentures shall not exceed the market value of such assets as assessed by a registered valuer.
(3) Deposit from directors of public company: Deposit from the directors of public company is not exempt
under clause of Rule 2(b). Hence, it is covered by the definition of 'Deposit'.
Que. No. 10] Distinguish between: Deposits & Loan CS (Inter) - June 2002 (5 Marks)
Ans.: There have been a number of judicial decisions bringing out distinction between a loan and a deposit. In
Annamalai v. Veerappa AIR 1956 SC 12, it was held that the term 'deposit' and 'loan' are not synonymous and
whether a transaction is a deposit or loan does not merely depend on the terms of document, but has to be judged
from the intention of the parties.
In a sense, deposit is also a loan with this difference that a loan is repayable the minute it is incurred. In the case
of deposit the repayment will depend on the maturity date fixed therefore or the terms of agreement relating to
the demand on the making of which the deposit becomes payable. In other words, unlike a loan, there is no
immediate obligation to repay in the case of deposits.
Under the Limitation Act, 1963, the periods when limitation would begin in case of loan and in case of deposits
are provided for differently. In the former case the limitation commences from the date when the loan is made,
whereas in the latter from the date when the demand is made. Therefore, the distinction between a loan and a
deposit is fine but appreciable.
Que. No. 11] Distinguish between: Deposit & Debenture
Ans.: According to Section 2(30), debenture includes debenture stock, bonds and any other securities of a company
whether constituting a charge on the assets of the company or not. A debenture is a document which either creates
or acknowledges a debt. A debenture may be secured or unsecured. Where the debenture is unsecured, it will
surely fall within the definition of deposit. It is only the debentures which satisfy the conditions stipulated in Rule
2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 2014, which are excluded from the definition of
deposits.
Que. No. 12] Who is depositor?
Ans.: Depositor [Rule 2(l)(d)]: Depositor means-
(i) Any member of the company who has made a deposit with the company in accordance with Section 73(2)
or
(ii) Any person who has made a deposit with a public company in accordance with Section 76 of the Act.
Que. No. 13] State the provisions relating to acceptance of deposit by 'eligible companies'.
Ans.: Acceptance of deposits from public by eligible companies [Section 76]: A public company, having such net
worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to
compliance with the requirements Section 73(2) and subject to such rules as the Central Government may, in
consultation with the RBI, prescribe.
Credit rating to be obtained: Such a company shall be required to obtain the rating (including its net worth,
liquidity and ability to pay its deposits on due date) from a recognized credit rating agency for informing the public
the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety
and the rating shall be obtained for every year during the tenure of deposits.
Creation of charge: Every company accepting secured deposits from the public shall within 30 days of such
acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of
the deposit holders in accordance with such rules as may be prescribed.
Eligible Company [Rule 2(l)(e)]: Eligible Company means a public company having a net worth of not less than `
100 Crore or a turnover of not less than ` 500 Crore and which has obtained the prior consent of the company in
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general meeting by means of a special resolution and also filed the said resolution with the ROC and with the RBI
before making any invitation to the public for acceptance of deposits.
However, an eligible company, which is accepting deposits within the limits specified in Section 180(1) (c), may
accept deposits by means of an ordinary resolution.
As per Section 180(l)(c) the board of directors of the company can borrow money, where the money to be
borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share
capital and free reserves, apart from temporary loans obtained from the company's bankers in the ordinary course
of business
Que. No. 14] Can a company accepts or renew any deposit which is repayable on demand?
Ans.: Terms and conditions of acceptance of deposits by companies [Rule 3(1)]: No company and no eligible
company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon
receiving a notice, within a period of less than 6 months or more than 36 months from the date of acceptance or
renewal of such deposit.
Exceptions: A company may, for the purpose of meeting any of its short-term requirements of funds, accept or
renew such deposits for repayment earlier than 6 months from the date of deposit or renewal, subject to the
condition that —
(a) Such deposits shall not exceed 10% of the aggregate of the paid-up share capital and free reserves of the
company, and
(b) Such deposits are repayable not earlier than 3 months from the date of such deposit or renewal thereof.
Que. No. 15] A single fixed deposit holder, after marriage, applied for adding the name of his wife as joint holder.
The company refused to do so. Comment. CS (Executive) - June 2011 (4 Marks)
Ans.: As per Rule 3(2), where depositors so desire, deposits may be accepted in joint names not exceeding three,
with or without any of the clauses, namely, "Jointly", "Either or Survivor", "First named or Survivor", "Anyone or
Survivor". Thus, company cannot refuse to add the name of wife of deposit holder.
Que. No. 16] Write a short note on: Ceiling limits for acceptance of deposits
A company cannot raise deposits for an unlimited amount. Comment. CS (Inter) - Dec 2006 (5 Marks)
Ans.: Ceiling for acceptance of deposits [Rule 3(3)]: No company shall accept or renew any deposits if the amount
of deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of
such deposits exceeds 35% of the aggregate of the paid-up share capital, free reserves and securities premium
account of the company.
However, a private company may accept from its members monies not exceeding 100% of aggregate of the paid
up share capital, free reserves and securities premium account and such company shall file the details of monies so
accepted to the Registrar in such manner as may be specified.
Ceiling for acceptance of deposits for eligible company [Rule 3(4)]: No eligible company shall accept or renew:
(a) Any deposit from its members, if the amount of such deposit together with the amount of deposits
outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the paid up
share capital, free reserves and securities premium account of the company.
(b) Any other deposit, if the amount of such deposit together with the amount of such other deposits,
outstanding on the date of acceptance or renewal exceeds 25% aggregate of the paid up share capital, free reserves
and securities premium account of the company.
Deposits by Government Companies [Rule 3(5)]: No Government company eligible to accept deposits shall accept
or renew any deposit, if the amount of deposits together with the amount of other deposits outstanding as on the
date of acceptance or renewal exceeds 35% of the aggregate of the paid up share capital, free reserves and
securities premium account of the company.
Que. No. 17] As per the audited balance sheet of Dowell Ltd. as at 31st March, 2019, the details of share capital
and reserves and surplus are as under:
` in crores
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Equity Share Capital 300.00
Reserves & Surplus:
Profit & Loss A/c 62.75
General Reserves 12.00
Securities Premium 25.00
Break up of unsecured loans as at 31st March, 2019 in given below:
Deposits from public 13.00
Deposits from shareholders 3.62
Compute the limits up to which Dowell Ltd. can accept further deposits from public & shareholders. Assume that
Dowell Ltd. is 'Eligible Company'. CS (Inter) - Dec 1999 (8 Marks)
Ans.: Calculation of paid-up capital and free reserve as per balance sheet as at 31.3.2019.
Particulars ` in crores
Equity Share Capital 300.00
Profit & Loss Account 62.75
Securities premium 25.00
Paid-up capital & free reserve 399.75
Calculation of acceptance of deposit from shareholder and from public: f in crores
Particulars From Shareholders From public
Limit up to which Dowell Ltd. can accept deposits
- 10% from shareholder & 25% from public of ` 399.75 crores 39.975 99.9375
- Existing deposits as at 31st March, 2019 (3.62) (13.00)
Further deposits that can be accepted. 36.355 86.9375
` in crores
Equity Share Capital 200
Preference Share Capital 50
Reserves & Surplus:
Profit & Loss A/c 40
General Reserves 20
Securities Premium 15
Revaluation Reserve 25
Capital Redemption Reserve 10
Deferred revenue expenditure to the extent not written off as on 31st March 2015 is ` 0.50 crores. Break up of
unsecured loans as at 31st March, 2019 in given below:
Deposits from public 5
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Deposits from shareholders 1
Inter-corporate deposit 6
This apart unsecured debenture as on 31st March, 2015 are as follows:
Convertible debenture 3
(Convertible into equity shares within 31st December, 2019)
Non-convertible debenture 2
Compute the limits up to which Seelu Ltd. can accept further deposits from public & shareholders.
Ans.: Calculation of paid-up capital and free reserve as per balance sheet as at 31.3.2019.
Particulars ` in crores
Equity Share Capital 200
Preference Share Capital 50
Profit & Loss Account 40
General Reserves 20
Securities premium 15
(-) Deferred revenue expenditure (0.50)
Paid-up capital & free reserve 324.50
Calculation of acceptance of deposit from shareholder and from public: ` in crores
Particulars From Shareholders From public
Limit up to which Dowell Ltd. can accept deposits
- 10% from shareholder & 25% from public of ` 334.50 lakhs 32.45 81.125
- Existing deposits as at 31st March, 2019 (1,00) (7.00)
Further deposits that can be accepted. 31.45 74.125
Important Notes:
♦ Revaluation reserve and capital redemption reserve is not free reserve hence will not he added while
calculating paid-up capital and free reserve.
♦ Inter-corporate deposit will not be treated as deposit as per Rule 2(h).
♦ Unsecured non-convertible debenture are deposit as per Rule 2(b), hence will be treated as existing deposit.
` in crores
Equity share capital 300.00
Reserves and surplus:
Profit & Loss A/c 62.75
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Securities Premium 25.00
Capital Subsidy (Central Grant) 10.00
Revaluation Reserve 30.00
Equity share capital 139.75
Break up of unsecured loans as at 31st March, 2015 in given below:
Deposits from public 13.00
Deposits from shareholders 3.62
Inter-corporate deposits 15.00
Deferred sales tax liability 28.63
60.25
Compute the limits up to which Hi-Fi Ltd. can accept further deposits from public & shareholders. (Answer to
the nearest rupees in crores) CS (Inter) - June 2005 (8 Marks)
Hint: Further deposits that can be accepted: From Shareholders - ` 37.355 crores, From Public - ` 89.4375 crores.
"Capital Subsidy (Central Grant)" will be treated as part of paid-up capital & free reserve.
Que. No. 20] Write a short note on: Ceiling on rate of interest & brokerage on deposits
Ans.: Ceiling on rate of interest on deposits [Rule 3(6)]: No company or any eligible company shall invite or accept
or renew any deposits carrying a rate of interest or pay brokerage at a rate exceeding the maximum rate of interest
or brokerage prescribed by the RBI for acceptance of deposits by non-banking financial companies.
Who is eligible to receive brokerage [Explanation to Rule 3(6)]: Only the person who is authorized, in writing, by
a company to solicit deposits on its behalf and through whom deposits are actually procured will be entitled to the
brokerage. Payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of
these Rules.
Prohibition on alteration of the terms & conditions of the deposit [Rule 3(7)]: The company shall not reserve to
itself either directly or indirectly a right to alter, to the prejudice or disadvantage of the depositor, any of the terms
and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the
form of advertisement is issued and deposits are accepted.
Que. No. 21] Board of directors of Green Field Ltd. decides to acceptdeposits from the public at a compound
interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board
can go ahead with its proposal. CS (Executive) - June 2016 (4 Marks)
Ans.: As per Rule 3(6) of the Companies (Acceptance of Deposit) Rules, 2014, no company or any eligible company
shall invite or accept or renew any deposits carrying a rate of interest or pay brokerage at a rate exceeding the.
maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by nonbanking financial
companies.
Thus, Green Field Ltd. can accept deposit at a compound interest rate provided that rate of interest should not
exceed the rate prescribed by the RBI for acceptance of deposits by non-banking financial companies.
Que. No. 22] Every company accepting deposit from the public is required to obtain credit rating from the credit
rating agency. Comment.
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Ans.: Credit rating for acceptance of deposits [Rule 3(8)]: Every eligible company shall obtain, at least once in a
year, credit rating for deposits accepted by it and a copy of the rating shall be sent to the Registrar of Companies
along with the return of deposits in Form DPT-3.
The credit rating shall not be below the minimum investment grade rating or other specified credit rating for fixed
deposits, from any one of the approved credit rating agencies as specified for NBFC's in the Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, issued by the RBI, as amended from
time to time.
Que. No. 23] Every advertisement inviting deposit public must contain certain particulars. What are those
particulars? CS (Inter) - June 2000 (9 Marks), Dec 2002 (10 Marks)
What is the period of validity of such advertisement? CS (Inter) - June 2000 (2 Marks)
Can Company accept deposit without issuing such advertisement? Explain position with reference to relevant
rules. CS (Inter) - June 2000 (5 Marks), June 2003 (6 Marks)
A company can accept deposits without issuing advertisement. Comment.
Every company intending to invite deposits from public u/s 58A must issue an advertisement which shall be
signed by all the directors of the company. CS (Executive) - Dec 2011 (5 Marks)
Ans.: Form and particulars of advertisements/circulars [Rule 4]:
(1) Every company intending to invite deposit from its members shall issue a circular Form DPT. 1 to all its
members by registered post with acknowledgement due or speed post or by electronic mode. In addition to issue
of circular, the circular may be published in an English newspaper and in vernacular language newspaper.
(2) Every eligible company intending to invite deposits shall issue a circular in the form of an advertisement in
Form No. DPT. 1 for the purpose in English newspaper and in vernacular language newspaper.
(3) Every company inviting deposits from the public shall upload a copy of the circular on its website.
(4) Any circular or a circular in the form of advertisement inviting deposits has to be issued in the authority and
in the name of the board of directors of the company.
(5) A copy of circular or a circular in the form of advertisement has to be delivered to the ROC 30 days before
the date of issue. It has to be signed by a majority of the directors or their agents, duly authorized by them in
writing.
(6) A circular or circular in the form of advertisement issued shall be valid until the expiry of 6 months from the
date of closure of the financial year in which it is issued or until the date on which the financial statement is laid
before the company in AGM or, where the AGM for any year has not been held, the latest day on which AGM
should have been held, whichever is earlier. A fresh circular or circular in the form of advertisement shall be issued,
in each succeeding financial year, for inviting deposits during that financial year.
(7) The date of the issue of the newspaper in which the advertisement appears shall be taken as the date of
issue of the advertisement and the effective date of issue of circular shall be the date of dispatch of the circular.
Que. No. 24] What are provisions made under the Companies (Acceptance of Deposit) Rules, 2014 relating to
"Deposit Insurance"?
Ans.: Deposit Insurance [Rule 5]:
(1) Every company and every other eligible company inviting deposits shall enter into a contract for providing
deposit insurance at least 30 days before the issue of circular or advertisement or at least 30 days before the date
of renewal. For this purposes the amount as specified in the deposit insurance contract shall be deemed to be the
amount in respect of both principal amount and interest due thereon.
(2) The deposit insurance contract shall specifically provide that in case the company defaults in repayment of
principal and interest, the depositor shall be entitled to the repayment of principal and the interest by the insurer
up to the aggregate monetary ceiling as specified in the contract.
In the case of deposit and interest not exceeding ` 20,000, the deposit insurance contract shall provide for payment
of the full amount of the deposit and interest.
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In the case of deposit and the interest in excess of ` 20,000, the deposit insurance contract shall provide for
payment of an amount not less than ` 20,000 for each depositor.
(3) The amount of insurance premium on deposits shall be borne by the company and shall not be recovered
from the depositors.
(4) If any default is made by the company in complying with the terms and conditions of the deposit insurance
contract which makes the insurance cover ineffective, the company shall either rectify the default immediately or
enter into a fresh contract within 30 days.
The amount of deposits covered under the deposit insurance contract and interest payable shall be repaid within
the next 15 days.
If a company does not repay the amount of deposits within said 15 days it shall pay 15% interest p.a. for the period
of delay and shall be treated as having defaulted and shall be liable to be punished in accordance with the
provisions of the Act.
Que. No. 25] What are the provisions made under the Companies (Acceptance of Deposit) Rules, 2014 for
"Creation of Security" for deposit accepted by the companies?
Ans.: Creation of Security [Rule 6]:
(1) Every company and every eligible company inviting secured deposits shall provide for security by way of a
charge on its assets as referred to in Schedule III excluding intangible assets of the company for the due repayment
of deposit and interest which shall not be less than the amount remaining unsecured by the deposit insurance. In
the case of deposits which are secured by the charge on the assets referred to in Schedule III excluding intangible
assets, the amount of such deposits and the interest payable shall not exceed the market value of such assets as
assessed by a registered valuer.
It is clarified that the company shall ensure that the total value of the security either by way of deposit insurance
or by way of charge or by both on company's assets shall not be less than the amount of deposits accepted and
the interest payable thereon.
It is also clarified that pending notification, valuation of stocks, shares, debentures, securities etc. shall be
conducted by an independent merchant banker who is registered with the SEBI or an independent Practicing CA
having a minimum experience of 10 years.
(2) The security (not being in the nature of a pledge) for deposits shall be created in favour of a trustee for the
depositors on:
(a) Specific movable property of the company, or
(b) Specific immovable property of the company wherever situated, or any interest therein.
Que. No. 26] Write a short note on: Appointment of deposit trustees
Ans.: Appointment of deposit trustees [Rule 7]: No company or any eligible company shall issue a circular or
advertisement inviting secured deposits unless the company has appointed one or more deposit trustees for
depositors for creating security for the deposits. A written consent shall be obtained from the deposit trustee
before their appointment and a statement shall appear in the circular or circular in the form of advertisement with
reasonable prominence to the effect that the deposit trustee have given their consent to the company to be so
appointed.
Execution of deposit trust deed before issuing advertisement: The company shall execute a deposit trust deed in
Form DPT-2 at leas` 7 days before issuing the circular or circular in the form of advertisement.
Certain persons not to be appointed as deposit trustees: Following person shall not be appointed as a trustee for
the deposit holders:
(a) Who is a director, KMP or any officer or employee of the company or of its holding, subsidiary or associate
company or a depositor in the company.
(b) Who is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such
holding company.
(c) Who has any material pecuniary relationship with the company.
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(d) Who has given guarantee in respect of principal debts secured by the deposits or interest.
(e) Who is related to any person specified in clause (a) above.
Removal of deposit trustees: No deposit trustee may be removed from office after the issue of circular or
advertisement and before the expiry of his term except with the consent of all the directors present at a meeting
of the board. In case the company is required to appoint independent directors, at least one independent director
shall be present in such meeting of the Board.
Que. No. 27] Write a short note on: Duties of Deposit Trustees
Ans.: Duties of Deposit Trustees [Rule 8]: It shall be the duty of every deposit trustee —
♦ To ensure that the assets and deposit insurance are sufficient to cover the repayment of the principal and
interest on deposits.
♦ To satisfy himself that the circular or advertisement inviting deposits does not contain any information which
is inconsistent with the deposit scheme or trust deed and is in compliance with the Rules and provisions of the Act.
♦ To ensure that the company does not commit any breach of covenants and provisions of the trust deed.
♦ To take reasonable steps to procure a remedy for any breach of covenants of the trust deed or the terms of
invitation of deposits.
♦ To take steps to call a meeting of deposit holders as and when such meeting is required to be held.
♦ To supervise the implement the conditions regarding creation of security for deposits and the terms of
deposit insurance.
♦ To do such acts as are necessary in the event the security becomes enforceable.
♦ To carry out acts necessary for the protection of the interest of depositors and to resolve their grievances.
Que. No. 28] Write a short note on: Meeting of depositors through deposit trustee
Ans.: Meeting of depositors through deposit trustee [Rule 9]: The meeting of all the depositors shall be called by
the deposit trustee on:
(1) Requisition in writing signed by at least l/10th of the depositors in value for the time being outstanding.
(2) The happening of any event, which constitutes a default or which in the opinion of the deposit trustee, affects
the interest of the depositors.
Que. No. 29] Write a short note on: Form of application for deposits Ans.: Form of application for deposits [Rule
10]:
(i) No company shall accept, or renew any deposit, whether secured or unsecured, unless an application in
prescribed form is submitted by the intending depositor.
(ii) The application shall contain a declaration by the intending depositor to the effect that the deposit is not
being made out of any money borrowed by him from any other person.
Que. No. 30] Write a short note on: Nomination
Ans.: Nomination [Rule 11]: A depositor may, at any time, make a nomination and the provisions of Section 72
shall apply to the nomination made under this Rule.
Que. No. 31] Write a short note on: Furnishing of deposit receipts to depositors.
A depositor had deposited some money in a cumulative scheme of an eligible non-banking non-financial
company registered under the provisions of the Companies Act, 2013, but he did not receive the fixed deposit
receipts until 42 days of the date of deposit. However he got it on 47th day. State with reasons whether an
infringement of law is involved in this case. CS (Inter) - June 2004 (6 Marks)
Ans.: Furnishing of deposit receipts to depositors [Rule 12]: Every company shall furnish to the depositor or his
agent a deposit receipt within a period of 2 weeks from the date of receipt of money or realization of cheques on
acceptance of a deposit.
Deposit receipt shall be signed by an officer of the company duly authorized by the Board in this behalf and shall
state
- Date of deposit,
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- Name and address of the depositor,
- Amount received by the company as deposit,
- Rate and periodicity of interest payable
- Date on which the deposit is repayable.
Que. No. 32] Write a short note on: Maintenance of liquid assets and creation of Deposit Repayment Reserve
Account
Ans.: Maintenance of liquid assets and creation of Deposit Repayment Reserve A/c [Rule 13]: The company
should deposit on or before the 30th day of April each year, such sum which shall not be less than 20% of the
amount of its deposits maturing during the following financial year in any scheduled bank.
The amount so deposited shall not be utilized for any purpose other than for the repayment of deposits.
The amount remaining deposited shall not at any time fall below 15% of the amount of deposits maturing, until
the end of the current financial year and the next financial year.
Que. No. 33] State the requirements relating to keeping of "register of deposits" under the Companies
(Acceptance of Deposit) Rules, 2014.
Ans.: Registers of deposits [Rule 14]:
(1) Every company accepting deposits shall keep at its registered office registers for deposits accepted or
renewed. Following particulars are required to be entered in such deposit register:
- Name, address and PAN of the depositors
- Particulars of guardian, in case of a minor
- Particulars of the nominee
- Deposit receipt number
- Date and amount of each deposit
- Duration of the deposit and the date on which each deposit is repayable
- Rate of interest
- Due dates for payment of interest
- Mandate and instructions for payment of interest and for non-deduction of tax at source, if any
- Date or dates on which payment of interest will be made
- Details of deposit insurance including extent of deposit insurance
- Particulars of other security/ charge created
- Any other particulars relating to the deposit;
(2) Entries in the register shall be made within 7 days from the date of issuance of the deposit receipt. Such
entries shall be authenticated by a director or Company Secretary of the company or by any other authorized
officer.
(3) The register shall be preserved in good order for a period of not less than 8 years from the financial year in
which the latest entry is made in the register.
Que. No. 34] What are the provisions of the Companies (Acceptance of Deposit) Rules, 2014 for premature
repayment of deposits? CS (Inter) - Dec 2000 (5 Marks), Dec 2003 (6 Marks)
Shine Well Ltd. has accepted deposits from the public under the Companies (Acceptance of Deposits) Rules,
2014. The company now decided to repay some of its deposits before maturity. Can the company do so? If yes,
what are the conditions attached there to? CS (Executive) - June 2011 (4 Marks)
Ans.: General provisions regarding premature repayment of deposits [Rule 15]: When a company makes a
repayment of deposits, on the request of the depositor, after the expiry of a period of 6 months from the date of
such deposit, the rate of interest payable on such deposit shall be reduced by 1%.
When a depositor is permitted to renew his deposit, before the expiry of the period for which deposit was accepted
by the company, for availing of a higher rate of interest, the company shall pay interest to depositor at the higher
152
rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than
the unexpired period of the deposit.
Where the period for which the deposit had run contains any part of a year, then, if such part is less than 6 months,
it shall be excluded and if such part is 6 months or more, it shall be reckoned as one year.
Que. No. 35] You company has accepted the deposits of ` 50,45,000. Advise the Managing Director of your
company regarding filing of return of deposits?
Ans.: Return of deposits to be filed with the Registrar [Rule 16]: Every company shall on or before the 30th day
of June, of every year,.file with the Registrar, a return in Form DPT-3 along with the prescribed fee and furnish the
information contained therein as on the 31st day of March of that year duly audited by the auditor of the company.
Que. No. 36] What types of disclosures are required to be made in financial statement regarding acceptance of
deposit by the companies?
Ans.: Disclosures in the financial statement [Rule 16A]: Every company, other than a private company, shall
disclose in its financial statement, by way of notes, about the money received from the director.
Every private company shall disclose in its financial statement, by way of notes, about the money received from
the directors, or relatives of directors.
Que. No. 37] Write a short note on: Penal rate of interest
Ans.: Penal rate of interest [Rule 17]: Every company shall pay a penal rate of interest of 18% p.a. for the overdue
period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.
Que. No. 38] Sun-beam Ltd. failed to pay interest on repayment of deposits. One depositor approached the
consumer forum with the request to issue order against the company for payment of interest on deposits. The
company contended that the consumer forum was not a proper authority to issue such directions. Advise the
company suitably. CS (Executive) - Dec 2014 (8 Marks)
Ans.: In Neela Raje v. Amogh Industries RP No. 409 of the 1992 dated 26.8.1993, 840 12 CLA 90 (NCDRC), the
National Commission was faced with a query as to whether a complaint lodged in regard to the failure to pay
interest on repayment of the principal amount on the maturity of a deposit by a company could be entertained by
a consumer forum.
The commission pointed out that after the Amendment Act, 1993, a consumer forum can direct payment of
amounts due to a depositor under the provisions of Section 14 of the Consumer Protection Act, 1986.
Thus, the contention of Sun-beam Ltd. is not valid.
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CHAPTER
10
CREATION & REGISTRATION OF
CHARGES
Note: In this chapter, unless otherwise stated 'Rule' means the Companies (Registration of Charges) Rules,'2014.
MEANING & KINDS OF CHARGES
Que. No. 1] Define the term 'Charge' and also explain the punishment for default with respect to registration of
charge as per the provisions of the Companies Act, 2013?
A charge becomes void against the liquidator and creditors if the particulars thereof are not filed for registration.
What are the consequences of non-registration of a charge which requires registration under Section 77?
Ans.: Charge [Section 2(16)]: Charge means an interest or lien created on the property or assets of a company or
any of its undertakings or both as security and includes a mortgage.
A charge is a security given for loans obtained.
Normally, the debentures and other borrowings of the company are secured by a charge on the assets of the
company. Where property, both existing and future, is agreed to be made available as a security for the repayment
of debt and creditors have a present right to have it made available, there is a charge created.
Consequences of non-registration of a charge: Following are the consequences of non-registration of charges:
(1) The charge will be void as against the liquidator if the company goes into liquidation and against creditors,
but against them only. In other words unregistered charge shall not be taken into account by the liquidator.
(2) The charge is good against the company and the amount becomes payable immediately.
(3) Until liquidation, the person seeking to enforce such a charge, has available to him all remedies of a mortgage
against the company, though not against other creditors.
(4) Subsequent charge holder gets better title if the charge is not registered.
(5) During liquidation the charge-holder (creditor) assumes the status of an unsecured creditor, as the charge is
void against liquidator and creditors.
(6) The charge-holder (creditor) has no lien on the title deeds or documents deposited with him as the deposit
is only ancillary to the void charge.
(7) Although a security becomes void by non-registration, it does not affect the contract or obligation of the
company to repay the money thereby secured. In fact, Section 77 provides that where a charge becomes void by
non-registration, the money becomes immediately payable and the company cannot repudiate it on the ground of
non-registration.
(8) Penalty for contravention [Section 86]: If any company contravenes any provision relating to 'creation &
registration of charges' -
(a) The company shall be punishable with fine which shall not be less than ` 1,00,000 but which may extend to `
10,00,000 and
(b) Every officer of the company who is in default shall be punishable -
- with imprisonment for a term which may extend to 6 months or
- with fine which shall not be less than ` 25,000 but which may extend to ` 1,00,000 or
- with both.
Que. No. 2] Write a short note on: Kinds of Charges
A specific charge is one that without more, fastens on ascertained and definite property capable of b eing
ascertained and defined. Comment. CS (Inter) - June 2000 (5 Marks)
154
Ans.: A charge on the property of the company as security for debts may be of the following:
(1) Fixed or Specific Charge: A charge is fixed or specific when it is made specifically to cover assets which are
ascertained and definite or are capable of being ascertained and defined, at the time of creating charge e.g., land,
building, or heavy machinery.
A fixed charge is against security of certain specific property, and the company loses its right to dispose off that
property as unencumbered. In other words, the company can deal with such property, subject to the charge so
that the charge holder gets priority over all subsequent transferees except a bona fide transferee for consideration
without notice of the earlier charge.
(2) Floating Charge: A floating charge is not attached to any definite property but covers property of a
fluctuating type e.g., stock-in-trade. A floating charge is a charge on a class of assets present and future which in
the ordinary course of business is changing from time to time and leaves the company free to deal with the
property as it sees fit until the holders of charge take steps to enforce their security.
The advantage of a floating charge is that the company may continue to deal in any way with the property which
has been charged. The company may sell, mortgage or lease such property in ordinary course of its business if it is
authorized by its MOA.
Que. No. 3] What is 'floating charge'? When does it crystallize? What is effect of crystallization of a floating
charge? CS (Inter) - Dec 2004 (5 Marks)
CS (Executive) - June 2014 (4 Marks) CS (Executive) - Dec 2015 (4 Marks)
Ans.: A floating charge attaches to the company's property generally and remains dormant till it crystallizes or
becomes fixed. The company has a right to carry on its business with the help of assets having a floating charge till
the happening of some event which determines this right.
In certain cases like default, liquidation etc. the lender can take physical possession of the assets and realize his
dues by selling the current assets, without the intervention of the Court. This is termed as 'crystallization of charge'.
A floating charge crystallizes and the security becomes fixed in the following cases:
(1) When the company goes into liquidation.
(2) When the company ceases to carry on the business.
(3) When the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver
to take possession of the property charged.
(4) On the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed or to have crystallized. Until the charge
crystallizes or attaches or becomes fixed the company can deal with the property so charged in any manner it likes.
Effect of crystallization of a floating charge: On crystallization, the floating charge converts itself into a fixed charge
on the property of the company. It has priority over any subsequent equitable charge and other unsecured
creditors. But preferential creditors who have priority for payment over secured creditors in the winding-up get
priority over the claims of the debenture holders having floating charge.
Ans.: A floating charge remains afloat until a winding up commences, unless it has already crystallized through the
intervention of the debenture holders or the creditors. Also, a floating charge is valid only against the unsecured
creditors, whether in a winding-up or otherwise. But the Act prevents an unsecured creditor to get priority over
the other creditors by obtaining a floating charge when he learns that the company's liquidation is imminent.
Effect of floating charge [Section 332]: A floating charge on the undertakings or property of the company, which
is created within 12 months before the commencement of the winding-up proceedings shall be invalid, unless it is
proved that the company was solvent immediately after the creation of the charge. However, the charge will be
valid to the extent of the amount of any cash paid to the company at the time of or after the creation of the charge,
together with interest a` 5% p.a. or such other rate as may be notified by the Central Government.
In simple words, any floating charge created on the assets of the company within 12 months prior to winding-up
will be valid only to the extent of money advanced, plus 5% interest.
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Que. No. 5] A company can mortgage or charge any part of its 'reserve capital'. Comment.
Ans.: A company does not have implied power of charging its uncalled share capital and a company may charge its
uncalled capital if its MOA or AOA authorize it to charge it. The memorandum may give an express power to charge
uncalled capital, or the power may be so wide that it can be inferred by implication.
In Newton v. Debenture holders of Anglo-Australian Investment Co. (1895) A.C. 224, the memorandum authorized
the company to borrow upon any security of the company. It was held that the power was wide enough to include
a charge on uncalled capital. However, a company cannot mortgage or charge any part of its "reserve capital", i.e.,
such portion of its uncalled capital as is incapable of being called up except in the event of winding- up of the
company.
■ ■■ REGISTRATION OF CHARGES
Que. No. 6] State the provision regarding registration and modification of charges.
What are the charges that would be void against the liquidator and creditors unless registered?
It is basically duty of the company to effect the registration of charge. Examine.
Ans.: Duty to register charges [Section 77]: It shall be the duty of every company creating a charge within or outside
India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside
India, to register the particulars of the charge signed by the company and the charge-holder together with the
instruments, if any, creating such charge in prescribed form, on payment of prescribed fees with the ROC within
30 days of its creation. In simple words the charge has to be registered with ROC within 30 days of its creation.
Registration of creation or modification of charge [Rule 3]:
(1) For registration of charge, the particulars of the charge together with a copy of the instrument, if any,
creating or modifying the charge in Form CHG-1 (for other than debentures) or Form CHG-9 (for debentures
including rectification), duly signed by the company and the charge-holder shall be filed with the ROC within a
period of 30 days of the date of creation or modification of charge along with the prescribed fee.
(2) If the particulars of a charge are not filed within the aforesaid period, but filed within a period of 300 days
of the date of such creation or modification, the additional fee shall be levied.
(3) If the company fails to register the particulars of the charge within the period of 30 days, charge-holder (i.e.
lender) can file the Form No. CHG. 1 or Form No. CHG. 9, as the case may be with the ROC.
Certificate of registration [Rule 6]:
(1) Where a charge is registered with the Registrar, he shall issue a certificate of registration of such charge in
Form CHG-2.
(2) Where the particulars of modification of charge is registered, the Registrar shall issue a certificate of
modification of charge in Form CHG-3.
(3) The certificate issued by the Registrar shall be conclusive evidence that the requirements of as to registration
of creation or modification of charge, as the case may be, have been complied with.
Condonation of delay by Registrar [Rule 4]: The Registrar may, on being satisfied that the company had sufficient
cause for not filing the particulars and instrument of charge within a period of 30 days of the date of creation of
the charge, allow the registration of the same after 30 days but within a period of 300 days of the date of such
creation of charge or modification of charge on payment of additional fee.
The application for delay shall be made in Form CHG-10 and supported by a declaration from the company signed
by its secretary or director that such belated filing shall not adversely affect rights of any other intervening creditors
of the company.
Condonation of delay and rectification of register of charges [Section 87] & [Rule 12]:
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(1) Where the instrument creating or modifying a charge is not filed within a period of 300 days from the date
of its creation (including acquisition of a property subject to a charge) or modification and where the satisfaction
of the charge is not filed within 300 days from the date on which such payment of satisfaction, the Registrar shall
not register the same unless the delay is condoned by the Central Government.
(2) The application for condonation of delay shall be filed with the Central Government in Form CHG-8 along
with the fee.
(3) The order passed by the Central Government shall be required to be filed with the ROC in Form INC-28 along
with the fee.
Que. No. 7] XYZ Ltd. realized on 3rd June, 2016 that particulars of a charge created on 11th September, 2015 in
favour of a bank were not filed with the ROC for registration. What procedure should the company follow to get
the charge registered with the ROC? Would the procedure be different if the charge was created on 1st August,
2015 instead of 11th September, 2015. Explain with reference to the relevant provisions of the Companies Act,
2013.
Ans.: As per Section 77, every charge which requires registration must be registered within 30 days of its creation.
However, as per Rule 3 of the Companies (Registration of Charges) Rules, 2014, the Registrar may on an
application by the company allow registration of charge within 300 days of creation or modification of charge on
payment of additional fee.
As per Section 87 read with Rule 12, if company fails to register the charge even within this period of 300 days, it
may seek extension of from the Central Government. The application for condonation of delay shall be filed with
the Central Government in Form CHG-8 along with the fee. The order passed by the Central Government shall be
required to be filed with the Registrar in Form INC-28 along with the prescribed fees.
In given case XYZ Ltd. created charge on 11.9.2015, so it should have been get charge registered within 30 days
that is on or before 11.10.2015; beyond this date but up to 300 days from the date of creation of charge i.e. on or
before 8.7.2016, charge can be registered on payment of additional fees.
If the charge was created on 5.8.2015 instead of 11.9.2015 then up to 3.6.2016,300 days expires and as per Section
87 the company may seek extension from the Central Government. The application for condonation of delay shall
be filed with the Central Government in Form CHG-8 along with the fee. The order passed by the Central
Government shall be required to be filed with the Registrar in Form INC-28 along with the prescribed fees.
Que. No. 8] Rose Ltd. raised a loan from a State Financial Institution by creating hypothecation of book debts
and also future debts of the company. Incidentally, the charge was not registered with the Registrar of
Companies concerned. State financial institution demanded a certificate of registration of charge for the amount
of loan so granted by it. The directors of the company replied to the State Financial Institution that the charge
need not be registered for hypothecation of book debts. Is the action of the directors valid? Give reasons. CS
(Executive) - Dec 2014 (4 Marks)
Ans.: Charge [Section 2(16)]: Charge means an interest or lien created on the property or assets of a company or
any of its undertakings or both as security and includes a mortgage. Thus, raising a loan from a State Financial
Institution by creating hypothecation of book debts and also future debts of the company amount to charge within
the meaning of Section 2(16) and such charge must be registered as per Section 77 in Form CHG-1.
Thus, contention of directors of Rose Ltd. is incorrect and not acceptable. If Rose Ltd. fails to register the charge,
State Financial Institution can get it registered as per Section 78.
Que. No. 9] A company created a charge on its assets in favour of Laxmi Bank Ltd. on 1st October, 2019. This
charge was filed with the ROC on 10th October, 2019. The ROC issued certificate of registration of charge on
15th October, 2019. The same company also created charge on the same assets in favour of Saraswati Bank Ltd.
on 9th October, 2019 and filed the charge with the ROC on 10th October, 2019. The ROC issued certificate of
registration of charge on 12th October, 2019. Which bank will have priority in recovering its dues by disposing
the assets? CS (Final) - June 2002 (4 Marks)
Ans.: For given case following two principal should be noted:
- A registered charge has priority over un-registered charge and
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- When charge is registered it becomes effective from the date of creation of charge and not from the date of
registration.
Since, charge in favour of Saraswati Bank Ltd. was registered first on 12.10.2019 it gets priority and is effective
from the date of creation i.e. 9.10.2019.
However, charge in favour of Laxmi Bank Ltd. was registered on 15.10.2019 and it become effective from the date
of creation i.e. 1.10.2019.
Considering above views, it can be said that Laxmi Bank Ltd. will have priority in recovering its dues by disposing
the assets.
Que. No. 10] While sanctioning working capital limit, the rate of interest has been fixed at a specified percentage
above the bank rate as notified by the RBI. There was a change in the interest rate due to RBI notification issued
later. The bank insisted on filing a return of modification of charges. Is the stand of the bank correct? Discuss
with reasons. CS (Inter) - June 2005 (5 Marks)
Ans.: Whenever the terms or conditions, or the extent or operation, of any charge registered are or is modified, it
shall be the duty of the company to send to the ROC the particulars of such modification within 30 days. For
registration of modification of charges Form CHG-1 has to be filed.
In the light of this provision the changes in the rate of interest constitutes modification, therefore, the stand of
bank is correct.
Que. No. 11] XYZ Limited has office building in London. The company has been granted a term loan of ` 15 Crore
from a Bank. The company wants to mortgage office building of London.
Examining the provisions of the Companies Act, 2013, answer the following:
(i) Whether the company can mortgage the above office building?
(ii) Whether a charge can be created for property situated outside India?
Ans.: As per Section 179(3), the board of directors of company can exercise borrowing power. Thus, XYZ Ltd. can
mortgage its office building in London and can avail borrowings.
As per Section 77, every company creating a charge shall register the particulars of charge signed by the company
and its charge holder together with the instruments creating charge.
Any charge created within or outside India on property or assets or any of the company's undertakings whether
tangible or otherwise, situated in or outside India shall be registered.
Hence, all types of charges are required to be registered under the Companies Act, 2013 whether created within
or outside India.
Que. No. 12] Can charge holder make application when company fails to register a charge?
Ans.: Application for registration of charge by charge holder [Section 78] & [Rule 3(3)]: If the company fails to
register the particulars of the charge within the period of 30 days, charge-holder (i.e. lender) can file the Form
CHG-1 or Form CHG-9, as the case may be with the ROC.
The Registrar may, on such application, give notice to the company about such application. The company may
either itself register the charge or shows sufficient cause why such charge should not be registered.
On failure on part of the company, the Registrar may allow registration of such charge within 14 days after giving
notice to the company. Where registration is affected on application of the person in whose favour the charge is
created, that person shall be entitled to recover from the company, the amount of any fee or additional fees paid
by him to the Registrar for the purpose of registration of charge.
Que. No. 13] Write a short note on: Purchase or acquisition of a property subject to charge
Ans.: The requirement of registering the charge shall also apply to a company acquiring any property subject to
charge or any modification in terms and conditions of any charge already registered.
Purchase or acquisition of a property subject to charge [Section 79]: The provisions of Section 77 relating to
registration of charge shall apply to:
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(a) A company acquiring any property subject to a charge or
(b) Any modification in the terms or conditions or the extent or operation of any charge registered.
The provisions relating to condonation of delay shall apply, mutatis mutandis, to the registration of charge on any
property acquired subject to such charge and modification of charge.
Que. No. 14] Write a short note on: Verification of instruments
Ans.: According Rule 3(4) of the Companies (Registration of Charges) Rules, 2014, a copy of every instrument
evidencing any creation or modification of charge and required to be filed with the Registrar in pursuance of
Section 77, 78 or 79 shall be verified as follows-
(a) Where the instrument or deed relates solely to the property situated outside India, the copy shall be verified
by a certificate issued either under the seal of the company, or under the hand of any director or Company
Secretary of the company or an authorized officer of the charge holder or under the hand of some person other
than the company who is interested in the mortgage or charge;
(b) Where the instrument or deed relates, whether wholly or partly, to the property situated in India, the copy
shall be verified by a certificate issued under the hand of any director or company secretary of the company or an
authorized officer of the charge holder.
Que. No. 15] Write a short note on: Satisfaction of Charges
A delay in filling of memorandum of satisfaction of charge cannot be condoned by the Registrar of Companies.
Comment. CS (Inter) - June 2004 (4 Marks)
Ans.: Company to report satisfaction of charge [Section 82] & [Rule 8]: The company shall give intimation to the
Registrar of the payment or satisfaction in full of any charge within a period of 30 days from the date of such
payment or satisfaction in Form CHG-4 along with the fee.
The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or
satisfaction to be made within a period of 300 days of such payment or satisfaction on payment of such additional
fees as may be prescribed.
Where the Registrar enters a memorandum of satisfaction of, he shall issue a certificate of registration of
satisfaction of charge in Form CHG-5.
Where the satisfaction of the charge is not filed within 300 days, the Registrar shall not register the same unless
the delay is condoned by the Central Government.
On receipt of such intimation, the Registrar shall issue a notice to the holder of the charge calling a show cause
within such time not exceeding 14 days, as to why payment or satisfaction in full should not be recorded as
intimated to the Registrar. If no cause is shown by charge holder, the Registrar shall order that a memorandum of
satisfaction shall be entered in the register of charges and shall inform the company.
If the cause is shown to the registrar, he shall record a note to that effect in the register of charges and shall inform
the company accordingly.
Power of registrar to make entries of satisfaction in absence of intimation from the company [Section 83]:
There may be times where a company may fail to send intimation of satisfaction of charge to the Registrar but
registrar may on receipt of satisfactory evidence of satisfaction register memorandum of satisfaction. The
evidences may be -
(a) The debt for which the charge was given has been paid or satisfied in whole or in part or (b) Part of the property
or undertaking charged has been released from the charge or
(c) Part of the property or undertaking ceased to form part of the company's property or undertaking. The
Registrar may enter in the register of charges a memorandum of satisfaction.
The Registrar shall inform affected parties within thirty days of making the entry in the registrar of charges.
Que. No. 16] A company filed Form CHG-4 duly signed by both the bank and company's authorized personnel
for the satisfaction of charges based on the bank's letter issued one week after the date of payment of charge
(loan) but within 30 days from this payment date. The Registrar of Companies insisted that the letter of the bank
for accepting the satisfaction of charge be filed with Form No. CHG- 4 and also insisted on issue of notice to the
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holder of the charge, i.e., the bank. He also decided that the date of filing should be computed from the date of
bank's letter. Discuss the correctness of his views.
Ans.: Section 82 requires that the company shall give intimation to the Registrar of the payment or satisfaction in
full, of any charge relating to the company within 30 days from the date of such payment or satisfaction. The
company shall intimate satisfaction of the charge in Form CHG-4 accompanied by appropriate fees.
In given case, the Registrar need not insist on the company to file a letter of bank or financial institution in support
of Form CHG-4.
The satisfaction of charge is to be filed within 30 days from the date of satisfaction of charge and not from the
issue of bank letter.
Que. No. 17] Write a short note on: Notice of Charge
Ans.: Date of notice of charge [Section 80]: Where any charge on any property or assets of a company or any of
its undertakings is registered under section 77, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such
registration.
The section clarifies that if any person acquires a property, assets or undertaking for which a charge is already
registered, it would be deemed that he has complete knowledge of charge from the date the charge is registered.
Que. No. 18] Write a short note on: Register of charges maintained in ROC's office
Ans.: Register of charges to be kept by Registrar [Section 81] & [Rule 7]: The Registrar of Companies shall maintain
a register containing particulars of the charges registered in respect of every company. The particulars of charges
maintained on the Ministry of Corporate Affairs portal (www.mca.gov.in/MCA21) shall be deemed to be the
register of charges for the purposes of section 81 of the Act.
This charge register shall be open to inspection by any person on payment of fee for each inspection.
Que. No. 19J Write a short note on: Intimation of appointment of receiver or manager
Ans.: Intimation of appointment of receiver or manager [Section 84]: If any person obtains an order for the
appointment of a receiver of, or of a person to manage, the property, subject to a charge, of a company or if any
person appoints such receiver or person under any power contained in any instrument, he shall, within a period of
thirty days from the date of the passing of the order or of the making of the appointment, give notice
of such appointment to the company and the Registrar along with a copy of the order or instrument and the
Registrar shall, on payment of the prescribed fees, register particulars of the receiver, person or instrument in the
register of charges.
Any person so appointed shall, on ceasing to hold such appointment, give to the company and the Registrar a
notice to that effect and the Registrar shall register such notice.
As per Rule 9 the notice of appointment or cessation of a receiver of, or of a person to manage, the property,
subject to charge, of a company shall be filed with the ROC in Form CHG-6 along with fee.
Que. No. 20] Write a short note on: Company's Register of Charges
Explain the provision relating to inspection of copies of the instrument creating charges and the register of
maintained by the company. CS (Inter) - Dec 1999 (6 Marks)
Ans.: Company's Register of Charges [Section 85] & [Rule 10]:
(1) Every company shall keep at its registered office a register of charges in Form CHG-7 which shall include
therein all charges and floating charges affecting any property or assets of the company or any of its undertakings,
indicating in each case such particulars as may be prescribed.
(2) The entries in the register of charges maintained by the company shall be made forthwith after the creation,
modification or satisfaction of charge, as the case may be.
(3) Such register of charges shall contain the particulars of all the charges registered with the Registrar on any
of the property, assets or undertaking of the company and the particulars of any property acquired subject to a
charge as well as particulars of any modification of a charge and satisfaction of charge.
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(4) All the entries in the register shall be authenticated by a director or the secretary of the company or any
other person authorized by the Board for the purpose.
(5) The register of charges shall be preserved permanently and the instrument creating a charge or
modification thereon shall be preserved for a period of 8 years from the date of satisfaction of charge by the
company.
(6) A copy of the instrument creating the charge shall also be kept at the registered office of the company along
with the register of charges.
Inspection of Charges: The register of charges and instrument of charges shall be kept open for inspection during
business hou rs by members, creditors or any other person subject to reasonable restriction as the company by its
article impose. The register of charges and the instrument of charges kept by the company shall be open for
inspection-
(a) by any member or creditor of the company without fees
(b) by any other person on payment of prescribed fee.
Que. No. 21] Distinguish between: Mortgage and Charge
Ans.: Following are main points of distinction between mortgage & charge:
Points Mortgage Charge
Meaning A mortgage is the transfer of an interest in Although in a charge, the property is made a
specific immovable property for the purpose of security for the payment of the loan, yet the
securing payment of money advanced. transaction does not amount to mortgage.
Transfer of In mortgage there is transfer of interest in the In charge there is no transfer of any interest in
interest property. the property.
Created A mortgage can only be created by act of A charge may be created by act of parties or by,
parties. operation of law.
Registration A mortgage deed must be registered and A charge need not be made in writing, and if
attested by two witnesses. reduced to writing, it need not be attested or
registered.
Foreclosure In certain types of mortgage the mortgagee The charge-holder cannot foreclose though he
can foreclose the mortgaged property. can get the property sold as in a simple
mortgage.
Points Mortgage Charge
Personal In a mortgage, there can be security as well as In a charge the remedy of the charge-holder is
liability personal liability. against the property only.
Que. No. 22] Distinguish between: 'Notice of charge' & 'satisfaction of charge'
Ans.: Following are main points of distinction between notice of charge & satisfaction of charge:
Points Notice of charge Satisfaction of charge
Meaning When company taken a loan against some of When company repays a loan and relives the
the property of the company, giving it as security against which loan was raised then
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security then company is required to notify the company is required to notify the ROC. Such
ROC. Such intimation to ROC is known, as intimation to ROC is known as notice of
notice of charge. satisfaction of charge.
Form for notice For registration of charge, the particulars of the The company shall give intimation to the
charge together with a copy of the instrument, Registrar of the payment or satisfaction in full
if any, creating or modifying the charge in Form of any charge within a period of 30 days from
CHG-1 (for other than debentures) or Form the date of such payment or satisfaction in
CHG-9 (for debentures including rectification), Form CHG-4 along with the fee.
duly signed by the company and the charge-
holder shall be filed with the ROC within a
period of 30 days of the date of creation or
modification of charge along with the
prescribed fee.
Certificate of Where a charge is registered with the Where the Registrar enters a memorandum of
registration Registrar, he shall issue a certificate of satisfaction of, he shall issue a certificate of
registration of such charge in Form CHG-2. registration of satisfaction of charge
Where the particulars of' modification of inFormCHG-5.
charge is registered, the Registrar shall issue a
certificate of modification of charge in Form
CHG-3.
Summary of various Forms relating to 'Charge':
From CHG-1 Registration of charge creating or modifying for other than Debentures.
From CHG-2 Issue of certificate of registration of charge by ROC.
From CHG-3 Issue of certificate of registration of modification of charge by ROC.
From CHG-4 Intimation to ROC for satisfaction of charge.
From CHG-5 Certificate of registration of satisfaction of charge.
From CHG-6 Notice of appointment or cessation of a receiver by company to ROC.
From CHG-7 Register of charges to be kept by company.
From CHG-8 The application for condonation of delay to the Central Government.
From CHG-9 Registration of charge creating or modifying for debentures including rectification.
From CHG-10 The application to ROC for delay in registration of charges beyond 30 days from the date of
creation of charges but up to 300 days.
From CHG-28 The order passed by the Central Government for condonation of delay to be filed with ROC.
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CHAPTER
11
DIVISIBLE PROFITS & DIVIDENDS
■ ■■ DIVIDEND
Que. No. 1] Define the term 'dividend'. CS (Inter) - June 1999 (2 Marks)
Ans.: Dividend [Section 2(35)]: Dividend includes any interim dividend.
Thus, all the provisions that are applicable to final dividend are also applicable to interim dividend. Dividend is the
return on the share capital subscribed for and paid to a company by its shareholders.
Payment of dividend in proportion to amount paid-up [Section 51]: A company may, if so authorized by its articles,
pay dividends in proportion to the amount paid-up on each share.
As per Regulation 83 of Table F, dividend can be paid on the paid-up value of shares. Dividend cannot be paid on
calls-in-advance.
Que. No. 2] Write a short note on: Types of Dividend
Write a short note on: Interim Dividend CS (Inter) - Dec 2003 (4 Marks)
Ans.: Following are the various types on dividend:
(1) Final Dividend: Final dividend is recommended by the board of directors in its report to the shareholders,
which is attached to the balance sheet. It is declared by the shareholders at the AGM. Usually AOA of companies
provide that the shareholders cannot increase the rate or amount of dividend than the one recommended by the
Board. The shareholders may, however, declare the payment of dividend on equity shares at a rate lower than the
one recommended by the directors in their report.
It is the discretion of the board of directors to recommend or not to recommend the declaration of final dividend,
which has to be exercised in good faith in the interest of the company. The shareholders have no power to declare
final dividend in the absence of a recommendation of the board of directors in this regard.
(2) Interim Dividend: The interim dividend is paid in the middle of the year. A company can normally estimate
its profits for the current financial year on a fairly reasonable basis and in that event it can allocate to the reserves
the prescribed percentage of profits on the basis of its estimated profits. As a measure of precaution, the company
may allocate to the reserves a higher amount than the actual amount based on the prescribed percentage of its
estimated profits.
Interim dividend stands on the same footing as that of the final dividend. Both interim and final dividend when
declared become debt and are payable within 30 days of declaration.
Que. No. 3] Distinguish between: Dividend & Interest CS (Inter) - June 2006 (5 Marks)
Ans.: The following are the main points of distinction between dividend & interest:
Points Dividend Interest
Meaning Dividend is the return on the share capital Interest is the return on the debenture issued
subscribed for and paid to a company by its and deposit accepted by the company. The
shareholders. As per Section 2(35), "dividend term interest is not defined under the
includes any interim dividend." Companies Act, 2013.
Paid on Dividend is paid on preference and equity Interest is paid on debenture, deposit, bonds,
shares. long term borrowings and short term
borrowings.
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Rate Rate of dividend is variable in case of equity Interest rate is fixed normally at the time of
shares and on preference shares dividend is on issue and in case of loan at the time of
fixed rate. agreement.
Debt A dividend becomes a debt only after it has Interest becomes debts on the expiry of fixed
been declared by the company. period which may monthly, quarterly or yearly.
Divisible profit Dividend can be paid only when there is Interest has to be paid whether there is
divisible profit. divisible profit or not.
Treatment in Dividend is an appropriation of profits. Interest is a charge on profits.

accounts
Que. No. 4] Write a short note on: Dividend on Preference Shares

Ans.: A preference share carries a preferential right as to dividend in accordance with the term of issue and the
articles of association, subject to the availability of distributable profits. The preferential right to a dividend could
either be a fixed amount or an amount calculated at a fixed rate. It may be cumulative or non-cumulative.
Preference shares can carry dividend of a fixed amount, before any dividend is paid on the equity shares.
Preference shares are part of the company's share capital, consequently, preference dividends can be paid only if
the company has earned sufficient profits. A dividend becomes payable to the shareholders only when it is declared
in the manner laid down in the Act and by the company's articles. There should have been a formal declaration.
Preference shareholders are not entitled to treat the preference dividend as a debt and sue for its payment.
However, if the articles specify that the company's profit shall be applied, by way of payment of the preference
dividend, the preference shareholder can sue for it even though it has not been declared.
Que. No. 5] Write a short note on: Divisible Profits CS (Executive) - Dec 2011 (4 Marks)
Ans.: Divisible profit means the profits which the law allows the company to distribute to the shareholders by way
of dividend. "Profits available for dividend" has been held to mean the profits which the directors consider should
be distributed after making provision for depreciation or past losses, for reserves or for other purposes.
Que. No. 6] Write a short note on: Sources of dividend
What provisions and rules are to be observed by company before declaring dividend?
Dividend can be paid out of capital, if the articles of association authorize such payment. Comment.
Ans.: Dividend cannot be paid out of capital, even if the AOA authorize such payment.
Sources of dividend [Section 123(1)]: A company can pay dividend form the following sources:
(1) Dividend out of current profits: A company can pay dividend out of the profits of the company for that year
arrived at after providing for depreciation as per Section 123(2).
In computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any
change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall
be excluded.
(2) Dividend out of profits of previous financial years: A company can pay dividend out of profits for any
previous financial years after providing for depreciation and remaining undistributed.
(3) Dividend out of money provided by the Central or State Government: A company can pay dividend out of
money provided by the Central or State Government for the payment of dividend by the company in pursuance of
a guarantee given by that Government.
Dividend can be declared out of free reserve only: No dividend shall be declared or paid by a company from its
reserves other than free reserves.
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Prohibition on declaration of dividend [Section 123(6)]: If a company fails to comply with the provisions of Section
73 (Prohibition of acceptance of deposits from public) & Section 74 (Repayment of deposits, etc., accepted before
the commencement of this Act) shall not declare any dividend on its equity shares so long as such failure continues.
Que. No. 7] The Board of Directors of ABC Ltd. proposes to declare dividend at the rate of 20% to the equity
shareholders, despite the fact that the company has defaulted in repayment of public deposits accepted before
the commencement of Companies Act, 2013. Comment. CA (Final) - May 2015 (3 Marks)
Ans.: Section 123(6) specifically provides that a company which fails to comply with the provisions of Section 73
(Prohibition of acceptance of deposits from public) and Section 74 (Repayment of deposits, etc., accepted before
the commencement of this Act) shall not, so long as such failure continues, declare any dividend on its equity
shares.
In the given instance, the Board of Directors of ABC Ltd. proposes to declare dividend at the rate of 20% to the
equity shareholders; in spite of the fact that the company has defaulted in repayment of public deposits accepted
before the commencement of the Companies Act, 2013. So, according to the above provision, declaration of
dividend by the ABC Ltd. is not valid.
Que. No. 8] Outline the provisions with regard to transfer of profits to reserves which should be borne in mind
at the time of declaration of dividend by a company. CS (Inter) - Dec 2006 (4 Marks)
Ans.: Transfer to reserve [First proviso to Section 128(1)]: A company may, before the declaration of any dividend
in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to
the reserves of the company.
Que. No. 9] Can dividend can be declared without providing depreciation? Whether it is necessary to set off
previous losses and depreciation before declaration of dividend? CS (Inter) - June 2006 (8 Marks)
Ans.: Depreciation [Section 128(2)]: For the purposes of Section 123(l)(a), depreciation shall be provided in
accordance with the provisions of Schedule II.
Dividend cannot be declared unless previous losses and depreciation are set off [Fourth proviso to Section
128(1)]: No company shall declare dividend unless carried over previous losses and depreciation not provided in
previous years are set off against profit of the company for the current year.
Que. No. 10] Board of Directors of AVB Ltd. wants to declare dividend ` 15 lakhs out of capital profits for the year
ended 31st March, 2017, without making a provisions for depreciation.
Referring to the provisions of the Companies Act, 2013, you being the Secretary of the Company advise the board
whether it can go ahead with its proposal? CS (Executive) - June 2017 (4 Marks)
Ans.: Dividend cannot be paid out of capital, even if the AOA authorize such payment.
As per Fourth Proviso to Section 128(1), no company shall declare dividend unless carried over previous losses and
depreciation not provided in previous years are set off against profit of the company for the current year.
Keeping in view above provisions, AVB Ltd. cannot declare dividend out of capital. It can declare dividend of current
profit or out of profits for any previous financial years after providing for depreciation.
Que. No. 11] Under Section 123(1), depreciation will have to be provided for working out distributable profit.
Though, the present value of land of a company, dealing with land, is much less than the book value, the
difference between the book value and market value was not amortized before declaring dividend. Discuss.
Ans.: As per Section 123 (1), dividend can be paid by a company out of the profits of the company for that year
after providing for depreciation as per Section 123(2). However the 'land' is not subject to depreciation hence
question adjusting difference between the book value and market value by way of amortization does not arise.
Ans.: Declaration of dividend out of reserve [Second proviso to Section 128(1)]: If due to inadequacy or absence
of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned
by it in previous years and transferred by the company to the free reserves, such declaration of dividend shall be
made except in accordance with such rules as may be prescribed in this behalf.
However, no company shall declare dividend unless carried over previous losses and depreciation not provided in
previous year(s) are set off against profit of the company for the current year.
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As per Rule 7 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or
absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the
following conditions:
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it
in the 3 years immediately preceding that year.
(2) The total amount to be drawn from such accumulated profits shall not exceed 1 / 10th of the sum of its paid-
up share capital and free reserves as appearing in the latest audited financial statement.
(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend
is declared before any dividend in respect of equity shares is declared.
(4) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
(5) No company shall declare dividend unless carried over previous losses and depreciation not provided in
previous year are set off against profit of the company of the current year the loss or depreciation, whichever is
less, in previous years is set off against the profit of the company for the year for which dividend is declared or
paid.
Free Reserves [Section 2(43)]: Free reserves means such reserves which, as per the latest audited balance sheet
of a company, are available for distribution as dividend. However, following shall not be treated as free reserves -
(i) any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a
reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and
loss account on measurement of the asset or the liability at fair value,
There is restriction on declaration of dividend out of reserves. Tliere is no restriction in distributing dividend out of
balance on profit & loss account i.e. undistributed profit of previous year.
Que. No. 13] Yash Ltd. has only one type of capital, viz. 40,000 equity shares of 1100 each. It also has got reserves
totaling ` 20,00,000. The company closes its books on 31st March each year. It has paid dividends @ 15% up to
2012-2013 and 20% thereafter. In 2015-2016, the company suffered a loss of ` 2,50,000; therefore, it wishes to
draw required amount out of the reserves to pay dividend at 12%. Advise the company.
Ans.: Dividends can be declared out of past years profits transferred to reserves. In this case, the company has to
comply with the Companies (Declaration of Dividend Out of Reserves) Rules, 2014. It lay down the following
conditions subject to which a dividend may be declared by a company in the event of inadequacy or absence of
profits in any year out of the profits earned by it in previous years and transferred to reserves.
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in
the 3 years immediately preceding that year.
Year Dividend Rate
2012-2013 15%
2013-2014 20%
2014-2015 20%
55%
Average rate of dividend = 55/3 = 18.33%

So, 18.33% dividend can be paid at first instance.
Amount required for dividend at 18.33% = 40,00,000 x 18.33% = 7,33,200.
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(2) The total amount to be drawn from such accumulated profits shall not exceed l/10th of the sum of its paid-
up share capital and free reserves as appearing in the latest audited financial statement.
l/10th of (Paid up capital + Free Reserve) = (40,00,000 + 20,00,000) x 1/10 = 6,00,000.
Thus, above amount in condition (1) will be restricted to ` 6,00,000.
(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend
is declared before any dividend in respect of equity shares is declared.
Total amount to be drawn from such accumulated profits 6,00,000
(-) Losses incurred (2,50,000)
(-) Preference dividend -
Amount that can be drawn from accumulated profits 3,50,000
So, rate of dividend = 3,50,000/40,00,000 x 100 = 8.75%

(4) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
Reserves 20,00,000
Amount that can be drawn from accumulated profits (3,50,000)
Balance of reserve 16,50,000
Paid up capital x 15% = 40,00,000 x 15% = 6,00,000

As balance of reserve i.e. 16,50,000 is more than 6,00,000. This condition is fulfilled.
So, rate of dividend can be 8.75%.
Que. No. 14] State the provisions of the Companies Act, 2013 relating to 'interim dividend'.
Ans.: Declaration of interim dividend [Section 123(3)]: The Board of Directors of a company may declare interim
dividend during any financial year or at any time during the period from closure of financial year till holding of AGM
- Out of the surplus in the profit and loss account or
- Out of profits of the financial year for which such interim dividend is sought to be declared or
- Out of profits generated in the financial year till the quarter preceding the date of declaration of the interim
dividend
Restriction on interim dividend in case of loss: In case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim
dividend shall not be declared at a rate higher than the average dividends declared by the company during the
immediately preceding 3 financial years.
Que. No. 15] WL Ltd. is facing loss in business during the current financial year 2015-2016. In the immediate
preceding 3 financial years, the company had declared dividend at the rate of 8%, 10% & 12% respectively. To
maintain the goodwill of the company, the Board of Directors has decided to declare 12% interim dividend for
the current financial year. Examine the applicable provisions of the Companies Act, 2013 and state whether the
Board of Directors can do so? CA (Final) - May 2015 (3 Marks)
Ans.: According to Section 123(3) in case the company has incurred loss during the current financial year up to the
end of quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not
be declared at a rate higher than the average dividends declared by the company during the immediately preceding
three financial years.
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In the immediate preceding three financial years, the company declared dividend at the rate of 8%, 10% & 12%. As
per the abovementioned provision, such interim dividend shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three financial years [i.e.
8+10+12=30/3=10%]. Therefore, decision of Board of Directors to declare 12% of the interim dividend for the
current financial year is not tenable.
Que. No. 16] Distinguish between: Interim Dividend & Final Dividend
Ans.: The following are the main points of distinction between interim & final dividend:
Points Interim Dividend Final Dividend
Meaning Dividend which is paid in the middle of the year Dividend which is recommended by the board
is known as interim dividend. of directors and approved by the shareholders
in AGM is known as final dividend.
Shareholder's Interim dividend can be declared by the board Final dividend is recommended by the board of
approval of directors and it does not required approval directors and must be approved by the
of the shareholder. shareholders.
Decrease in Since interim dividend does not require The shareholders cannot increase the rate of
rate approval of shareholders, rate of interim dividend than the one recommended by the
dividend cannot be decreased. Board. The shareholders may, however,
declare the payment of dividend on equity
shares at a rate lower than the one
recommended by the directors in their report.
Sources A company may declare interim dividend A company can pay final dividend form the
during any financial year out of the surplus in following sources:
the profit and loss account and out of profits of - out of current profits
the financial year in which such interim
- out of profits of previous financial years
dividend is sought to be declared.
- out of money provided by the Central or
State Government
Restriction in In case the company has incurred loss during If due to inadequacy or absence of profits in
case of loss the current financial year up to the end of the any financial year, any company proposes to
quarter immediately preceding the date of declare final dividend out of the accumulated
declaration of interim dividend, such interim profits earned by it in previous years and
dividend shall not be declared at a rate higher transferred by the company to the reserves,
than the average dividends declared by the such declaration of dividend shall be made as
company during the immediately preceding 3 per the Companies (Declaration & Payment of
financial years. Dividend) Rules, 2014.
Que. No. 17] Is company required to deposit the amount of dividend declared to separate account? Also state
to whom the dividend is payable?
Ans.: Deposit in a separate account of dividend after declaration [Section 123(4)]: The amount of the dividend,
including interim dividend, shall be deposited in a scheduled bank in a separate account within 5 days from the
date of declaration of such dividend.
Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder
entitled to the payment of the dividend.
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Payment of dividend to registered shareholder [Section 123(5)]: Dividend shall be paid by a company in respect
of any share to the registered shareholder only or to his order or to his banker and shall be payable in cash. (Thus,
dividend cannot be paid in 'kind' e.g. inform of gifts, goods)
However, the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares
or paying up any amount for the time being unpaid on any shares held by the members of the company is
permitted.
State the legal provisions relating to disposal of unpaid and unclaimed dividends.
CS (Inter) - June 1999 (2 Marks), Dec 2005 (4 Marks) CS (Inter) - Dec 2006 (6 Marks)
Ans.: Unpaid Dividend Account [Section 124(1)]: After declaration of dividend, the company has to pay dividend
within 30 days of declaration of dividend. If amount of dividend remains unpaid or unclaimed for 30 days of
declaration of dividend, then in nex` 7 days the company has to transfer the amount unclaimed to the to a special
account in any scheduled bank to be called the "Unpaid Dividend Account".
Posting the details of unpaid dividend on website [Section 124(2)]: The company shall, within a period of 90 days
of making any transfer of an amount to the Unpaid Dividend Account, prepare a statement containing the names,
their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the
company and also on any other website approved by the Central Government, in prescribe form and in prescribed
manner.
Payment of interest [Section 124(3)]: If any default is made in transferring the total amount to the Unpaid Dividend
Account, the company shall pay interest at the rate of 12% p.a. on so much of the amount as has not been
transferred to the Unpaid Dividend Account.
Claiming dividend from Unpaid Dividend Account [Section 124(4)]: Any person claiming to be entitled to any
money transferred under Section 124 (1) to the Unpaid Dividend Account of the company may apply to the
company for payment of the money claimed.
Transfer from Unpaid Dividend Account to Investor Education & Protection Fund [Section 124(5)]: Any
money transferred to the Unpaid Dividend Account and which remains unpaid or unclaimed for a period of 7 years
from the date of such transfer shall be transferred by the company along with interest accrued thereon to the
Investor Education & Protection Fund established Section 125(1).
The company shall send a statement in the prescribed form of the details of such transfer to the authority which
administers the said Fund and that authority shall issue a receipt to the company as evidence of such transfer.
Transfer of shares to Investor Education & Protection Fund [Section 124(6)]: All shares in respect of which
dividend has not been claimed for seven consecutive years or more shall be transferred by the company in the
name of Investor Education and Protection Fund along with a statement containing prescribed details.
However, any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor
Education and Protection Fund in accordance with prescribed procedure and on submission of prescribed
documents.
Que. No. 19] Write a short note on: Investor Education & Protection Fund
CS (Inter) - June 2008 (4 Marks) CS (Executive) - Dec 2010 (4 Marks), June 2013 (4 Marks)
Rise Ltd., a company with diversified interests, has constituted Investor Education and Protection Fund as
required under the provisions of the Companies Act, 2013. The company has so far not deposited any amount
to the fund. The President (Finance) has asked you, the Company Secretary, to submit a note on amounts
payable to the credit of the fund and the period within which amount shall be paid. Prepare the said note.
Ans.: Establishment of Investor Education & Protection Fund [Section 125(1)]: The Central Government shall
establish a Fund to be called the Investor Education and Protection Fund (herein referred to as the Fund).
Amount credited to Fund [Section 125(2)]: There shall be credited to the Fund -
(a) Amount given by the Central Government by way of grants
(b) Donations given by the Central Government, State Governments, companies or any other institution
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(c) Amount in the Unpaid Dividend Account
(d) Amount in the general revenue account of the Central Government which had been transferred as per
Section 205A(5) of the Companies Act, 1956
(e) Amount lying in the Investor Education and Protection Fund under Section 205C of the Companies Act, 1956
(f) Interest or other income received out of investments made from the Fund
(g) Amount received Section 38(4)
(h) Application money received by companies for allotment of any securities and due for refund
(i) Matured deposits with companies other than banking companies
(j) Matured debentures with companies
(k) Interest accrued on the amounts referred to in clauses (h) to (j)
(l) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 or
more years
(m) Redemption amount of preference shares remaining unpaid or unclaimed for 7 or more years and
(n) Other prescribed amounts.
Amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount has remained unclaimed
and unpaid for a period of 7 years from the date it became due for payment.
Utilization of Fund [Section 125(3)]: The Fund shall be utilized for -
(a) Refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money
due for refund and interest thereon.
(b) Promotion of investor's education, awareness and protection.
(c) Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures,
shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in
accordance with the orders made by the Court which had ordered disgorgement.
(d) Reimbursement of legal expenses incurred in pursuing class action suits under Sections 37 & 245 by
members, debenture-holders or depositors as may be sanctioned by the Tribunal.
(e) Any other incidental purpose, in accordance with prescribed rules.
Explanation: The disgorged amount refers to the amount received through disgorgement or disposal of securities.
Any person claiming to be entitled to the amount referred in Section 125(2) may apply to the authority constituted
Section 125(5) for the payment of the money claimed.
Que. No. 20] When dividend can be held in abeyance?
Ans.: Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer
of shares [Section 126]: Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company, it shall -
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the company is
authorized by the registered holder of such shares in writing to pay such dividend to the transferee specified in
such instrument of transfer and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of fully paid-up bonus
shares.
Que. No. 21] What is the penalty if a dividend has not been paid by the company within 30 days from the date
of declaration? Also state the circumstances when a company will not be deemed to have committed any offence
if it does not pay dividend in prescribed period?
Write a short note on: Punishment for failure to distribute dividend & exceptions
Ans.: Punishment for failure to distribute dividends [Section 127]: Where a dividend has been declared by a
company but has not been paid or the dividend warrant has not been posted within 30 days from the date of
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declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he
is knowingly a party to the default, be punishable:
- With imprisonment which may extend to 2 years and
- With fine which shall not be less than ` 1,000 for every day during which such default continues
The company shall also be liable to pay simple interest at the rate of 18% p.a. during the period for which such
default continues.
When payment of dividend may be withheld: In following cases, non-payment of dividend will be permitted i.e. it
will not be treated as offence:
(a) Where the dividend could not be paid by reason of the operation of any law.
(b) Where a shareholder has given directions to the company regarding the payment of the dividend and those
directions cannot be complied with and the same has been communicated to him.
(c) Where there is a dispute regarding the right to receive the dividend.
(d) Where the dividend has been lawfully adjusted by the company against any sum due to it from the
shareholder.
(e) Where the failure to pay the dividend or to post the warrant was not due to any default on the part of the
company.
Que. No. 22] The Annual General Meeting of ABC Ltd. declared a dividend at the rate of 30% payable on paid up
equity share capital of the company as recommended by Board of Directors on 30th April, 2014. But the company
was unable to post the dividend warrant to Ranjan, an equity shareholder, up to 30th June, 2014. Ranjan filed a
suit against the company for the payment of dividend along with interest at the rate of 20% p. a. for default
period. Decide in the light of provisions of the Companies Act, 2013, whether Ranjan would succeed? Also state
the director's liability in this regard. CA (Final) - Nov 2013 (5 Marks)
Ans.: As per Section 124(1), a company has to pay dividend within 30 days of declaration of dividend. The posting
of dividend warrant by the company within 30 days will be deemed to be payment irrespective of the fact whether
the shareholder has encashed it or not.
Failure to pay or post dividend warrant within 30 days constitutes an offence and as per Section 127, the company
shall be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.
In the given case, the AGM of ABC Ltd. declared a dividend at the rate of 30% payable on paid up equity share
capital as recommended by the board of directors on 30th April, 2014. But, the company was unable to post the
dividend warrant to Mr. Ranjan, up to 30th June, 2014 and thus there is contravention of Section 127.
(i) In view of the above provisions, Mr. Ranjan can file a suit against the company for the payment of dividend
because failure to pay or post dividend warrant within 30 days. Thus, he would succeed but he is entitled for simple
interest at the rate of 18% p.a. (and not 20% as claimed) during the period for which such default continues.
(ii) Every director of the company, if he is knowingly a party to the default, is punishable
- With imprisonment which may extend to 2 years and
- With fine which shall not be less than ` 1,000 for every day during which such default continues.
Que. No. 23] A company for the financial year 2014-2015 declared dividend on 19th September 2015 but failed
to pay the same within the prescribed time. A case was filed against director in this regard. The director has
contended that he had resigned before the declaration of dividend. Decide the fate of directors in the light of
relevant provisions of the Companies Act, 2013.
Ans.: As per Section 124(1), a company has to pay dividend within 30 days of declaration of dividend. Failure to
pay or post dividend warrant within 30 days constitutes an offence and directors of the company are liable to
punishment as provided under Section 127.
However, in N. Kumar v. M.O. Roy, Assistant Director, S.F.I.O (2007) 80 SCL 55 (MAD), it was held that if the director
has resigned before declaration of dividend then he cannot be held liable for the default of non-payment of
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dividend within 30 days of declaration of dividend as he may not be aware about the entire affairs of the company
after his resignation.
Que. No. 24] How and who declares the dividend? Can shareholder increase the rate of dividend recommended
by board of director?
Ans.: Board of director of company recommends dividend and it is approved by the shareholder in the AGM.
Shareholder can reduce the rate of dividend proposed by shareholder but cannot increase it.
Company can declare dividend in extraordinary general meeting (EOGM), if it could not declare dividend in annual
general meeting (AGM). [Department Circular No. 22 dated 25.9.1975]
However, if dividend is declared in AGM, it cannot be increased in further in subsequent EGM.
Que. No. 25] A resolution was passed by the shareholders in an annual general meeting approving final dividend
@ 20% for the financial year 2016-2017 and one month later the Board of directors decided to pay further
dividend @ 5% for the financial year 2016-2017. CS (Executive) - Dec 2008 (5 Marks)
Ans.: Board of director of company recommends divided and it is approved by the shareholder in the AGM.
Shareholder can reduce the rate of dividend proposed by shareholder but cannot increase it.
Company can declare dividend in extraordinary general meeting (EOGM), if it could not declare dividend in annual
general meeting (AGM). [Department Circular No. 22 dated 25.9.1975]
However, if dividend is declared in AGM, it cannot be increased in further in subsequent EGM or board meeting.
Thus, decisions of directors to pay further dividend @5% for the financial year 2016-2017 for which already
dividend is declared @ 20% is invalid.
Que. No. 26] Dividend once declared becomes debt. Comment. CS (Inter) - Dec 2004 (4 Marks)
Can decision to pay interim dividend be revoked? CS (Inter) - June 2002 (2 Marks)
The board of directors of a company in a meeting held on 30th April, 2015 declared interim dividend. In another
meeting held on 18th May 2015, the board of directors revoked the interim dividend declared without assigning
any reason. Advise the company in the matter.
Ans.: A dividend when declared becomes a debt and a shareholder is entitled to sue for recovery of the same after
expiry of the period of 30 days prescribed u/s 207. A dividend when proposed does not become a debt but only
becomes debt when declared.
Revocation of declared dividend: A dividend including interim dividend once declared becomes a debt and cannot
be revoked, except with the consent of the shareholders. But where a dividend has been illegally declared, the
directors will be justified in revoking the declared dividend. If an illegally declared dividend is paid then the
directors shall be responsible, liable and accountable to the company personally.
As per Section 2 (35), "dividend includes any interim dividend." Hence, interim dividend also cannot be revoked.
Que. No. 27] In Evergreen Ltd., the Board of directors declared an interim dividend but could not distribute the
dividend due to objections of audit committee that the accounts considered by the Board were false; and true
financial results were inflated by not incorporating outstanding liabilities and over-valuation of inventories. A
shareholder filed a suit for non-payment of dividend. One of the directors contended that he never attended
the Board meeting where the issue relating to payment of interim dividend was declared on the basis of false
accounts. Discuss about the validity of contention of the director.
Ans.: As per Section 124(1), a company has to pay dividend within 30 days of declaration of dividend. Failure to
pay or post dividend warrant within 30 days constitutes an offence and directors of the company are liable to
punishment as provided under Section 127.
A dividend including interim dividend once declared becomes a debt and cannot be revoked, except with the
consent of the shareholders. But where a dividend has been illegally declared, the directors will be justified in
revoking the declared dividend.
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Que. No. 28] The Board of Directors of American Express Ltd. declared interim dividend third time during the
financial year 2015-2016. After declaration, the Board of Directors decided to revoke third interim dividend as
they noticed that company's financial position did not permit payment of such interim dividend. The Board of
Directors seek your advice in this matter. Please advise the Board as a company secretary. Will your advice be
different in case it was a regular dividend instead of interim dividend?
Ans.: A dividend including interim dividend once declared becomes a debt and cannot be revoked, except with the
consent of the shareholders. But where a dividend has been illegally declared, the directors will be justified in
revoking the declared dividend. If an illegally declared dividend is paid then the directors shall be responsible, liable
and accountable to the company personally.
As per Section 2(35), "dividend includes any interim dividend." Hence, both final dividend and interim dividend
once declared cannot be revoked.
Thus, board of directors of American Express Ltd. cannot revoke interim dividend even though company's financial
position did not permit payment of such interim dividend.
Que. No. 29] Write a short note on: Dividend Warrant CS (Inter) - Dec 1999 (4 Marks)
Ans.: "Dividend warrant" is an order by the company to its banker to pay the amount specified therein to the
shareholder whose name is written therein. The shareholder may, at his discretion thereafter draw the amount of
the warrant from his account with the bank and with whom he deposits the warrant for collection.
Dividend Mandate: The shareholders may desire that their dividends be credited directly to their bank account.
The request will be made in a form duly filled and sent to the company. This is known as "Dividend Mandate". This
authorizes the company to pay dividends directly to bank account of the shareholder. This form is also used for
purposes like payment of interest on debentures and other securities.
Que. No. 30] What is 'capital profit'? Can dividend be declared out of capital profit? If so, under what
circumstances? , CS (Inter) - June 2008 (4 Marks)
Ans.: The term capital profits may be defined to mean those profits which arise otherwise than in the normal
course of the business and earned out of capital transactions. The usual sources of capital profits are:
- Profits on sale of fixed assets
- Profits on revaluation of fixed assets
- Premium on issue of shares/debentures/bonds
- Profits on reissue of forfeited shares
- Capital redemption reserve account
- Profit prior to incorporation
The Act does not mention specifically whether capital profits i.e. profits which arise where a company sells part of
its fixed assets at a price higher than the original cost of such asset, can be distributed as' dividend. However, in
the two important cases Lubbock vs. British Bank of South America (1892) 2 Ch. 198 and Foster vs. The New Trinidad
Lake Asphalt Co. Ltd. (1901) 1 Ch. 208, the Courts have held that capital profits cannot be considered as available
for distribution as dividend unless:
(a) The AOA authorize such a distribution and
(b) The surplus is realized and remains after a valuation of the whole of the assets and liabilities.
■ ■■ PROCEDURE FOR DECLARATION AND PAYMENT OF INTERIM DIVIDEND
Que. No. 31] Prepare a brief note explaining procedure for declaration and payment of interim dividend.
Ans.: The procedure for declaration and payment of interim dividend is as follows:
(1) Verify from company's AOA that it authorize the directors to declare interim dividend. If not then alter the
AOA accordingly.
(2) Issue notice for holding a meeting of the Board of directors of the company to consider the matter.
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(3) In case of listed companies, notify Stock exchanges where the securities of the company are listed, at leas` 2
working days in advance of the date of the meeting of its Board of Directors at which the recommendation of
interim dividend is to be considered. [Regulation 29 of SEBI (LODR) Regulations, 2015]
(4) At the Board meeting, the Board of Directors considers in detail all the matters with regard to the declaration
and payment of an interim dividend.
(5) In case of a listed company, immediately within 30 minutes of the conclusion of the Board meeting, but only
after the close of the market hours, intimate the stock exchanges with regard to the Board's decision about
declaration and payment of interim dividend. [Regulation 30 of SEBI (LODR) Regulations, 2015]
(6) Publish notice of book closure in a newspaper circulating in the district in which the registered office of the
company is situated at leas` 7 days before the date of commencement of book closure.
(7) Close the register of members and the share transfer register of the company.
(8) Open the "Interim Dividend Account of Ltd." with the bank and deposit the amount of dividend
payable in the account within 5 days of declaration and give the authority to Bank to honour the dividend warrants
when presented.
(9) Make arrangements with the bank and in collaboration with other banks if required, for payment of the
Dividend Warrants.
(10) Prepare a statement of dividend in respect of each shareholder containing the details like (a) Name and
address of the shareholder with ledger Folio No., (b) No. of shares held, (c) Dividend payable.
(11) Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
(12) To have sufficient number of dividend warrants printed in consultation with the company's banker appointed
for the purpose of dividend. To get approval of the RBI for printing the warrants with MICR facility. Get the dividend
warrants filled in and signed by the persons authorized by the Board.
(13) Prepare two copies of the list of members with names and addresses only for mailing purposes - one to cut
and paste on envelopes which could even be printed on self sticking labels and the other for securing receipt from
the Post Office.
(14) Dispatch dividend warrants within 30 days of the declaration of dividend. In case of joint shareholders,
dispatch the dividend warrant to the first named shareholder.
(15) Publish a Company notice in a newspaper circulating in the district in which the registered office of the
company is situated to the effect fhat dividend warrants have been posted and advising those members of the
company who do not receive them within a period of 15 days, to get in touch with the company for appropriate
action.
(16) Issue bank drafts and/ or cheques to those members who inform that they received the dividend warrants
after the expiry of their currency period or their dividend warrants were lost in transit after satisfying that the same
have not been encashed.
(17) Arrange for transfer of unpaid or unclaimed dividend to a special account named "Unpaid dividend A/c"
Within 7 days after expiry of the period of 30 days of declaration of final dividend.
(18) Confirm the interim dividend in the next AGM.
Que. No. 32] Prepare a brief note explaining procedure for declaration and payment of interim dividend.
Ans.: The following steps are required to be taken by a company in respect of declaration and payment of final
dividend:
♦ Issue notice for holding a meeting of the Board of directors of the company to consider the matter. It must
contain time, date and venue of the meeting and details of the business to be transacted there at and must be sent
to all the directors for the time being in India and to all other directors, at their usual address in India.
♦ In case of listed companies notify stock exchanges where the securities of the company are listed, at leas` 2
working days in advance of the date of the meeting of its Board of Directors at which the recommendation of final
dividend is to be considered. [Regulation 29 of SEBI (LODR) Regulations, 2015]
♦ Hold Board meeting and pass necessary resolution in relation to payment of dividend.
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♦ Transfer to reserves such percentage as board of director consider appropriate of the current profits.
♦ In case of a listed company, immediately within 30 minutes of the conclusion of the Board meeting, intimate
the stock exchanges with regard to the Board's decision about declaration and payment of dividend. [Regulations
29 & 30]
♦ Publish notice of book closure in a newspaper circulating in the district in which the registered office of the
company is situated at leas` 7 days before the date of commencement of book closure.
♦ Close the register of members and the share transfer register of the company.
♦ Hold the AGM and pass an ordinary resolution declaring the payment of dividend to the shareholders of the
company as per recommended by the Board.
♦ Prepare a statement of dividend in respect of each shareholder containing the details like: (a) Name and
address of the shareholder with ledger Folio No., (b) No. of shares held, (c) Dividend payable.
♦ Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
♦ Open a separate bank account for making dividend payment and credit the said bank account with the total
amount of dividend payable within five days of declaration of dividend.
♦ To have sufficient number of dividend warrants printed in consultation with the company's banker appointed
for the purpose of dividend.
♦ Get the dividend warrants filled in and signed by the persons authorized by the Board.
♦ Dispatch dividend warrants within 30 days of the declaration of dividend. In case of joint shareholders,
dispatch the dividend warrant to the first named shareholder.
♦ Publish a Company notice in a newspaper circulating in the district in which the registered office of the
company is situated to the effect that dividend warrants have been posted and advising those members of the
company who do not receive them within a period of fifteen days, to get in touch with the company for appropriate
action.
♦ Issue bank drafts and/ or cheques to those members who inform that they received the dividend warrants
after the expiry of their currency period or their dividend warrants were lost in transit after satisfying that the same
have not been encashed.
♦ Arrange for transfer of unpaid or unclaimed dividend to a special account named "Unpaid dividend A/c"
Within 7 days after expiry of the period of 30 days of declaration of final dividend.
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Chapter
12
CORPORATE SOCIAL RESPONSIBILITY
PROVISIONS OF COMPANIES ACT, 2013 RELATING TO CSR
Que. No. 1] Explain the concept of 'CSR' (Corporate Social Responsibility) as introduced by the Companies Act,
2013. Examining the provisions of the Act, answer the following:
(i) Which companies are required to constitute a CSR Committee?
(ii) Which companies are excluded from the requirements of the provisions of the Act in relation to CSR
Committee?
(iii) What is the minimum contribution the companies are required to make towards CSR?
CA (Final) - Nov 2014 (8 Marks) CS (Executive) - June 2016 (4 Marks)
Ans.: Corporate Social Responsibility [Section 135(1)]: Every company fulfilling following criteria shall constitute
Corporate Social Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at
least one director shall be an independent director -
- Company having net worth of ` 500 Crore or more, or
- Company having turnover of ` 1,000 Crore or more or
- Company having net profit of ` 5 Crore or more
Net worth/tumover/net profit of the immediately preceding financial year should be taken for the purpose of this
section.
Where a company is not required to appoint an independent director u/s 149(4), it shall have in its CSR Committee
2 or more directors.
Disclosure in Board's report [Section 135(2)]: The Board's report u/s 134(3) shall disclose the composition of the
CSR Committee.
The disclosure of contents of CSR Policy in the Board's report and on the company's website, if any, shall be as
per annexure attached to the Companies (Corporate Social Responsibility Policy) Rules, 2014. [Rule 9 of the
Companies (Accounts) Rules, 2014]
CSR Committee [Section 135(3)]: The Corporate Social Responsibility Committee shall -
(a) Formulate and recommend to the Board, CSR Policy which shall indicate the activities to be undertaken by
the company in areas or subject, specified in Schedule VII.
(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a).
(c) Monitor the CSR Policy of the company from time to time.
Duties of board with regard to CSR [Section 135(4)]: The Board of every company shall -
(a) After taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the
company and disclose contents of such policy in its report and also place it on the company's website, if any, in
such manner as may be prescribed; and
(b) Ensure that the activities as are included in Corporate Social Responsibility Policy of the company are
undertaken by the company.
Amount to be spent on CSR [Section 135(5)]: The Board of every company shall ensure that the company spends,
in every financial year, at leas` 2% of the average net profits of the company made during the 3 immediately
preceding financial years, in pursuance of its CSR Policy.
The company shall give preference to the local area and areas around it where it operates, for spending the amount
earmarked for CSR activities.
If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the
amount.
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Explanation: For the purposes of this section "net profit" shall not include such sums as may be prescribed, and
shall be calculated in accordance with the provisions of Section 198.
Companies excluded from the requirements of CSR Committee: Every company which ceases to be a company as
per Section 135(1) for 3 consecutive financial years -
(1) shall not be required to constitute a CSR Committee, and
(2) is not required to comply with the provisions as per Section 135.
SCHEDULE VII
(See Section 135)
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating
to —
(i) Eradicating hunger, poverty and malnutrition, 'promoting health care including preventive health care and
sanitation including contribution to the Swachh Bharat Kosh set-up by the Central Government for the promotion
of sanitation] and making available safe drinking water.
(ii) Promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly and the differently abled and livelihood enhancement projects.
(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting
up old age homes, day care centres and such other facilities for senior citizens and measures for reducing
inequalities faced by socially and economically backward groups.
(iv) Ensuring environmental sustainability, ecological balance, protection, of flora and fauna, animal welfare,
agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution
to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional art and
handicrafts.
(vi) Measures for the benefit of armed forces veterans, war widows and their dependents.
(vii) Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports.
(viii) Contribution to the prime minister's national relief fund or any other fund set up by The Central Government
for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes,
minorities and women.
(ix) Contributions or funds provided to technology incubators located within academic institutions which are
approved by the Central Government.
(x) Rural development projects.
(xi) Slum area development.
Explanation: The term 'slum area' shall mean any area declared as such by the Central Government or any State
Government or any other competent authority under any law for the time being in force.
Que. No. 2] Brave Ltd. is listed at Bombay Stock Exchange and has a net worth of over ` 600 Crore. The company
has constituted a corporate social responsibility (CSR) committee with Jay and Vijay as its members. Both Jay
and Vijay are directors of the company, Jay being an independent director.
Explaining the provisions of the Companies Act, 2013 relating to 'corporate social responsibility', examine
whether the company has complied with the provisions of the Act in this regard.
Ans.: As per Section 135, every company fulfilling following criteria shall constitute a Corporate Social
Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at least one director
shall be an independent director -
Que. No. 3] From the following information in respect of two companies viz. ZYX Ltd. and CBA Private Ltd.,
compute the amount the companies are required to spend on account of Corporate Social Responsibility (CSR):
177
Financial Year ZYX Ltd. CBA Private Ltd. (` in Net Profit/(Loss) Net Profit/ (Loss) (` in Crore)
Crore)
2014-2015 Not incorporated (4)
2015-2016 6 (1)
2016-2017 18 6

Ans.: As per Section 135, every company fulfilling following criteria shall constitute a Corporate Social
Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at least one director
shall be an independent director -
- Company having net worth of X 500 Crore or more, or
- Company having turnover of X 1,000 Crore or more or
- Company having net profit of X 5 Crore or more
The Board of directors of company to whom provisions of Corporate Social Responsibility applies shall ensure that
the company spends, in every financial year, at leas` 2% of the average net profits of the company made during
the 3 immediately preceding financial years, in pursuance of its CSR Policy.
Keeping in view of above provisions, answer to give case is as under:
(1) XYZ Ltd.: Since XYZ Ltd. has yet to complete its first three years after incorporation, it is not required to spend
anything on CSR activity.
(2) CBA Private Ltd.: Average net profit of the company is X 1,00,00,000. Thus, company has to spend X 2,00,000
on CSR activities.
■ ■■ THE COMPANIES (CSR POLICY) RULES, 2014
Que. No. 4] Write a short note on: Net profit for the purpose of CSR
Ans.: Net Profit [Rule 2(f)]: Net profit means the net profit of a company as per its financial statement prepared in
accordance with the applicable provisions of the Companies Act, 2013, but shall not include the following, namely
-
(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate
company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered under and complying with the
provisions of Section 135.
In case of a foreign company, net profit means the net profit of such company as per profit and loss account
prepared in terms of Section 381(l)(a) read with Section 198 of the Companies Act, 2013.
Que. No. 5] Which types of companies are required to comply with the provisions relating to CSR provisions
under the Companies (CSR Policy) Rules, 2014?
Ans.: CSR Provisions to whom applicable [Rule 3(1)]: Every company including its holding or subsidiary, and a
foreign company defined in Section 2(42) having its branch office or project office in India, which fulfils the criteria
specified in Section 135(1) shall comply with the provisions of Section 135 of the Companies Act, 2013 and the
Companies (CSR Policy) Rules, 2014.
However net worth, turnover or net profit of a foreign company shall be computed in accordance with balance
sheet and profit and loss account of such company prepared in accordance with the provisions Section 381(1) (a)
and Section 198.
CSR Provisions to whom not applicable [Rule 3(2)]: Every company which ceases to be a company covered under
Section 135(1) for 3 consecutive financial years shall not be required to -
(a) Constitute a CSR Committee; and
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(b) Comply with the provisions relating to CSR, till such time it meets the criteria specified in Section 135(1).
Que. No. 6] Write a short note on: CSR Activities
Ans.: CSR Activities [Rule 4]:
(1) The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs
or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
(2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through
-
(a) A company established u/s 8 or a registered trust or a registered society, established by the company, either
singly or along with any other company, or
(b) A company established under section 8 or a registered trust or a registered society, established by the Central
or State Government or any entity established under an Act of Parliament or a State legislature.
However, if the Board of a company decides to undertake its CSR activities through a company established u/s 8
or a registered trust or a registered society, such company or trust or society shall have an established track record
of 3 years in undertaking similar programs or projects and the company has specified the projects or programs to
be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and
reporting mechanism.
(3) A company may also collaborate with other companies for undertaking projects or programs or CSR activities
in such a manner that the CSR Committees of respective companies are in a position to report separately on such
projects or programs in accordance with these rules.
(4) The CSR projects or programs or activities undertaken in India only shall amount to CSR Expenditure.
(5) The CSR projects or programs or activities that benefit only the employees of the company and their families
shall not be considered as CSR activities.
(6) Companies may build CSR capacities of their own personnel as well as those of their implementing agencies
through Institutions with established track records of at leas` 3 financial years but such expenditure including
expenditure on administrative overheads, shall not exceed 5% of total CSR expenditure of the company in one
financial year.
(7) Contribution of any amount directly or indirectly to any political party u/s 182 shall not be considered as CSR
activity.
Que. No. 7] Write a short note: CSR Committees
Ans.: CSR Committees [Rule 5]: The companies mentioned in the Rule 3 shall constitute CSR Committee as under
-
(i) An unlisted public company or a private company which is not required to appoint an independent director shall
have its CSR Committee without such director.
(ii) A private company having only 2 directors on its Board shall constitute its CSR Committee with two such
directors.
(iii) With respect to a foreign company, the CSR Committee shall comprise of at leas` 2 persons of which one
person shall be as specified under Section 380(1 )(d) and another person shall be nominated by the foreign
company.
The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or
programs or activities undertaken by the company.
Que. No. 8] Write a short note on: CSR Policy
Ans.: CSR Policy - meaning [Rule 2(e)]: CSR Policy relates to the activities to be undertaken by the company as
specified in Schedule VII of the Companies Act, 2013 and the expenditure thereon, excluding activities undertaken
in pursuance of normal course of business of a company.
CSR Policy [Rule 6]: The CSR Policy of the company shall, inter alia, include the following namely:
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(a) A list of CSR projects or programs which a company plans to undertake falling within the purview of the
Schedule VII, specifying modalities of execution of such project or programs and implementation schedules for the
same; and
(b) Monitoring process of such projects or programs:
CSR activities do not include the activities undertaken in pursuance of normal course of business oba company.
The Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility
Policy are related to the activities included in Schedule VII.
The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities
shall not form part of the business profit of a company.
Que. No. 9] Write a short note on: CSR Expenditure
Ans.: CSR Expenditure [Rule 7]: CSR expenditure shall include all expenditure including contribution to corpus, or
on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR
Committee, but does not include any expenditure on an item not in conformity or not in line with activities which
fall within the purview of Schedule VII.
Other important points relating to CSR expenditure are as follows:
♦ The Board of every company shall ensure that the company spends, in every financial year, at leas` 2% of the
average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its
CSR Policy. This amount will be CSR expenditure.
♦ If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending
the amount.
♦ The company shall give preference to the local area and areas around it where it operates, for spending the
amount earmarked for CSR activities.
♦ Expenditure incurred on specified activities that are carried out in India only will qualify as CSR expenditure.
Such expenditure includes contribution to the corpus or on projects or programs relating to CSR activities.
♦ Expenditure incurred in undertaking normal course of business will not form a part of the CSR expenditure.
Companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of
normal course of business and those that are done incrementally as part of the CSR initiatives.
♦ Any surplus arising out of CSR activities will not be considered as business profit for the spending company.
♦ Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the
Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is
required to do so as per Section 135.
Que. No. 10] Write a short note on: CSR Reporting
Examining the provisions of the Companies (CSR Policy) Rules, 2014, answer the following:
(i) Whether reporting of CSR is mandatory in Board's Report?
(ii) Whether it is mandatory for Foreign Company to give report on CSR activity?
(iii) Whether display of CSR policy of a company on website of the company is mandatory or not?
Ans.: CSR Reporting [Rule 8]:
(1) The Board's Report of a company shall include an annual report on CSR containing particulars specified in
Annexure.
(2) In case of a foreign company, the balance sheet filed u/s 381(l)(a) shall contain an Annexure regarding report
on CSR.
Display of CSR Activities on Website [Rule 9]: The Board of Directors of the company shall, after taking into account
the recommendations of CSR Committee, approve the CSR Policy for the company and disclose contents of such
policy in its report and the same shall be displayed on the company's website, if any, as per the particulars specified
in the Annexure.
Matters to be included in Annual Report for CSR [Annexure to the Companies (CSR Policy) Rules, 2014]:
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The report of the Board of Directors attached to the financial statements of the Company would also need to
include an annual report on the CSR activities of the company in the format prescribed containing following
particulars -
♦ A brief outline of the company's CSR policy, including overview of projects or programs proposed to be
undertaken and a reference to the web-link to the CSR policy and projects or programs.
♦ Composition of the CSR Committee.
♦ Average net profit of the company for las` 3 financial years.

♦ Prescribed CSR Expenditure.
♦ Details of amount spent for CSR during the financial year.
♦ In case the company has failed to spend the 2% of the average net profit of the las` 3 financial years or any
part thereof, the company shall provide the reasons for not spending the amount in its Board report.
♦ A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is
in compliance with CSR objectives and Policy of the company.
MISCELLANEOUS PROVISIONS
Que. No. 11] Whether CSR expenditure of a company can be claimed as business expenditure?
Ans.: The amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act,
2014 provides that any expenditure incurred by an assessee on the activities relating to Corporate Social
Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.
Que. No. 12] What tax benefit can be availed in respect of expenditure incurred on CSR?
Ans.: No Specific Tax Exemptions have been extended to CSR Expenditure per se. The Finance Act, 2014 also clarifies
that expenditure on CSR does not form part of business expenditure. While no specific tax exemption has been
extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister's Relief
Fund, scientific research, rural development projects, skill development projects, agricultural extension projects,
etc., which find place in Schedule VII, already enjoy exemptions under different sections of the Income-tax Act,
1961.
Que. No. 13] Whether provisions of CSR are applicable on Section 8 company, if it fulfils the criteria of Section
135(1) of the Companies Act, 2013.
Ans.: Section 135 of the Companies Act, 2013 reads "Every company ", i.e. no specific exemption is given
to Section 8 companies with regard to applicability of Section 135, hence Section 8 companies are required to
follow CSR provisions.
Que. No. 14] Can the CSR expenditure be spent on the activities beyond Schedule VII?
Ans.: MCA has clarified that the statutory provision and provisions of CSR Rules, 2014, is to ensure that activities
undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act, 2013.
The entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects
enumerated in the said Schedule. The items enlisted in the Schedule VII of the Act, are broad-based and are
intended to cover a wide range of activities. The General Circular also provides an illustrative list of activities that
can be covered under CSR: In a similar way many more can be covered. It is for the Board of the company to take
a call on this.
Que. No. 15] Referring to the provisions of the Companies Act, 2013 relating to 'Corporate Social Responsibility'
(CSR), answer the following:
(i) Which activities would not qualify as CSR?
(ii) Whether the average net profit criteria for CSR is before tax or after tax?
Ans.:
181
(i) Activities that would not qualify as CSR: Following are some of the activities that cannot be constitute
CSR activity:
♦ CSR projects or programs or activities that benefit only the employees of the company and their families.
♦ One-off events such as marathons/awards/charitable contribution/advertisement/sponsorships of TV
programmes etc.
♦ Expenses incurred by companies for the fulfilment of any other Act/Statute of regulations (such as Labour
Laws, Land Acquisition Act, 2013, Apprentice Act, 1961 etc.)
♦ Contribution of any amount directly or indirectly to any political party.
♦ Activities undertaken by the company in pursuance of its normal course of business.
♦ Project or programmes or activities undertaken outside India.
(ii) Average net profit criteria for CSR: Computation of net profit for Section 135 is as per Section 198 of the
Companies Act, 2013 which is primarily Profit Before Tax (PBT).
Que. No. 16] Can the unspent amount from out of the minimum required CSR expenditure be carried forward
to the next year?
Ans.: The Board is free to decide whether any unspent amount from oilt of the minimum required CSR expenditure
is to be carried forward to the next year. However, the carried forward amount should be over and above the next
year's CSR allocation equivalent to at leas` 2% of the average net profit of the company of the immediately
preceding 3 years.
Que. No. 17] What is the role of Government in monitoring implementation of CSR by companies under the
provision of the Companies Act, 2013?
Ans.: The main thrust and spirit of the law is not to monitor but to generate conducive environment for enabling
the corporates to conduct themselves in a socially responsible manner, while contributing towards human
development goals of the country.
The existing legal provisions like mandatory disclosures, accountability of the CSR Committee and the Board,
provisions for audit of the accounts of the company etc., provide sufficient safeguards in this regard. Government
has no role to play in monitoring implementation of CSR by companies.
Que. No. 18] Can CSR funds be utilized for Government Scheme?
Ans.: The objective of this provision is indeed to involve the corporates in discharging their social responsibility
with their innovative ideas and management skills and with greater efficiency and better outcomes. Therefore, CSR
should not be interpreted as a source of financing the resource gaps in Government Scheme. Use of corporate
innovations and management skills in the delivery of 'public goods' is at the core of CSR implementation by the
companies. In principle, CSR fund of companies should not be used as a source of funding Government Schemes.
CSR projects should have a larger multiplier effect than that under the Government schemes.
However, under CSR provision, the Board of the eligible company is competent to take decision on supplementing
any Government Scheme provided the scheme permits corporates participation and all provisions of Section 135
of the Act and rules thereunder are complied by the company.
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CHAPTER
13
ACCOUNTS S AUDIT
BOOKS OF ACCOUNT
Que. No. 1] Define the term 'books of account'
Ans.: Books of Account [Section 2(13)]: Books of account includes records maintained in respect of—
(i) All sums of money received and expended (ii) All sales and purchases of goods and services rendered
(iii) Assets and liabilities
(iv) Costing records (in case of specified companies)
Que. No. 2] Define the term 'Financial Statement'
Ans.: Financial Statement [Section 2(40)]: Financial statement in relation to a company, includes —
(i) Balance Sheet
(ii) Profit & Loss A/c or Income & Expenditure A/c
(iii) Cash Flow Statement
(iv) Statement of changes in equity
(v) Explanatory notes annexed to financial statement
With respect to OPC, Small Company and Dormant Company financial statement do not include the Cash Flow
Statement.
Que. No. 3] Every company must have financial year of 12 months and that to ending on 31st day of March every
year. Do you agree? Discuss.
Ans.: Financial Year [Section 2(41)]: Financial year, in relation to any company or body corporate, means the period
ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January
of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement
of the company or body corporate is made up.
Thus, first financial year can be more than 3 months and less than 15 months for newly incorporated company.
However, subsequent financial year shall be of 12 months only.
Uniform Financial Year: The Income-tax Act, 1961 requires that all companies must submit their income tax returns
on the basis of 'uniform financial year' closing on 31st March every year. Hence, most of the companies are also
closing their accounting year on 31st March, both for income tax purpose and for accounting under the Companies
Act, 2013, to avoid duplication of work. Now, concept of 'uniform financial year' has been introduced in the
Companies Act, 2013 also.
Different financial year if holding or subsidiary or associate is outside India: On an application made by a company
or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated
outside India and is required to follow a different financial year for consolidation of its accounts outside India, the
Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year.
Que. No. 4] CIF Techno-systems Private Ltd. is proposed to be incorporated in Bhubaneshwar, Orissa under the
Companies Act, 2013. The company will be a holding company of CIF Holding Private Ltd., already incorporated
in Brazil under the Company Law of Brazil. The company in Brazil follows financial year 1st January to 31st
December of a calendar year. Referring to the provisions of the Companies Act, 2013, state whether the financial
year of CIF Techno-system can also be 1st January to 31st December, in order to make it easier to prepare
consolidated financial statements.
Ans.: As per Section 2(41), financial year, in relation to any company or body corporate, means the period ending
on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a
183
year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of
the company or body corporate is made up.
However, on an application made by a company or body corporate, which is a holding company or a subsidiary or
associate company of a company incorporated outside India and is required to follow a different financial year for
consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year,
whether or not that period is a year.
Keeping in view of above provisions, CIF Techno-system Private Ltd. a subsidiary of CIF Holding Private Ltd. can
adopt its financial year as 1st January to 31st December but only after obtaining approval of Tribunal.
Que. No. 5] What are the provisions under the Companies Act, 2013 regarding keeping of books of account of a
company? CS (Inter) - June 2000 (5 Marks)
A company having its registered office in New Delhi wants to maintain its books of account at its factory in
Kolkata. Comment. CS (Inter) - June 2001 (4 Marks)
Ans.: Keeping of books of account & financial statement [Section 128(1)]: Every company shall prepare and keep
books of account and other relevant books and papers and financial statement for every financial year.
Such books of account should give a true and fair view of the state of the affairs of the company.
Books of account shall be kept on accrual basis and according to the double entry system of accounting.
Every company shall also keep books of account of its branch office which should explain the transactions effected
both at the registered office and its branches.
The company may keep books of account or other relevant papers in electronic mode in prescribed manner.
Que. No. 6] Board of directors of KM Ltd. proposes to transfer 11.33% of the net profits of the company for the
financial year 2016-2017 to general reserves. Examining the provisions of the Companies Act, 2013 advise the
Board whether it can go ahead with its proposal. CS (Executive) - Dec 2016 (4 Marks)
Ans.: Transfer to reserve [First proviso to Section 128(1)]: A company may, before the declaration of any dividend
in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to
the reserves of the company.
Thus, board of directors of KM Ltd. may transfer 11.33% of the net profit to general reserve.
Que. No. 7] Write a short note on: True and fair view CS (Executive) - Dec 2011 (4 Marks)
Ans.: According to Section 128(1), every company shall prepare and keep at its registered office books of account
and other relevant books and papers and financial statement for every financial year which give a true and fair
view of the state of the affairs of the company.
The books and papers and financial statement are said to be give a true and fair view:
- If proper books of account as required by law, have been kept by the company.
- If books of account are kept on accrual basis and according to double entry system of accounting.
- If the accounts of the company give the information required by the Act in the manner so required.
- If the balance sheet and profit and loss accounts are drawn up in a format and in accordance with the
provisions of the Act and in the form provided in Schedule III.
- If the financial position and working results of the company are stated clearly.
- If any material change in the method of accounting and the effect thereof on the financial position of the
company is clearly indicated.
- If there is a proper and full disclosure of the financial position of the company.
- If the financial statements comply with the accounting standards notified under Section 133.
- If books of account are not suppressing any transaction nor contain any fictitious transaction.
Que. No. 8] At which place the books of account of a company are required to be kept as per the provisions of
the Companies Act, 2013?
A company having its registered office in New Delhi wants to maintain its books of account at its factory in
Kolkata. Comment. CS (Inter) - June 2001 (4 Marks)
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Ans.: Place at which books of account should be kept [Proviso to Section 128(1)]: Every company shall prepare
and keep books of account and other relevant books and papers and financial statement at its registered office.
However, all or any of the books of account and other relevant papers may be kept at such other place in India as
the Board of Directors may decide. As per Rule 2A of the Companies (Accounts) Rules, 2014, the company shall,
within 7 days file with the Registrar a notice giving the full address of that other place in From AOC-5.
In case of branch, books of account can be kept at branch. However, proper summarized returns are required to
be sent periodically by the branch office to the company at its registered office or the other place where books of
account are kept.
Que. No. 9] Where a company has a branch office, whether in India or abroad, the original books of account,
records, etc. of the branch office will have to be maintained in the registered office of the company.
Ans.: As per Section 128(1), in case of branch, books of account can be kept at branch. However, proper
summarized returns are required to be sent periodically by the branch office to the company at its registered office
or the other place where books of account are kept.
Thus, it is incorrect to say that the original books of account, records, etc. of the branch office will have to be
maintained in the registered office of the company.
Que. No. 10] State the provisions of the Companies Act, 2013 relating to inspection of books of account?
Write a short note on: Right to inspection of books of account by a director or his duly appointed attorney.
A director has absolute right of inspection of books of account. Comment.
Ans.: Inspection of books of account [Section 128(3)]: The books of account and other books and papers shall be
open for inspection at the registered office of the company or at such other place in India by any director during
business hours.
In the case of financial information maintained outside the country, copies of such financial information shall be
maintained and produced for inspection by any director subject to prescribed conditions.
The inspection in respect of any subsidiary of the company shall be done only by the person authorized in this
behalf by a resolution of the Board of Directors of holding company.
The officers and other employees of the company shall give to the person making inspection all assistance in
connection with the inspection which the company may reasonably be expected to give.
Inspection of financial information maintained outside India [Rule 4 of the Companies (Accounts) Rules, 2014]:
(1) The summarized returns of the books of account of the company kept and maintained outside India shall be
sent to the registered office at quarterly intervals, which shall be kept and maintained at the registered office of
the company and kept open to directors for inspection.
(2) Where any other financial information maintained outside the country is required by a director, the director
shall furnish a request to the company setting out the full details of the financial information sought, the period
for which such information is sought.
(3) The company shall produce such financial information to the director within 15 days of the date of receipt
of the written request.
(4) The financial information shall be sought for by the director himself and not by or through his power of
attorney holder or agent or representative.
Inspection by other persons: Apart from directors of the company, following person can also inspect the books of
account of the company:
(1) Registrar of Company [Section 206]
(2) Authorized officer of the Central Government [Section 206]
(3) Officers of Serious Fraud Investigation Office (SFIO) [Section 212]
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Regulation 89 of the Table F:
(i) The Board shall from time to time determine whether and to what extent and at what times and places and
under what conditions or regulations, the accounts and books of the company, or any of them, shall be open to
the inspection of members not being directors.
(ii) No member shall have any right of inspecting any account or book or document of the company except as
conferred by law or authorised by the Board or by the company in general meeting.
Judicial Views:
♦ A director is entitled to take inspection of accounts personally or through an agent provided that there is no
reasonable objection to the person chosen and the agent undertakes not to utilize the information obtained by
him for any purpose other than the purpose of his principal. [Vakharia v. Supreme General Film Exchange Co. Ltd.,
(1948) 18 Com Cases 34 : AIR 1948 Bom 301]
♦ The petitioners (directors) wanted to exercise their right of inspection of books of account accompanied by
a C A.
The CLB allowed it subject to the undertaking being given by the CA that he would disclose the information
obtained through inspection only to the petitioners and not to others. [M.L. Thukral v. Krone Communications Ltd.,
(1996) 86 Com Cases 643 (CLB-New Delhi)]
Que. No. 11] XYZ Ltd. was registered in the year 2014 under Companies Act, 2013. There are allegations that the
3 directors who manage the affairs of the company are siphoning the funds of the company. The company has
not declared any dividends on the ground that company is incurring losses. Mr. A, who controls 51% of the share
capital of the company sends a notice to the management that he will inspect the books of account to verify the
allegations. Examine the right of Mr. A to carry out the inspection. State the persons who have the right to carry
out the inspection under the Companies Act, 2013.
CA (Final) - May 2011 & Nov 2014 (5 Marks)
Ans.: As per provisions of the Companies Act, 2013 only following persons are entitled to inspect the books of
account:
- Director of the company [Section 128(3)]
- Registrar of Company [Section 206]
- Authorized officer of the Central Government [Section 206]
- Officers of Serious Fraud Investigation Office (SFIO) [Section 212]
Thus, member of the company is not entitled to inspect the books of account.
Regulation 89 of. the Table F makes the following provisions for inspection of books of account by the members:
(i) The Board shall from time to time determine whether and to what extent and at what times and places and
under what conditions or regulations, the accounts and books of the company, or any of them, shall be open to
the inspection of members not being directors.
(ii) No member shall have any right of inspecting any account or book or document of the company except as
conferred by law or authorised by the Board or by the company in general meeting.
In the given case, Mr. A has not been authorized to inspect the books of account by the Board or by the members
in the general meeting. Thus, Mr. A.shall not have any right to inspect the books of account even if he holds 51 %
capital of the company.
Que. No. 12] Chatur is a director of Hopes Ltd., a public limited company, registered under the Companies Act,
1956. He wants to inspect the books of account and other books and papers of the company. Can he do so? Will
your answer be different, if the director wants to inspect the books of account through an agent?
CA (Final) - May 2013 (5 Marks) CS (Executive) - June 2011 (4 Marks)
Ans.: As per Section 128(3), the books of account and other books and papers shall be open for inspection at the
registered office of the company or at such other place in India by any director during business hours.
In Vakharia v. Supreme General Film Exchange Co. Ltd., it was held that a director is entitled to take inspection of
accounts personally or through an agent provided that there is no reasonable objection to the person chosen and
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the agent undertakes not to utilize the information obtained by him for any purpose other than the purpose of his
principal.
Thus, Chatur will be allowed to inspect the books of account. He can also inspect the books of account through an
agent provided that there is no reasonable objection to the person chosen and the agent undertakes not to utilize
the information obtained by him for any purpose other than the purpose of his principal i.e. Chatur.
Que. No. 13] Vir is a director in DJA Ltd. (the company). The company holds 75% shares of MRN Ltd. Vir wants
to inspect the books of MRN Ltd. Examining the provisions of the Companies Act, 2013 advise whether Vir, the
director of DJA Ltd. can be allowed to inspect the books of MRN Ltd.
Ans.: As per Section 128(3), the inspection in respect of any subsidiary of the company shall be done only by the
person authorized in this behalf by a resolution of the Board of Directors of holding company.
Thus, Vir can inspect the books of account of MRN Ltd. (subsidiary of DJA Ltd.) if he is authorized by the resolution
of the Board of Directors of DJA Ltd.
Que. No. 14] Suresh, a member of Ruchi Ltd., wants to inspect the register of deposits maintained by the
company as required under the provisions of the Companies Act, 2013. The company refused to provide the
register for inspection without assigning any reason. Referring to the provisions of the Act, examine the validity
of the company's refusal. What shall be your answer if the same Register is demanded by the statutory auditors
of the company for inspection and for their audit?
Ans.: A member of the company is not entitled to inspect the books of account of the company.
Register of deposit is part of the books of account and hence are not normally open for inspection by members of
the company. Hence, Suresh a member of company cannot inspect the Register of deposit and company can refuse
to inspection of the register without giving any reason.
The auditor enjoys the right of accessibility to books and records because he has to mention in his report whether,
proper books and records are maintained. Thus, company cannot refuse inspection of Register of deposit to
statutory auditor.
Que. No. 15] It is not obligatory for every company to preserve its books of account.
Ans.: Preservation of books of account [Section 128(5)]: Every company is required to preserve books of account
along with vouchers of las` 8 financial years.
However, if an investigation has been ordered in respect of the company, the Central Government may direct to
keep the books of account for longer period.
Que. No. 16] Board of Directors of Anil Limited has decided not to preserve the books of account and other
related records of accounts, for more than five years immediately preceding the relevant financial year of 2016-
2017 due to shortage of space in the office premises.
Referring to the provisions of the Companies Act, 2013, examine the validity of the Board's decision.
Ans.: Preservation of books of account [Section 128(5)]: Every company is required to preserve books of account
along with vouchers of las` 8 financial years.
However, if an investigation has been ordered in respect of the company, the Central Government may direct to
keep the books of account for longer period.
Thus, board of directors of Anil Ltd. has to preserve its books of account for 8 years even if there is shortage of
space in its office premises.
However, all or any of the books of account and other relevant papers may be kept at such other place in India as
the Board of Directors may decide. As per Rule 2A of the Companies (Accounts) Rules, 2014, the company shall,
within 7 days file with the Registrar a notice giving the full address of that other place in From No. AOC-5.
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Thus, decision of Board of Directors of Anil Limited not to preserve the books of account and other related records
of accounts for more than 5 years is not valid. However, if space is not available then company can keep the books
of account some other place by complain the provisions as stated above.
Que. No. 17] Who are responsible for keeping the books of account a company? What are the liabilities imposed
on them for their failure in this regard? CS (Inter) - Dec 2004 (6 Marks)
Ans.: Person responsible for keeping books of account [Section 128(6)]: Following persons are responsible for
maintaining the books of account:
- Managing director,
- Whole-time director in charge of finance
- Chief Financial Officer or
- Any other person charged by the Board with the duty of complying with the provisions of Section 128
Penalty: If person responsible for keeping and maintains of books of account fails to comply with the provisions of
Section 128 he shall be punishable
- with imprisonment for a term which may extend to 1 year or
- with both
Que. No. 18] Referring to the provisions of the Companies Act, 2013, explain whether the Company Secretary
being a Chief Financial Officer of the company can be held liable for maintenance of books of account of the
company. CS (Executive) - June 2016 (4 Marks)
Ans.: As per Section 128(6), following persons are responsible for maintaining the books of account:
- Managing director,
- Whole-time director in charge of finance
- Chief Financial Officer or
- Any other person charged by the Board with the duty of complying with the provisions of Section 128
As per Section 134(1), the financial statement, including consolidated financial statement, if any, shall be approved
by the Board of Directors before signing.
The financial statements are signed on behalf of the Board by the following persons:
- The Chairperson (where he is authorized by the Board) or
- Two directors out of which one shall be Managing Director and the CEO
- The CFO and the Company Secretary (if they are appointed)
Thus, if a Company Secretary is also appointed as Chief Financial Officer he is responsible for the maintenance of
books of account.
Que. No. 19] State the provisions of the Section 129 of the Companies Act, 2015 relating to 'financial statements'.
What are the provisions relating to laying and adoption of financial statements? Explain the law relating to
authentication of financial statements. CS (Inter) - Dec 1998 (5 Marks), June 2004 (5 Marks)
Ans.: Requirements as to financial statements [Section 129(1)]: The financial statements —
(a) shall give a true and fair view of the state of affairs of the company,
(b) shall comply with the accounting standards notified under Section 133
(c) shall be in the form provided in Schedule III.
The items contained in financial statements shall be in accordance with the applicable accounting standards.
Nothing contained in the Section 133(1) shall apply to:
- insurance companies
- banking companies
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- electricity companies
- other class of companies, accounts of which are governed by Special Acts
Part I of the Schedule III gives the format of Balance Sheet and general instructions for preparation of balance
sheet
Part II of the Schedule III gives the format of Profit & Loss Account (Income Statement) and general instructions
for preparation of Profit & Loss Account Laying of financial statements at AGM [Section 129(2)]: At every annual
general meeting of a company, the Board of Directors of the company shall lay before such meeting financial
statements for the financial year.
Consolidation of accounts [Section 129(3)]: Where a company has one or more subsidiaries, it shall, in addition to
financial statements provided, prepare a consolidated financial statement of the company and of all the
subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM of the company
along with the laying of its financial statement.
The company shall also attach along with its financial statement, a separate statement containing the salient
features of the financial statement of its subsidiary or subsidiaries in Form No. AOC-1 as per Companies (Accounts)
Rules, 2014.
The Central Government has been given power to provide for the consolidation of accounts of companies in
prescribed manner.
The word "subsidiary" shall include associate company and joint venture.
The provisions, which are applicable to the preparation, adoption and audit of the financial statements of a holding
company shall, mutatis mutandis, apply to the consolidated financial statements of subsidiaries. [Section 129(4)]
Deviation from the accounting standards [Section 129(5)]: Where the financial statements of a company do not
comply with the-accounting standards referred, the company shall disclose in its financial statements, the
deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out
of such deviation.
Exemption [Section 129(6)]: The Central Government may, on its own or on an application, exempt any class or
classes of companies from complying with any of the requirements of this section or the rules made thereunder,
if it is considered necessary to grant such exemption in the public interest. Such exemption may be granted either
unconditionally or subject to such conditions as may be specified in the notification.
Que. No. 20] Consolidation of financial statements is mandatory for all companies including unlisted companies
and private companies. CS (Executive) - June 2017 (5 Marks)
Ans.: A company is required to present a 'consolidated financial statement' if it is holding company and other is
subsidiary of earlier company.
As per Section 129(3), Where a company has one or more subsidiaries, it shall, in addition to financial statements
provided, prepare a consolidated financial statement of the company and of all the subsidiaries in the same form
and manner as that of its own which shall also be laid before the AGM of the company along with the laying of its
financial statement.
The company shall also attach along with its financial statement, a separate statement containing the salient
features of the financial statement of its subsidiary or subsidiaries in Form AOC-1 as per the Companies (Accounts)
Rules, 2014.
The Central Government may provide for the consolidation of accounts of companies in such manner as may be
prescribed.
Explanation: The word "subsidiary" shall include associate company and joint venture.
Thus, consolidation of financial statement is mandatory for all companies including unlisted and private company.
Que. No. 21] When balance sheet considered to be final? Is it an acknowledgement of debt?
Ans.: Balance sheet when final: The various provisions make it clear that it is only after the balance sheet and P &
L A/c have been placed before and considered by the general body of the shareholders of the company that they
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are finally accepted. It would, therefore, be correct to say that the balance sheet and the accounts of the company
are finalized only after the seal of approval of the shareholders is obtained. [Commissioner of Income Tax v.
National Industrial Corporation (1982) 52 Com Cases 535 : (1983) 1 Comp L] 100 (Del)]
Balance sheet as acknowledgement of debt: The balance sheet of a company wherein the company admits its
indebtedness in a certain sum, to any person, is sufficient acknowledgement of the debt. The approval of the
balance sheet in board meeting and signing of it by two directors is sufficient acknowledgement for purpose of the
Limitation Act. [Jones v. Bellegroves Properties Ltd. (1949) 2 All ER 198 (CA)]
Que. No. 22] The Board of directors of Grow More Ltd., a public company, has duly delegated its power to
approve the financial statement of the company for the year 2014-2015 to a committee of directors. The said
committee considered the financial statement and approved the same before the financial statement were
handed over to the statutory auditor of the company. Will you accept such approval of financial statement? CS
(Executive) - June 2012 (5 Marks)
Ans.: The financial statements are required to be placed only at an AGM and not at any other meeting. The board
of directors cannot delegate power to approve the financial statements to a committee of directors. In case the
financial statements are not ready for laying at the AGM, the company may adjourn the said AGM to a subsequent
date when the financial statements are expected to be ready for laying. This may be done by adopting a suitable
resolution adjourning the said AGM to a specified date. However, the adjourned AGM should, be held within
statutory time limit.
Que. No. 23] What are the provisions of the Companies Act, 2013 regarding re-opening of accounts on Court's
or Tribunal's orders?
Ans.: Re-opening of accounts on Court's or Tribunal's orders [Section 130]: A company shall n.ot re-open its books
of account and not recast its financial statements, unless an application in this regard is made by the Central
Government, the Income-tax authorities, SEBI, any other statutory regulatory body or authority or any person
concerned and an order is made by a Court of competent jurisdiction or the Tribunal to the effect that—
(i) The relevant earlier accounts were prepared in a fraudulent manner or
(ii) The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of
financial statements
However, the Court or the Tribunal shall give notice to the Central Government, the Income-tax authorities, SEBI
or any other statutory regulatory body or authority concerned or any other person concerned and shall take into
consideration the representations, if any, made by such authorities.
The accounts so revised or re-cast shall be final.
Period of which accounts can be re-opened: No order shall be made in respect of re-opening of books of account
relating to a period earlier than 8 financial years immediately preceding the current financial year. However, where
a direction has been issued by the Central Government for keeping of books of account for a period longer than 8
years, the books of account may be ordered to be re-opened within such longer period.
Que. No. 24] What are the provisions of the Companies Act, 2013 regarding voluntary revision of financial
statements or Board's report?
Ans.: Voluntary revision of financial statements or Board's report [Section 131(1)]: If it appears to the directors
of a company that the financial statement of the company or the report of the Board, do not comply with the
provisions of Section 129 or 134, they may prepare revised financial statement or a revised report in respect of any
of the 3 preceding financial years after obtaining approval of the Tribunal. Such application has to be made by the
company in prescribed form and in prescribed manner and a copy of the order passed by the Tribunal shall be filed
with the Registrar.
The Tribunal shall give notice to the Central Government and the Income tax authorities and shall take into
consideration the representations before passing any order amending the financial statements.
Such revised financial statement or report shall not be prepared or filed more than once in a financial year.
The detailed reasons for revision of the financial statement or report shall also be disclosed in the Board's report
in the relevant financial year in which such revision is being made.
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Limitation of revision of financial statements [Section 131 (2)]: Where copies of the previous financial statement
or report have been sent out to members or delivered to the Registrar or laid before the company in general
meeting, the revisions must be confined to —
(a) The correction in respect of which the previous financial statement or report do not comply with the provisions
of section 129 or 134 and
(b) The making of any necessary consequential alternation.
Rules by Central Government for revision of financial statement [Section 131(3)]: The Central Government may
make rules in relation to revised financial statement or a revised director's report. Such rules may, in particular —
(a) make different provisions according to which the previous financial statement or report are replaced or are
supplemented by a document indicating the corrections to be made
(b) make provisions with respect to the functions of the company's auditor in relation to the revised financial
statement or report
(c) require the directors to take such steps as may be prescribed.
Que. No. 25] The paid-up equity share capital of Strong Foundry Ltd. is ` 45 lakh. President (Finance) of the
company seeks your advice whether it is possible to re-open its books of account and recast the company's
financial statements of the previous year. You being the Secretary of the company, advise the President
(Finance) by preparing a note in this regard. CS (Executive) - June 2016 (4 Marks)
Ans.: Please refer to Answer of Que. Nos. 23 & 24.
Que. No. 26] Write a short note on: National Financial Reporting Authority
Ans.: Constitution of National Financial Reporting Authority [Section 132(1)]: The Central Government may, by
notification, constitute a National Financial Reporting Authority (NFRA) to provide for matters relating to
accounting and auditing standards under Companies Act, 2013.
Functions of NFRA [Section 132(2)]: Functions of the National Financial Reporting Authority are as follows-
(a) To make recommendations to the Central Government on the formulation and laying down of accounting
and auditing policies and standards for adoption by companies or class of companies or their auditors
(b) To monitor and enforce the compliance with accounting standards and auditing standards
(c) To oversee the quality of service of the professions associated with ensuring compliance with such standards,
and suggest measures required for improvement in quality of service and other related prescribed matters
(d) To perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.
Que. No. 27] Mention the importance of 'notes on accounts'. Will it convey meaning to stakeholders?
Ans.: One of the main objectives of the Annual Accounts of a company is to communicate effectively its strengths
and weaknesses. The bare figures encompassing the amounts are not sufficient by themselves to depict and explain
the true and fair view of the state of affairs of a company. It has, therefore, become necessary to explain and
communicate some of the vital information through 'Notes on Accounts'. By and large the notes on accounts are
explanatory. They elucidate the figures in the accounts and explain their significance.
Sometimes, these notes are clarificatory to meet the requirements of law. Whether a particular note is explanatory
or clarificatory will depend on the facts in each case and the manner in which it is stated. Notes on accounts form
an integral part of the accounts of a company and contain very interesting and vital information.
Contents of notes on accounts: The notes on accounts are intended to clarify and elucidate the financial position
of a company as disclosed in its balance sheet and profit and loss account. Generally, the notes on accounts dwell
on the following matters:
1. Basis of accounting
2. Significant accounting policies
3. Material changes, if any, in the method of accounting
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4. The effect of material changes in the method of accounting on any item in the financial statement in physical
terms to the extent ascertainable. Where such amount is not ascertainable, either wholly or in part, the fact should
be stated.
5. Method of valuation of fixed assets
6. Method of valuation of trade and other investments
7. Method of providing depreciation
8. Valuation of inventories
9. Treatment of any income and expenditure on cash basis as against accrual basis
10. Expenditure in foreign currency account
11. Foreign exchange conversion
12. Any disputed liabilities and claims against the company
13. Any major litigation pending by or against the company
14. Method of providing for retirement and terminal benefits
15. Remuneration paid to managerial personnel and their calculation thereof.
The above list is only illustrative and not exhaustive. There could be many other items in the Books of Account
which may be required to be explained, clarified or amplified so as to project a true and fair view of the state of
affairs of the company.
Que. No. 28/29] Who is authorized to prescribe accounting standards for the companies under the Companies
Act, 2013?
Ans.: Central Government to prescribe accounting standards [Section 133]: The Central Government may
prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered
Accountants of India, constituted under Section 3 of the Chartered Accountants Act, 1949, in consultation with
and after examination of the recommendations made by the NFRA.
Que. No. 30] Explain the legal provisions relating to approval and signing of financial statement under the
Companies Act, 2013? CS (Executive) - Dec 2013 (4 Marks)
Financial statements shall be signed by only by the Chairperson of the company. Explain.
Ans.: Approval and signing of financial statement [Section 134(1)]: The financial statement, including consolidated
financial statement, if any, shall be approved by the Board of Directors before signing.
The financial statements are signed on behalf of the Board by the following persons:
In the case of OPC, the financial statements are signed by only one director, for submission to the auditor for his
report.
Attachment of Auditor's Report [Section 134(2)]: The auditor's report shall be attached to every financial
statement.
Que. No. 31] The Board of Directors of Vishwakarma Electronics Ltd. consists of Mr. Ghanshyam, Mr. Hyder
(Directors) and Mr. Indersen (Managing Director). The company has also employed a full time Secretary. The
Profit & Loss Account and Balance Sheet of the company were signed by Mr. Ghanshyam and Mr. Hyder. Examine
whether the authentication of financial statements of the company was in accordance with the provisions of the
Companies Act, 2013? CA (Final) - Nov 2011 (5 Marks)
Ans.: As per Section 134(1), the financial statements are signed on behalf of the Board by the following persons:
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As per the facts given in the financial statements are signed by only two directors and it amounts to contravention
of Section 134(1).
The financial statement should have been signed by —
(1) Mr. Indersen (Managing Director)
(2) Mr. Ghanshyam or Mr. Hyder (Directors)
(3) Whole time Company Secretary
Que. No. 32] Adorable Ltd., incorporated under the Companies Act, 2013 has on its Board, 5 directors and a
Managing Director. The company has also appointed a Company Secretary. The financial statements of the
company, viz., balance sheet and statement of profit and loss for the year ended 31st March, 2015, were
authenticated under signatures of one director and the Company Secretary.
Referring to the provisions of the Companies Act, 2013, examine the validity of authentication. What shall be
your answer in case the company in question is a 'one person company'?
Ans.: As per Section 134(1), the financial statements are signed on behalf of the Board by the following persons:
As per the facts given in the financial statements are signed by only one director and Company Secretary and it
amounts to contravention of Section 134(1).
The financial statement should have been signed by -
(1) Managing Director
(2) One directors other than Managing Director
(3) Whole time Company Secretary
In the case of OPC, the financial statements are signed by only one director, for submission to the auditor for his
report.
Que. No. 33] The power of directors to approve the financial statement can be delegated to a committee of
directors or some of the directors. Comment.
Ans.: As per Section 134(1), the financial statement, including consolidated financial statement, if any, shall be
approved by the Board of Directors before signing.
Thus, to approval of the financial statement cannot be delegated to a committee of directors or some of the
directors.
Que. No. 34] The time gap between date of approval of financial statement by the board of directors of the
company and the date of notice of annual general meeting should be 45 days. Comment.
Ans.: As per Section 101, notice of every meeting including AGM has to be given 21 clear days before the date of
meeting.
As per Section 134(1), the financial statement shall be approved by the Board of Directors before signing.
As per Section 136(1), a copy of the financial statements, auditor's report and every other document required by
law to be annexed or attached to the financial statements, which are to be laid before a company in its general
meeting, shall be sent to —
(1) Every member of the company
(2) Every trustee for the debenture-holder
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(3) All persons who are entitled notice of the meeting (i.e. auditor, directors, legal representative of any
deceased member and the assignee of an insolvent member)
The notice of the meeting is required to be sent at least 21 clear days. Hence, financial statements have also to be
sent at least 21 clear days before the meeting.
Thus, the board of director should approve the financial statement at least 21 clear days before sending the notice
of AGM. There is no specific provision in the Companies Act, 2013 regarding gap between approval of financial
statement and sending the notice of meeting.
Que. No. 35] Write a short note on: Directors Responsibility Statement
Ans.: Directors Responsibility Statement [Section 134(5)]: The Directors Responsibility Statement referred shall
State following in Board's Report —
(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with
proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made judgments and
estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company
at the end of the financial year and of the profit and loss of the company for that period;
(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in
accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis; and
(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate and were operating effectively.
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and
that such systems were adequate and operating effectively.
Que. No. 36] Write a short note on: Issue, circulation and publication of various documents
Ans.: Issue, circulation and publication of various documents [Section 134(7)]: A signed copy of every financial
statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a
copy each of—
(a) Notes annexed to or forming part of financial statement
(b) Auditor's Report
(c) Board's Report
Que. No. 37] Who are entitled to receive the copy of financial statement? Can company sent abridged financial
statement instead of sending full financial statement?
Ans.: Right of member to copies of audited financial statement [Section 136(1)]: A copy of the financial
statements, auditor's report and every other document required by law to be annexed or attached to the financial
statements, which are to be laid before a company in its general meeting, shall be sent to —
The notice of the meeting is required to be sent at least 21 clear days. Hence, financial statements have also to be
sent at least 21 clear days before the meeting.
Exception: If the copies of the documents are sent less than 21 days before the date of the meeting, they shall,
notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members -
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(a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less
than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the
meeting.
Abridged financial statement in case of listed company [Proviso to Section 136(1)]: A listed company can send
abridged financial statement in Form AOC-3 as per Rule 10 of the Companies (Accounts) Rules, 2014.
However, copies of the financial statement and other documents should be made available for inspection at its
registered office during working hours for a period of 21 days before the date of the meeting.
If a shareholder asks for full financial statement, it shall be send to him.
Financial statement on website in case of listed company: A listed company shall also place its financial statements
including consolidated financial statements, if any, and all other documents required to be attached thereto, on
its website, which is maintained by or on behalf of the company.
Every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each
of subsidiary on its website, if any.
However, a listed company which has foreign subsidiary—
(a) Where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any
law of the country of its incorporation, the requirement shall be deemed to be met if consolidated financial
statement of such foreign subsidiary is placed on the website of the listed company.
(b) Where such foreign subsidiary is not required to get its financial statement audited under any law of the
country of its incorporation and which does not get such financial statement audited, the holding Indian listed
company may place such unaudited financial statement on its website and where such financial statement is in a
language other than English, a translated copy of the financial statement in English shall also be placed on the
website.
Que. No. 38] Write a short note on: Mode of sending financial statements
Ans.: Mode of sending financial statements [Section 20 & Rule 11 of the Companies (Accounts) Rules, 2014:
Financial statements can be sent to members and others through post or courier or hand delivery.
However, in case of listed company or a public company whose net worth is more than one crore and turnover
of more than ` 10 Crores, financial statement can be send by —
(a) E-mail if shares in demat form and e-mail id is registered with depository
(b) E-mail if shares are in physical form and members has consented in writing for receiving by e-mail.
(c) Post, Courier or hand delivery.
Que. No. 39] What are the provisions of the Companies Act, 2013 relating to inspection of financial statements?
Ans.: Inspection of financial statements [Section 136(2)]: A company shall allow every member or trustee of the
holder of any debentures issued by the company to inspect the financial statements, auditor's report and every
other document required by law to be annexed or attached to the financial statements at its registered office
during business hours.
Every company having a subsidiary or subsidiaries shall provide a copy of separate audited or unaudited financial
statements, as the case may be, as prepared in respect of each of its subsidiary to any member of the company
who asks for it.
Que. No. 40] An auditor of a company signed the balance sheet, profit & loss account and schedules/notes and
furnished the auditor's report on the same date on which the reports were signed by the directors on behalf of
the board. On the director raised objection stating that the audit cannot be completed and certified in a day. Do
you agree with directors and if not, why? CS (Executive) - Dec 2012 (5 Marks)
Ans.: Time gap between authentication of accounts and signing by auditor: Section 143 gives the auditors access
at all times to the books of account and vouchers of the company, which amply suggests that they do not have to
remain idle at any time after their appointment as auditors. Subject to the convenience of the company, he may
actually commence the checking up of vouchers, etc., and the company may prepare Trial balances, balance sheets
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etc, which will save time for the auditors in the preparation of their report in due course. Thus, if the auditor signs
the balance sheet on the same date on which the directors have approved it, it may not be inferred from the
circumstances that the auditor has not performed the audit efficiently. There is no violation of Section 134 where
the audit is completed before approval of the balance sheet by the Board of directors.
Que. No. 41] What are the provisions regarding filing of financial statement and other documents with ROC?
Give your opinion whether the Registrar of Companies can take financial statement on record even if it is not
laid before annual general meeting or placed before the extraordinary general meeting.
Ans.: Copy of financial statement to be filed with Registrar [Section 137(1)]: A copy of the financial statements,
including consolidated financial statement, along with all the documents attached to financial statements, duly
adopted at the AGM, shall be filed with the Registrar within 30 days of the date of AGM in prescribed manner
along with prescribed fees.
As per Rule 12 of the Companies (Accounts) Rules, 2014 —
- A financial statement shall be filed in Form AOC-4 which should be pre-certified by Practicing CA.
- The class of companies as may be notified by the Central Government, shall mandatorily file financial
statement in Extensible Business Reporting Language (XBRL) format.
Financial accounts to be filed even if not adopted in AGM: Even if financial statements are not adopted at AGM
or adjourned AGM, such un-adopted financial statements along with other required documents shall be filed with
the Registrar within 30 days of the date of AGM and the Registrar shall take them in his records as provisional till
the financial statements are filed with him after their adoption in the adjourned AGM for that purpose.
Financial statements adopted in the adjourned AGM shall be filed with the Registrar within 30 days of the date of
such adjourned AGM.
Filing of financial statement in case of OPC: OPC shall file a copy of the financial statements duly adopted by its
member, along with all the documents which are required to be attached to such financial statements, within 180
days from the closure of the financial year.
Filing of financial statement in case of companies having subsidiary outside India: In case of companies having
subsidiary outside India and which has no place of business in India, the accounts of subsidiary should also be filed
along with financial statement of the holding company.
However, in the case of foreign subsidiary which is not required to get its financial statement audited under any
law of the country of its incorporation and which does not get such financial statement audited, the requirements
shall be deemed to be met if the holding Indian company files such unaudited financial statement along with a
declaration to this effect and where such financial statement is in a language other than English, along with a
translated copy of the financial statement in English.
Financial statement to be filed even if AGM is not held [Section 137(2)]: Where the AGM of a company for any
year has not been held, the financial statements along with the documents required to be attached, duly signed
along with the statement of facts and reasons for not holding the AGM shall be filed with the Registrar within 30
days of the last date before which the AGM should have been held.
Que. No. 42] Director of the company along with another director were prosecuted under for their failure to file
return, annual accounts and audited balance sheet required to be laid before the annual general meeting. The
director moved the Court to quash the prosecution initiated by the ROC. As a Company Secretary in Practice
advise in the matter. CS (Executive) - Dec 2013 (4 Marks)
Ans.: The facts of the given case are similar to Kishan Prasad Palaypu v. Registrar of Companies [(2008) 83 SCL 376
(AP)]. A director of the company along with another director were prosecuted for their failure to file return, annual
accounts and audited balance sheet required to be laid before the annual general meeting. The director moved
the Court under Section 482 of the Code of Criminal Procedure for quashing the proceedings contending that the
complaints filed were barred by limitation. Dismissing the petition, the Court held that Section provides for penalty
at the rate of ` 1,000 for every day till the default continues, it was held that default in complying with the provisions
is a continuing default covered by Section 472 of the Code of Criminal Procedure. The contravention is a continuing
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offence and the period of limitation prescribed under Section 468 of the Code does not apply to the prosecution
launched against the company. Thus, the Court will reject to quash the prosecution initiated by the ROC.
Que. No. 43] Grow More Ltd. is a government company in which the Central Government and many State
Governments in India are members. The company has recently convened its annual general meeting at its
registered office. Does the legislature have any access to the annual reports of such a company? Give your
advice. CS (Executive) - June 2011 (4 Marks)
Ans.: As per Sections 394 & 395, in case of Government Companies, the Central Government must place before
both the Houses of Parliament an annual report on the working and affairs of each Government company within
three months of its annual general meeting together with a copy of the audit report and any comments upon or
supplement to such report made by the Comptroller and Auditor General of India. Where a State Government is a
member of a Government company, the annual report is likewise to be placed before the State Legislature.
Que. No. 44] Prudent General Insurance Company Ltd. is engaged in the general insurance business. The
company is not listed in any stock exchange in India but is a subsidiary of Reliable General Insurance Company
Ltd., listed at Bombay Stock Exchange. The turnover of Prudent General Insurance Company Ltd. is ` 330 Crore.
Examining the provisions of the Companies Act, 2013, state whether the company is required to file XBRL
enabled balance sheet. CS (Executive) - June 2016 (4 Marks)
Ans.: Filing of financial statements with Registrar in XBRL Format [Rule 3 of the Companies (Filing of Documents
and Forms in Extensible Business Reporting Language) Rules, 2015]: The following class of companies has to file
their Balance Sheet, Profit & Loss A/c and other documents with the Registrar using the Extensible Business
Reporting Language (XBRL) namely:
(1) All Companies listed with any Stock Exchange in India and their Indian subsidiaries.
(2) All Companies having paid-up capital of ` 5 Crore or above.
(3) All companies having turnover of ` 100 Crore or above.
(4) All companies which are required to prepare their financial statements in accordance with the Companies
(Indian Accounting Standards) Rules, 2015.
The companies which have filed their financial statements shall continue to file their financial statements and other
documents though they may not fall under the class of companies specified therein in succeeding years.
Companies in Banking, Insurance, Power Sectors and Non-Banki7ig Financial companies are exempted for
Extensible Business Reporting Language (XBRL) filing.
Thus, Prudent General Insurance Company Ltd. being an insurance company is not required to file their Balance
Sheet and Profit & Loss A/c in XBRL.
■ ■■ AUDIT
Que. No. 45] Who can be appointed as auditor of a company? CS (Inter) - June 2001 (4 Marks)
The Board of Directors of X Ltd. desirous of appointing CD & Co. as their auditors. What qualifications are
necessary for the auditor to be so appointed?
Ans.: Who can be appointed as auditor of a company [Section 141(1)]: A person shall be eligible for appointment
as an auditor of a company only if he is a Chartered Accountant. A firm whereof majority of partners practicing in
India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
Where a firm including a Limited Liability Partnership (LLP) is appointed as an auditor of a company, only the
partners who are Chartered Accountants shall be authorized to act and sign on behalf of the firm.
Que. No. 46] Discuss the provisions of the Companies Act, 2013 relating to appointment of auditor of a company.
Ans.: Appointment of auditor [Section 139(1)]: Every company whether it is public or private limited shall have an
auditor to audit its accounts. The appointment of auditor is mandatory in the Annual General Meeting (AGM).
Every company shall, at its first AGM, appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting.
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Before appointment of auditor, the written consent to such appointment, and a certificate in should be obtained
from the auditor. Such certificate shall also indicate whether the auditor satisfies the criteria provided in Section
141.
After appointing the auditor the company shall inform the auditor concerned of his or its appointment, and also
file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.
As per Rule 4(2) of the Companies (Audit & Auditors) Rules, 2014, such notice is required to be filed in Form ADT-
1.
Recommendations of audit committee [Section 139(11)]: If a company is required to constitute an Audit
Committee u/s 177, all appointments, including the filling of a casual vacancy of an auditor shall be made after
taking into account the recommendations of such committee.
Que. No. 47] Explain the concept of rotation of auditors as per Companies Act, 2013. Also state the class of
companies to which it is applicable.
Ans.: Rotation of auditors [Section 139(2)]: Listed company or a company belonging to such class or classes of
companies as may be prescribed, shall not appoint or re-appoint—
(a) An individual as auditor for more than one term of 5 consecutive years and
(b) An audit firm as auditor for more than two terms of 5 consecutive years.
However, an individual auditor who has completed his term of 5 years shall not be eligible for re-appointment as
auditor in the same company for 5 years from the completion of his term.
In case of an audit firm which has completed its 2 term of 5 years shall not be eligible for re-appointment as auditor
in the same company for 5 years from the completion of such term.
It is further provided that as on the date of appointment no audit firm having a common partner or partners to the
other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be
appointed as auditor of the same company for a period of 5 years.
As per Rule 5 of the Companies (Audit & Auditors) Rules, 2014 for the purposes of Section 139 (2), the class of
companies shall mean the following classes of companies excluding one person companies and small companies:-
(a) All unlisted public companies having paid up share capital of X 10 Crore or more;
(b) All private limited companies having paid up share capital of X 20 Crore or more;
(c) All companies having public borrowings from financial institutions, banks or public deposits of X 50 Crore or
more.
Strict provisions relating to rotation can be imposed by members [Section 139(3)]: Members of a company may
resolve to provide that: .
(a) In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may
be resolved by members or
(b) The audit shall be conducted by more than one auditor.
Power of Central Government to prescribe rules relating to rotation [Section 139(4)]: The Central Government
may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of Section
139(2).
Que. No. 48] On recommendation of the Board of Directors of DJA Ltd. (listed company), Mr. R is appointed at
the AGM held on 1st October, 2014 as the company's auditor for a period of 10 years. A resolution to this effect
was passed unanimously with no vote against the resolution. Explaining the provisions of the Companies Act,
2013 relating to the appointment and re-appointment of auditors:
(i) Examine the validity of the above resolution.
(ii) What shall be your answer in case an audit firm Messrs R & Associate is appointed as the company's
auditor? CA (Final) - Nov 2014 (5 Marks)
Ans.: As per Section 139(2), an individual shall not appointed or re-appointed as auditor for more than one term
of 5 consecutive years. Thus, the appointment of Mr. R as auditor of the company for 10 years is not valid.
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As per Section 139(2), an audit firm shall not appointed or re-appointed as auditor for more than two term of 5
consecutive years. This means that a firm can be appointed for 5 years and thereafter may be reappointed for
further 5 years. The total period for which a firm can be appointed is 10 years. A firm cannot be appointed as
auditor for 10 years by a single resolution. Thus, the appointment of Messrs R & Associate as the company's auditor
for ten years by a single resolution is not valid.
Que. No. 49] State the provisions relating to appointment of first auditor.
Ans.: Appointment of first auditor [Section 139(6)]: The first auditor of a company shall be appointed by the Board
of Directors within 30 days from the date of registration of the company. If the Board of Directors fails to appoint
such auditor, it shall inform the members of the company, who shall within 90 days at an extraordinary general
meeting appoint auditor and such auditor shall hold office till the conclusion of the first AGM.
Appointment of first auditor by Government company [Section 139(7)]: In the case of a Government Company or
any other company owned or controlled, directly or indirectly, by the Central or any State Government(s) the first
auditor shall be appointed by the Comptroller & Auditor-General (CAG) within 60 days from the date of registration
of the company. If CAG of does not appoint auditor within 60 days, the Board of Directors of the company shall
appoint auditor within the next 30 days and in the case of failure of the Board to appoint such auditor within the
next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an
EGM, who shall hold office till the conclusion of the first AGM.
Tenure of first auditor: The first auditor shall hold office till the conclusion of first AGM.
Que. No. 50] State the provisions relating to appointment of subsequent auditor in case of Government
Companies.
Ans.: Appointment of subsequent auditor in case of Government Companies [Section 139(5)]: In the case of a
Government company or any other company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government or Governments, or partly by the Central Government and partly by one
or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year,
appoint an auditor duly qualified to be appointed as an auditor of companies, within a period of 180 days from the
commencement of the financial year.
Tenure: The auditor shall hold office till the conclusion of the AGM.
Que. No. 51] Write a short note on: Filling of casual vacancy of auditors
Ans.: Filling of casual vacancy of auditors [Section 139(8)(i)]: Any casual vacancy in the office of an auditor shall
be filled by the Board of Directors within 30 days. If’such casual vacancy is as a result of the resignation of an
auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months
of the recommendation of the Board and he shall hold the office till the conclusion of the next AGM.
Filling of casual vacancy of auditors by government company [Section 139(8)(ii)]: In the case of a government
company, any casual vacancy in the office of an auditor shall be filled by the CAG within 30 days. If the CAG does
not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.
Que. No. 52] Mr. A was appointed auditor of AAS Ltd. by Board to fill the casual vacancy that arose due to death
of the auditor originally appointed in AGM. Subsequently, Mr. A also resigned on health grounds during the
tenure of appointment. Comment how the vacancy arising in the place of audit will be filled up?
Ans.: As per Section 139(8), any casual vacancy in the office of an auditor shall be filled by the Board of Directors
within 30 days. If casual vacancy is as a result of the resignation of an auditor, such appointment shall also be
approved by the company at a general meeting convened within 3 months of the recommendation of the Board.
In the present case the auditor Mr. A resigned and the vacancy had been filled in by Board. But, the vacancy caused
by resignation cannot be filled by Board, since it does not amount to casual vacancy; it can be filled only
shareholders in general meeting.
The fact that Mr. A was appointed by the Board of Directors, originally is a matter irrelevant in this situation. If the
cause of vacancy is resignation, then the power of appointment shall vest with the general meeting only.
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Que. No. 53] Due to the resignation of the existing auditor, the board of directors of Hanuman Ltd. appoints Ram
as the auditor. Comment.
Ans.: As per Section 139(8) of the Companies Act, 2013, a casual vacancy, caused by the resignation of an auditor,
can be filled only by the company in a general meeting convened within 3 months of the recommendation of the
Board. Thus, the appointment of Ram by the Board of Directors of Hanuman Ltd. is not valid.
Que. No. 54] Write a short note on: Re-appointment of Auditors
Ans.: Re-appointment of Auditors [Section 139(9)]: A retiring auditor may be re-appointed at an AGM if:
(a) He is not disqualified for re-appointment
(b) He has not given the company a notice in writing of his unwillingness to be re-appointed; and
(c) A special resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed.
It is, however, to be noted that the re-appointment of the existing auditor is not automatic as there must be an act
of the company re-appointing him by passing a resolution.
No auditor is appointed or re-appointed [Section 139(10)]: Where at any annual general meeting, no auditor
is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
Que. No. 55] Write a short note on: Removal of auditors
Rao & Rao, a firm of chartered accountants, have to be appointed in place of Shah & Shah as the auditor of
Freebee Ltd. explain the steps to be taken with regard to appointment of auditor.
Ans.: Removal of auditors [Section 140(1)]: The auditor may be removed from his office before the expiry of his
term only by a special resolution of the company, after obtaining the previous approval of the Central Government.
The outgoing auditor shall be given a reasonable opportunity of being heard.
As per Rule 7(1) of the Companies (Audit & Auditors) Rules, 2014, the application to the Central Government for
removal of auditor shall be made in Form ADT-2 along with prescribed fees.
The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for
passing the special resolution.
Requirement of special notice [Section 140(4)]: Special notice shall be required for a resolution at an AGM
appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not
be re-appointed. However, special notice is not required if the retiring auditor is not appointed due to completion
of consecutive tenure of 5 years or 10 years, as provided under Section 139(2).
On receipt of notice of such a resolution, the company shall forthwith send a copy to the retiring auditor.
Where notice is given and the retiring auditor makes representation in writing to the company of a reasonable
length and requests its notification to members of the company, the company shall, unless the representation is
received by it too late for it to do so,
(a) in any notice of the resolution given to members of the company, state the fact of the representation having
been made and
(b) send a copy of the representation to every member of the company to whom notice of the meeting is sent,
whether before or after the receipt of the representation by the company
If a copy of the representation is not sent because it was received too late or because of the company's default,
the auditor may require that the representation shall be read out at the meeting.
If copy of representation is not sent a copy thereof shall be filed with the Registrar.
If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights
conferred by Section are being abused by the auditor, then, the copy of the representation may not be sent and
the representation need not be read out at the meeting.
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The Tribunal either suo motu or on an application made to it by the Central Government or by any person
concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent
manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by
order, direct the company to change its auditors.
If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is
required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor
and the Central Government may appoint another auditor in his place.
An auditor, whether individual or firm, against whom final order has been passed by the Tribunal shall not be
eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order
and the auditor shall also be liable for action u/s 447.
Explanation I: It is clarified that the case of a firm, the liability shall be of the firm and that of every partner or
partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its director or officers.
Explanation II: "Auditor" includes a firm of auditors.
Que. No. 56] Write a short note on: Resignation by Auditor
Ans.: Resignation by Auditor [Section 140(2)]: The auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, a statement in the prescribed form with the company and the
Registrar, and in case of government companies referred to in Section 139(5), the auditor shall also file such
statement with the CAG indicating the reasons and other facts as may be relevant with regard to his resignation.
As per Rule 8 of the Companies (Audit & Auditors) Rules, 2014, when an auditor has resigned from the company,
he shall file a statement in Form ADT-3.
Que. No. 57] Manohar, the auditor of Belle Ltd. appointed by the company in its last general meeting has
resigned from the office of auditor of the company for some personal reasons.
Referring to the provisions of the Companies Act, 2013, answer the following:
(a) Who is the competent authority to accept and approve the resignation?
(b) State the manner in which the vacancy caused by Manohar's resignation shall be filled in,
Ans.: Resignation by Auditor [Section 140(2)]: The auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, a statement in the prescribed form with the company and the
Registrar, and in case of government companies referred to in Section 139(5), the auditor shall also file such
statement with the CAG indicating the reasons and other facts as may be relevant with regard to his resignation.
As per Rule 8 of the Companies (Audit & Auditors) Rules, 2014, when an auditor has resigned from the company,
he shall file a statement in Form ADT-3.
There is no specific provision in the Companies Act, 2013 regarding approval of resignation of auditor, but as
general power of company vest in directors they are competent to accept and approve the resignation of auditor.
Filling of casual vacancy of auditors [Section 139(8)(i)]: Any casual vacancy in the office of an auditor shall be filled
by the Board of Directors within 30 days. If such casual vacancy is as a result of the resignation of an auditor, such
appointment shall also be approved by the company at a general meeting convened within 3 months of the
recommendation of the Board and he shall hold the office till the conclusion of the next AGM.
Filling of casual vacancy of auditors by government company [Section 139(8)(ii)]: In the case of a government
company, any casual vacancy in the office of an auditor shall be filled by the CAG within 30 days. If the CAG does
not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.
Ans.: Disqualification of Statutory Auditor [Section 141(3)]: The following persons shall not be eligible for
appointment as an auditor of a company, namely:
(a) A body corporate other than a limited liability partnership
(b) An officer or employee of the company
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(c) A person who is a partner or employee of an officer or employee of the company
(d) A person who, or his relative or partner —
(i) Is holding any security of or interest in the company or its subsidiary, or of its holding or associate company
or a subsidiary of such holding company. However the relative may hold security or interest in the company of face
value not exceeding ` 1,000 or such sum as may be prescribed.
As per Rule 10(1) of the Companies (Audit & Auditors) Rules, 2014, for the purpose of Section 141(3)(d)(i), a
relative of an auditor may hold securities in the company of face value not exceeding ` 1,00,000.
(ii) Is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding
company, in excess of such amount as may be prescribed
As per Rule 10(2) of the Companies (Audit & Auditors) Rules, 2014, for the purpose of Section 141 (3)(d)(ii), person
who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company
or a subsidiary of such holding company, in excess of ` 5,00,000 shall not be eligible for appointment.
(iiz) Has given a guarantee or provided any security in connection with the indebtedness of any third person to the
company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such
amount as may be prescribed
As per Rule 10(3) of the Companies (Audit & Auditors) Rules, 2014, for the purpose of Section 141(3)
(d)(iii), a person who or whose relative or partner has given a guarantee or provided any security in connection
with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or
a subsidiary of such holding company, in excess of ` 1,00,000 shall not be eligible for appointment.
(e) A person or a firm who, whether directly or indirectly, has business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of
such nature as may be prescribed
As per Rule 10(4) of the Companies (Audit & Auditors) Rules, 2014, for the purpose Section 141(3)(e), the term
"business relationship" shall be construed as any transaction entered into for a commercial purpose, except—
(t) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor
or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under
those Acts;
(ii) commercial transactions which are in the ordinary course of business of the company at arm's length price -
like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies
engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
(f) A person whose relative is a director or is in the employment of the company as a director or key managerial
personnel
(g) A person who is in full time employment elsewhere or a person or a partner of a firm holding appointment
as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment
as auditor of more than 20 companies
In case of private companies Section 141(3)(g) shall apply with the modification that the words "other than one
person companies, dormant companies, small companies and private companies having paid-up share capital less
than ` 100 Crores" shall be inserted after the words "twenty companies" - Notification [F no. 1/1/2014 - CL. V],
dated 5.6.2015.
(h) A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not
elapsed from the date of such conviction
(i) A person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding
company or its subsidiary company.
Vacation of office if auditor is disqualified after appointment [Section 141(4)]: Where a person appointed as an
auditor of a company incurs any of the disqualifications mentioned in Section 141 (3) after his appointment, he
shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the
auditor.
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Que. No. 59] Mr. A is a part-time Practicing Chartered Accountant and is the financial controller of X Ltd. The
company wants to appoint him as its auditor in the ensuing annual general meeting. Offer your comments in
the matter.
Ans.: As per Section 141(3), an officer or employees of the company are not qualified for appointment as auditor
of a company. In the present case Mr. A is the financial controller and thus an officer of the company. Therefore,
he is disqualified for appointment as an auditor of the company.
Que. No. 60] Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory
Auditor of Krishna Ltd. for the accounting year 2014-2015. Mr. Hanuman holds 100 equity shares of Shiva Ltd.,
a subsidiary company of Krishna Ltd.
Ans.: As per Section 141(3)(d), a person who is holding any security of the company or its subsidiary is disqualified
for appointment as auditor.
In the present case, Mr. Hanuman, a partner of M/ s. Ram and Hanuman Associates, holds 100 equity shares of
Shiva Ltd., which is a subsidiary of Krishna Ltd. As such, the firm, M/s. Ram and Hanuman Associates would be
disqualified to be appointed as statutory auditor of Shiva Ltd. Thus, firm is also disqualified for appointment of
auditor in Krishna Ltd. (i.e. Holding Company)
Que. No. 61] Amol & Co., a proprietary firm of Amol, a Chartered Accountant in practice, has been appointed as
the statutory auditor by a private limited company. Subsequently, it came to light that Mr. Amol has been
holding less than 1% of the shares of that company. Will this vitiate the appointment of the statutory auditor?
Answer with reasons. CS (Inter) - June 2005 (4 Marks)
for appointment as auditor. Since Mr. Amol has been holding some shares of the company, he is disqualified for
appointment as auditor and his appointment is not valid.
Que. No. 62] Sanjay, a Chartered Accountant, is the financial controller of Sonik Industries (Pvt.) Ltd. for the last
five years. The company now wants to appoint him as the statutory auditor of the company. Examining the
provisions of the Companies Act, 2013, advise whether the company can appoint Sanjay as its statutory auditor.‘
Ans.: As per Section 141(1), a person shall be eligible for appointment as an auditor of a company only if he is a
Chartered Accountant.
As per Section 141(3), an officer or employee of the company is disqualified for appointment as an auditor.
As per facts given in case, Sanjay is employee of Sonik Industries Ltd. working as financial controller and he is
disqualified for appointment as an auditor.
Que. No. 63] Ram is a Chartered Accountant in practice. His proprietary concern has been appointed as the
statutory auditor of a private limited company. Subsequently, it came to light that Mrs. Ram has been holding
less than 1% shares of that private limited company. Examine the legal validity of the appointment of statutory
auditor. CS (Executive) - Dec 2017 (4 Marks)
for appointment as auditor. Since, Ram has been holding some shares of the company, he is disqualified for
appointment as auditor and his appointment is not valid.
Que. No. 64] Write a short note on: Remuneration of auditors
Ans.: Remuneration of auditors [Section 142]: The remuneration of the auditor shall be fixed in its general meeting
or in such manner as may be determined therein. However the Board may fix remuneration of the first auditor
appointed by it.
The remuneration shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the
auditor in connection with the audit of the company and any facility extended to him but does not include any
remuneration paid to him for any other service rendered by him at the request of the company.
Que. No. 65] Discuss in brief the various rights of statutory auditors.
Ans.: Statutory Auditor of a company has been given enough vested power by the act so as to enable him to carry
out the auditing of the books of account independently. The rights of a auditors are discussed herein given below:
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(1) Right to receive information and explanations: The company auditor has to state in his report, whether he
has received necessary information and explanations for the purpose of audit. When the auditor is not provided
the information required by him his only remedy would be to report the same to the shareholder's through
qualification in the auditor's report. [Section 143(1)]
(2) Right of accessibility to the books and records: The auditor enjoys the right of accessibility to books and
records because he has to mention in his report whether proper books and recordsqre maintained. It is for the
auditor to determine what record or document is necessary for the purpose of the audit. [Section 143(1)]
The auditor of a company which is a holding company shall also have the right of access to the records of all its
subsidiaries and associate companies in so far as it relates to the consolidation of its financial statements with that
of its subsidiaries and associate companies. [Proviso to Section 143(1)]
(3) Right to visit branches: Since the auditor has to report on the consolidated financial statements which also
include the results of the branch operations, he has the right to visit the branches to obtain information. Even if
the branch accounts are audited by another auditor, this right is still available because it is possible that the auditor
may not be getting full information from the branch auditor regarding the branch accounts.
(4) Right of lien: The term lien refers to the right of possession. The auditor enjoys this right over the books of
the clients if there is a fee due. The guidelines to be followed while exercising this right is:
(a) Documents retained must belong to the client who owes the money.
(b) Documents must have come into possession of the auditor on the authority of the client. They must not have
been received through irregular or illegal means. In case of a company client, they must be received on the
authority of the board of directors.
(c) Such of the documents can be retained which are connected with the work on which fees have not been
paid.
Que. No. 66] Discuss in brief the various duties of statutory auditors. CS (Inter) - June 2002 (10 Marks)
Ans.: The duties of an auditor are many and varied. He must examine the original books of account, kept by the
company to discover any inaccuracies or omissions therein, to examine the company's balance sheet and profit
and loss account, and report on the original books of account and the annual accounts to the members.
Duties of Auditor [Section 143(1)]: An auditor has to inquire:
(a) Whether loans and advances are properly secured and the terms on which they have been made are not
prejudicial to the interests of the company or its members;
(b) Whether transactions which are represented merely by book entries are not prejudicial to the interests of
the company;
(c) Where the assets of the company as consists of shares, debentures and other securities have not been sold
at a price less than that at which they were purchased by the company (except for investment or a banking
company);
(d) Whether loans and advances made by the company have not been shown as deposits;
(e) Whether personal expenses have not been charged to revenue accounts;
(f) Whether cash has actually been received in respect of any shares shown in the books to have been allotted for
cash; and if no cash has actually been so received, the position as stated in the books is correct, regular and is not
misleading.
Duty of the auditor to make a report to the members [Section 143(2)]: It is the duty of the auditor to make a
report to the members of the company on the accounts examined by him, and on every balance sheet, every profit
and loss account and on every other document to be part of or annexed to the balance sheet or profit and loss
account and laid before the company in general meeting.
Auditors Report [Section 143(3)]: The report, besides other things necessary in any particular case, must expressly
state:
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(a) Whether he has sought and obtained all the information and explanations which to the best of his knowledge
and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such
information on the financial statements;
(b) Whether, in his opinion, proper books of account as required by law have been kept by the company so far
as appears from his examination of those books and proper returns adequate for the purposes of his audit have
been received from branches not visited by him
(c) Whether the report on the accounts of any branch office of the company by a person other than the
company's auditor has been sent to him under the proviso to that sub-section and the manner in which he has
dealt with it in preparing his report;
(d) Whether the company's balance sheet and profit and loss account dealt with in the report are in agreement
with the books of account and returns;
(e) Whether in his opinion, the financial statements comply with the accounting standards;
(f) The observations or comments of the auditors on financial transactions or matters which have any adverse
effect on the functioning of the company;
(g) Whether any director is disqualified from being appointed as a director u/s 164 (2);
(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters
connected therewith;
(i) Whether the company has adequate internal financial controls with reference to financial statements in
place and the operating effectiveness of such controls;
(j) Such other matters as may be prescribed.
Duty to give reason for qualification in audit report [Section 143(4)]: Where any of the above matters is answered
in the negative or with a qualification, the auditor's report must state the reason for the same.
Duty to comply with Auditing Standards [Section 143(9)]: Every auditor shall comply with the Auditing Standards.
(It is to be noted that auditor has to comply with auditing standards and not accounting standards. Combiling
accounting standards is duty of management and not of auditor)
As per Section 143(10), the Central Government may prescribe the standards of auditing or any addendum thereto,
as recommended by the ICAI in consultation with the National Financial Reporting Authority (NFRA). However,
until any auditing standards are notified, any standard or standards of auditing specified by the ICAI shall be
deemed to be the auditing standards.
Duty to sign audit reports [Section 145]: The person appointed as an auditor of the company shall sign the auditor's
report or sign or certify any other document and the qualifications, observations or comments on financial
transactions or matters, which have any adverse effect on the functioning of the company mentioned in the
auditor's report shall be read before the company in general meeting and shall be open to inspection by any
Duty to attend general meeting [Section 146]: All notices of, and other communications relating to, any general
meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by
the company, attend either by himself or through his authorized representative, who shall also be qualified to be
an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which
concerns him as the auditor.
Under Section 143(11) the Central Government may, in consultation with the NFRA, by general or special order,
direct, in respect of certain class or description of companies, that the auditor's report shall also include a
statement on such matters as may be specified therein the Central Government is empowered to issue order
requiring the auditor to include in his report a statement on such matters as may be specified.
Que. No. 67] Peculiar Ltd., an unlisted company, did not prepare its financial statements for the year ended 31st
March, 2017 in conformity with some of the mandatory accounting standards. With reference to the provisions
of the Companies Act, 2013, state the responsibilities of the directors and statutory auditors of the company in
this regard. CS (Executive) - Dec 2016 (4 Marks)
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Ans.: As per Section 129(1), the financial statements shall comply with the accounting standards notified under
Section 133. The items contained in financial statements shall be in accordance with the applicable accounting
standards.
As per Section 129(5), where the financial statements of a company do not comply with the accounting standards
referred, the company shall disclose in its financial statements, the deviation from the accounting standards, the
reasons for such deviation and the financial effects, if any, arising out of such deviation.
As per Section 134(5), the Directors Responsibility Statement referred shall state in Board's Report that in the
preparation of the annual accounts, the applicable accounting standards had been followed along with proper
explanation relating to material departures.
As per Section 143(9), every auditor shall comply with the Auditing Standards. Duty to comply with accounting
standards in on company and its directors and not on auditor of the company. Auditor has to comply only with
Auditing Standards only.
Que. No. 68] The auditors of PQR Ltd. accepted the Certificate of the Manager, a person of knowledge,
competence and high reputation, as to the value of the stock in trade. The stock was grossly overstated for
several years in the balance sheets of the company. As a result of this over valuation dividends were paid out of
capital.
The Auditors did not examine the books of account very minutely. If they had done so and compared the amount
of stock at the beginning of the year, with the purchases and sales, during the year, they would have noticed the
over valuation. The company subsequently went into liquidation and the auditors were sued to make good the
loss caused by the wrongful payment of dividends relying on the balance sheets figures. Based on the above
facts, you are required to decide, with reference to the provisions of the Companies Act, 2013 and the decided
case laws, the following issues:
(i) Whether auditors of the company will be liable for the loss caused to the company by the wrongful
payment of dividends based on the Balance Sheets duly audited by the Auditors.
(ii) What are statutory duties of the Auditors in this regard? CA (Final) - Nov 2016 (8 Marks)
Ans.: Section 143 provides that the main duty of the auditor is to make a report to the members of the company
on the accounts examined by him and the balance sheet and the profit and loss account and on every document
which is annexed to the balance sheet or profit and loss account laid before the company in general meeting. The
auditor owes a duty to the members to state whether the accounts give a true and fair view of the affairs of the
company at the end of the financial year and of the profit and loss account of the year.
The duty of an auditor is to give information in direct and express terms and not merely to arouse inquiry.
[Crichton's Oil Co. Re (1902) 2ch 86]
If he discovers that any illegal or improper payments or any other papers have been made, his duty will be to make
it public by reporting.
The auditor occupies a fiduciary position in relation to the shareholders and in auditing the accounts maintained
by the directors, he must act in the best interest of the shareholders who are in the position of beneficiaries. But,
there is a limitation relating the duties to be performed by the auditors. An auditor is not bound to be a detective,
as loss laid to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is
a watchdog but not a bloodhound. He is justified in believing tried servants of the company in whom confidence is
placed by the company. He is entitled to assume that they are honest and to rely upon their representations,
provided he takes reasonable care. If there is anything calculated to excite suspicion, he should probe it to the
bottom, but in the absence of anything of that kind he is only bound to be reasonably cautious and careful.
The above problem is related to case of Kingston Mill Co. Re (No 2) (1896) 2 ch 279. In this case it was held that,
the auditors were not liable. It is not auditor's duty to take stock. There are many matters in which he may rely on
the honesty and accuracy of others. Further they (auditors) do not guarantee the discovery of all frauds.
Que. No. 69] What are the special provisions are made under the Companies Act, 2013 in relation to audit of
Government Companies?
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Ans.: Direction by CAG in relation to government audit [Section 143(5)]: In the case of a Government company
or any other company owned or controlled by the Central or State Government, the Comptroller & Auditor-
General (CAG) of India shall appoint the auditor Section 139(5) or 139 (7).
The Comptroller & Auditor-General direct appointed auditor the manner in which the accounts of the Government
companies are required to be audited.
The auditor so appointed shall submit a copy of the audit report to the Comptroller & Auditor-General of India.
Such audit report includes the directions issued by the Comptroller & Auditor-General of India, the action taken
thereon and its impact on the accounts and financial statement of the company.
Right of CAG to conduct supplementary audit [Section 143(6)]: The Comptroller & Auditor-General of India shall
within 60 days from the date of receipt of the audit report have a right to conduct a supplementary audit of the
financial statement of the government company by person authorized him. For the purposes of such audit, he may
require information or additional information to be furnished to person authorized by him, on such matters and in
such form, as the Comptroller and Auditor-General of India may direct.
The Comptroller & Auditor-General of India may comment upon or supplement such audit report.
Any comments given by the Comptroller & Auditor-General of India upon, or supplement to, the audit report shall
be sent by the company to every person entitled to copies of audited financial statements and also be placed
before the AGM of the company at the same time and in the same manner as the audit report.
Test Audit [Section 143(7)]: The Comptroller & Auditor-General of India may by an order, cause test audit of the
accounts and the provisions of section 19A of the Comptroller and Auditor-General's (Duties, Powers &
Conditions of Service) Act, 1971, shall apply to the report.of such test audit.
Que. No. 70] Write a brief note on branch audit.
Ans.: Branch Audit [Section 143(8)]: Where a company has a branch office, the accounts of that office shall be
audited either by the company's auditor appointed for the company or by any other person qualified for
appointment as an auditor of the company.
Where the branch office is situated in a country outside India, the accounts of the branch office shall be audited
either by the company's auditor or by an accountant or by any other person duly qualified to act as an auditor of
the accounts of the branch office in accordance with the laws of that country.
The duties and powers of the company's auditor with reference to the audit of the branch and the branch auditor,
if any, shall be such as may be prescribed.
As per Rule 12 of the Companies (Audit & Auditors) Rules, 2014, duties and powers of the company's auditor with
reference to the audit of the branch and the branch auditor are as follows.
(1) For the purposes of Section 143(8), the duties and powers of the company's auditor with reference to the
audit of the branch and the branch auditor, if any, shall be as contained in Section 143(1) to 143(4).
(2) The branch auditor shall submit his report to the company's auditor.
(3) The provisions of Section 143(12) with Rule 12 hereunder regarding reporting of fraud by the auditor shall
also extend to such branch auditor to the extent it relates to the concerned branch.
The branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor
of the company who shall deal with it in his report in such manner as he considers necessary.
Que. No. 71] State the provisions relating to reporting of fraud by an auditor as contained in the Companies Act,
2013.
Ans.: Duty to report fraud [Section 143(13) to (15)]: If an auditor of a company in the course of the performance
of his duties as auditor, has reason to believe that an offence of fraud involving prescribed amount, is being or has
been committed in the company by its officers or employees, the auditor shall report the matter to the Central
Government within prescribed time and in prescribed manner.
In case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit
committee constituted under Section 177 or to the Board in other cases within prescribed time and in prescribed
manner.
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The companies, whose auditors have reported frauds to the audit committee or the Board but not reported to the
Central Government, shall disclose the details about such frauds in the Board's report in prescribed manner.
Reporting of frauds by auditor [Rule 13 of the Companies (Audit & Auditors) Rules, 2014]:
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to
believe that an offence of fraud, which involves or is expected to involve individually an amount of ` 1 or above, is
being or has been committed against the company by its officers or employees, the auditor shall report the matter
to the Central Government.
(2) The auditor shall report the matter to the Central Government as under:
(a) The auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately
but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days.
(b) On receipt of such reply or observations, the auditor shall forward his report and the reply or observations
of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the
Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or
observations.
(c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the
stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing
the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not
received any reply or observations.
(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post
with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.
(e) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact
telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership
Number.
(f) The report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving lesser than the amount specified, the auditor shall report the matter to Audit
Committee constituted u/ s 177 or to the Board immediately but not later than 2 days of his knowledge of the
fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
(4) The following details of each of the fraud reported to the Audit Committee or the Board during the year shall
be disclosed in the Board's Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during
the performance of his duties u/ss 148 and 204 respectively.
Que. No. 72] Which type of services cannot be provided by the auditor as provided in Section 144 of the
Companies Act, 2013?
A statutory auditor of a private limited company is restricted to take up any other assignment in the companies.
Ans.: Auditor not to render certain services [Section 144]: An auditor shall provide to the company only such other
services as are approved by the Board of Directors or the audit committee, but which shall not include any of the
following services whether such services are rendered directly or indirectly to the company or its holding company
or subsidiary company, namely:
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(i) Accounting and book keeping services (zi) Internal audit
(iii) Design and implementation of any financial information system
(iv) Actuarial services
(v) Investment advisory services
(vi) Investment banking services
(vii) Rendering of outsourced financial services (viii) Management services and (ix) Any other kind of prescribed
services
Explanation: The term "directly or indirectly" shall include rendering of services by the auditor:
(i) In case of auditor being an individual, either himself or through his relative or any other person connected or
associated with such individual or through any other entity, whatsoever, in which such individual has significant
influence or control, or whose name or trade mark or brand is used by such individual.
(ii) In case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or
associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant
influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
Que. No. 73] Rajesh & Ramesh Co., Chartered Accountants, are the statutory auditor of FDE Textiles Pvt. Ltd.
DEF Products Ltd., the holding company of FDE Textiles Pvt. Ltd., is considering to allot assignment of designing
of financial information system to Rajesh & Ramesh Co. Comment and advise the Board of directors of DEF
Products. Ltd. on the above. CS (Professional) - Dec 2017 (5 Marks)
Ans.: As per Section 144, an auditor shall not provide certain services directly or indirectly to the company or its
holding company or subsidiary company.
"Design and implementation of any financial information system" is covered by Section 144.
As per facts given in case, Rajesh & Ramesh Co. is appointed as statutory auditor of the FDE Textiles Pvt. Ltd. and
DEF Products Ltd. is its holding company. Thus, auditor is prohibited to give such service to FDE Textiles Pvt. Ltd.
as well as DEF Products Ltd. as provided in Section 144.
Ans.: Auditor to sign audit reports [Section 145]: The person appointed as an auditor of the company shall sign
the auditor's report or sign or certify any other document of the company in accordance with the provisions of
Section 141(2).
Qualification to be read in general meeting and inspection thereof: The qualifications, observations or comments
on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned
in the auditor's report shall be read before the company in general meeting and shall be open to inspection by any
Que. No. 75] Whether it obligatory for the auditor to attend the annual general meeting under the Companies
Act, 2013? What are the right available to him, when he attends such meeting?
Ans.: Auditors to attend general meeting [Section 146]: All notices of, and other communications relating to, any
general meeting shall be forwarded to the auditor of the company.
The auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorized
representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard
at such meeting on any part of the business which concerns him as the auditor.
Que. No. 76] What are the punishments provided under the Companies Act, 2013 relating to contravention of
provisions relating to "audit & auditors (i.e. Sections 139 to 146)"?
Ans.: Punishment for contravention of provisions relating to "audit & auditors" [Section 147(1)]: If any of
the provisions of Sections 139 to 146 (both inclusive) is contravened:
- The company shall be punishable with fine which shall not be less than ` 25,000 but which may extend to `
5,00,000 or 4 times of his remuneration whichever is less.
- Every officer of the company who is in default shall be punishable with imprisonment for a term which may
extend to 1 year or with fine which shall not be less than ` 10,000 but which may extend to ` 1,00,000 or with both.
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Punishment for Auditors [Section 147 (2)]: If an auditor of a company contravenes any of the provisions of Section
139,143,144 or 145, the auditor shall be punishable with fine which shall not be less than ` 25,000 but which may
extend to f 5,00,000.
If an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or
its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may
extend to 1 year and with fine which shall not be less than ` 50,000 but which may extend to ` 25,00,000 or 8 times
of his remuneration whichever is less.
Conviction of auditor [Section 147 (3)]: Where an auditor has been convicted Section 147 (2), he shall be liable to
—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to members or creditors of the company
for loss arising out of incorrect or misleading statements of particulars made in his audit report.
Measures for prompt payment of damages [Section 147(4)]: The Central Government shall, by notification, specify
any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the
persons under Section 147(3)(ii).
Such body, authority or officer shall after payment of damages to such company or persons file a report with the
Central Government in respect of making such damages in such manner as may be specified in the said notification.
Joint and several liability of partners [Section 147(5)]: Where, in case of audit of a company being conducted by
an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner
or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability,
whether civil or criminal as provided in Companies Act, 2013 or in any other law for the time being in force, for
such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.
However, in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner
or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only
be liable.
Que. No. 77] Write a short note on: Liabilities of an auditor
Ans.: Apart from liability under the common law, the statutory liabilities of an auditor could be either Civil or
Criminal.
Ci vil Liability: An auditor may be held liable to the company for negligence where loss is caused to the company
due to the failure of the auditors to perform his duties with reasonable care and skill.
He is also liable for:
(i) breach of trust regarding any money or property of the company or
(ii) breach of duty.
Criminal Liability: An auditor is responsible for the destruction, mutilation, alteration, falsification or fraudulent
concealment of any books, papers or documents belonging to the company with an intent to defraud or deceive;
and also where he makes intentionally any false statement in any report or document prepared by him.
Criminal liability of an auditor may extend to imprisonment and/or fine at the discretion of the court.
■ ■■■ COST AUDIT
Que. No. 78] What do you understand by Cost Audit? Explain the provisions of Companies Act, 1956 relating to
cost audit?
Write a short note on: Appointment of cost auditor CS (Executive) - June 2012 (4 Marks)
Ans.: Cost Audit is a critical review undertaken for the purpose of:
(a) Verification of the correctness of cost accounts and (b) Checking that cost accounting plan is adhered to.
The Institute of Cost Accountants of India defines statutory cost audit as, "Asystem of audit introduced by the
Government of India for the review, examination and appraisal of the cost accounting records and added
information required to be maintained by the specified industries".
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Maintenance of costing records [Section 148 (1)]: The Central Government may, by order, in respect of such class
of companies engaged in the production of such goods or providing such services as may be prescribed, direct that
particulars relating to the utilization of material or labour or to other items of cost as may be prescribed shall also
be included in the books of account kept by that class of companies.
The Central Government shall, before issuing such order in respect of any class of companies regulated under a
special Act, consult the regulatory body constituted or established under such special Act.
Rule 5 of the Companies (Cost Records & Audit) Rules, 2014 makes following provisions relating to maintenance of
costing records:
(1) Every company under Rule 3 including all units and branches, shall, maintain cost records in Form CRA-1.
(2) The cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit
cost of production or cost of operations, cost of sales and margin for each of its products and activities for every
financial year on monthly or quarterly or half-yearly or annual basis.
(3) The cost records shall be maintained in such manner so as to enable the company to exercise, as far as
possible, control over the various operations and costs to achieve optimum economies in utilization of resources
and these records shall also provide necessary data which is required to be furnished under these rules.
Cost Audit [Section 148(2)]: If the Central Government is of the opinion, that it is necessary to do so, it may, by
order, direct that the audit of cost records of class of companies, which are covered under Section 148 (1) and
which have a net worth of prescribed amount or a turnover of prescribed amount, shall be conducted in the
manner specified in the order.
(1) Every company specified in item (A) of Rule 3 shall get its cost records audited in accordance with these rules
if
the overall annual turnover of the company from all its products and services during the immediately preceding
financial year is ` 50 Crore or more and the aggregate turnover of the individual product or products or service or
services for which cost records are required to be maintained under rule 3 is ` 25 Crore or more.
(2) Every company specified in item (B) of Rule 3 shall get its cost records audited in accordance with these rules
if the Overall annual turnover of the company from all its products and services during the immediately preceding
financial year is rupees ` 100 Crore or more and the aggregate turnover of the individual product or products or
service or services for which cost records are required to be maintained under Rule 3 is X 35 Crore or more.
(3) The requirement for cost audit under these rules shall not apply to a company which is covered in Rule 3 and
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue or
(ii) which is operating from a special economic zone or
(iii) which is engaged in generation of electricity for captive consumption through Captive Generating Plant.
Appointment of cost auditor [Section 148(3)]: The cost audit shall be conducted by Cost Accountant who shall be
appointed by the Board on such remuneration as may be determined by the members.
No person appointed u/s 139 (i.e. statutory auditor) as an auditor of the company shall be appointed for conducting
the audit of cost records.
The cost auditor shall comply with the cost auditing standards.
Cost audit shall be in addition to the audit conducted u/s 143.
Qualifications, disqualifications, rights, duties and obligations applicable to cost auditor [Section 148(5)]:
The qualifications, disqualifications, rights, duties and obligations applicable to statutory auditors, so far as may be
applicable, also apply to a cost auditor.
It shall be the duty of the company to give all assistance and facilities to the cost auditor for auditing the cost
records of the company.
The cost audit report shall be submitted by the cost accountant to the Board of Directors of the company.
Submission of cost audit report to the Central Government [Section 148(6)]: Within 30 days from receipt of cost
audit report from cost auditor, the company shall furnish the cost audit report to the Central Government, along
with full information and explanation on every reservation or qualification contained therein.
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Further information and explanation [Section 148(7)]: If, after considering the cost audit report and the
information and explanation furnished by the company, the Central Government is of the opinion that any further
information or explanation is necessary, it may call for such further information and explanation.
The company shall furnish the same within time specified by the Central Government.
Rule 6 of the Companies (Cost Records & Audit) Rules, 2014 makes following provisions relating to appointment
of cost audit and procedure for cost audit:
(1) The category of companies specified in Rule 3 and the thresholds limits laid down in rule 4, shall within 180
days of the commencement of every financial year, appoint a cost auditor. However before such appointment is
made, the written consent of the cost auditor to such appointment, and a certificate from him or it, shall be
obtained.
(2) The cost auditor appointed shall submit a certificate that -
(a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Cost and Works Accountants Act, 1959 and the rules or regulations made
thereunder;
(b) The individual or the firm, as the case may be, satisfies the criteria provided in Section 141, so far as may be
applicable;
(c) The proposed appointment is within the limits laid down by or under the authority of the Act; and
(d) The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with
respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(3) The company shall inform the cost auditor of his or its appointment and file a notice of such appointment
with the Central Government within a period of 30 days of the Board meeting in which such appointment is made
or within a period of 180 days of the commencement of the financial year, whichever is earlier, through electronic
mode, in Form CRA-2, along with prescribed fees.
(4) Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the
closure of the financial year or till he submits the cost audit report, for the financial year for which he has been
appointed.
However, the cost auditor may be removed from his office before the expiry of his term, through a board resolution
after giving a reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such removal
in writing.
The Form CRA-2 to be filed with the Central Government for intimating appointment of another cost auditor shall
enclose the relevant Board Resolution to the effect.
Nothing contained in rules shall prejudice the right of the cost auditor to resign from such office of the company.
(5) Any causal vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be
filled by the Board of Directors within 30 days of occurrence of such vacancy and the company shall inform the
Central Government in Form CRA-2 within 30 days of such appointments of cost auditor.
(6) The cost statements, including other statements to be annexed to the cost audit report, shall be approved
by the Board of Directors before they are signed on behalf of the Board by any of the director authorized by the
Board, for submission to the cost auditor to report thereon.
(7) Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report
along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3.
(8) Every cost auditor shall forward his report to the Board of Directors of the company within a period of 180
from the closure of the financial year to which the report relates and the Board of Directors shall consider and
examine such report particularly any reservation or qualification contained therein.
(9) Every company covered under the rules shall, within a period of 30 days from the date of receipt of a copy
of the cost audit report, furnish the Central Government with such report along with full information and
explanation on every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting
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Language format in the manner as specified in the Companies (Filing of Documents and Forms in Extensible
Business Report-
ing language) Rules, 2015 along with fees specified in the Companies (Registration Offices and Fees) Rules,
2014.
Que. No. 79] Distinguish between: Cost Audit & Statutory Audit
Ans.: The following are the main points of distinction between cost audit and statutory audit:
Points Cost Audit Statutory Audit
To whom it Covers only select specified industries. Compulsory for all companies incorporated
applies Product wise coverage and not the whole under the Companies Act, 2013.
company.
How applies The Central Government may, by order, in Automatic application of provisions for all
respect of certain class of companies engaged registered companies as per Section 139 of
in the production of prescribed goods or Companies Act, 2013.
services direct that particulars relating to the
utilization of material or labour or to other
items of cost as may be prescribed shall also
be included in the books of account kept by
that class of companies.
By whom Cost Audit is done by Cost Accountant. Statutory Audit is done by Chartered
Accountant.
Appointment The Cost Auditor is appointed by the Board of Statutory Auditor is appointed by the members
of auditor directors. in AGM.
To Whom The cost audit report shall be submitted by the Audit report is submitted to the members in
Audit report is Cost Accountant to the Board of Directors of the AGM.
submitted the company. A company shall within 30 days
from the date of receipt of a copy of the cost
audit report furnish the Central Government
such report along with full information and
explanation on every reservation or
qualification contained therein.
Base of report The report is on efficiency and propriety. The report is on true & fair view of the state of
affairs and the profit and loss.
Emphasis is on The emphasis is on adequacy or otherwise of The emphasis is on verification & authenticity
the cost accounting system. of transactions.
Points Cost Audit Statutoiy Audit
Form of audit Every cost auditor, who conducts an audit of There is no specific format provided for
report the cost records of a company, shall submit the statutory audit under the Companies Act,
cost audit report along with his or its 2013.
reservations or qualifications or observations
or suggestions, if any, in Form CRA-3
Que. No. 80] List out eight industry covered by the Companies (Cost Records & Audit) Rules, 2014.
213
Ans.: Some of the industries covered by Rule 3 of the Companies (Cost Records & Audit) Rules, 2014 are:
- Cement - Sugar and industrial alcohol
- Tyres & tubes -
Paper
- Electricals or electronic machinery -
Plastics and polymers
- Coffee and tea -
Milk powder
- Drugs and pharmaceuticals -
Jute and jute products
■ ■■ INTERNAL AUDIT & AUDIT COMMITTEE
Que. No. 81] Write a short note on: Internal Audit
Whether a private company is mandatorily required to appoint an internal auditor? Who may be appointed as
internal auditor? CS (Executive) - June 2015 (4 Marks)
Ans.: Internal Audit [Section 138]: Such class or classes of companies as may be prescribed shall be required to
appoint an internal auditor, who shall either be a Chartered Accountant or a Cost Accountant, or such other
professional as may be decided by the Board to conduct internal audit of the functions and activities of the
company.
The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be
conducted and reported to the Board.
Rule 13 of the Companies (Accounts) Rules, 2014 makes following provisions relating to internal audit:
The following class of companies shall be required to appoint an internal auditor or a firm of .internal auditors
which may be either an individual or a partnership firm or a body corporate, namely:
(a) Every listed company
(b) Every unlisted public company having -
(i) paid up share capital of ` 50 Crore or more during the preceding financial year or (if) turnover of ` 200 Crore or
more during the preceding financial year or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding ` 100 Crore or more at
any point of time during the preceding financial year or
(iv) outstanding deposits of ` 25 Crore or more at any point of time during the preceding financial year
(c) Every private company having -
(i) turnover of ` 200 Crore or more during the preceding financial year or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding ` 100 Crore or more at
any point of time during the preceding financial year:
Explanation: For the purposes of this rule -
(i) The internal auditor may or may not be an employee of the company.
(ii) The term "Chartered Accountant" shall mean a Chartered Accountant whether engaged in practice or not.
The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the
scope, functioning, periodicity and methodology for conducting the internal audit.
Que. No. 82] PQR Ltd. is an unlisted public company having paid-up share capital of t 80 Crores during the
preceding financial year 2014-2015. The turnover of the company was ` 110 Crores for the same period. Referring
to the provisions of the Companies Act, 2013, answer the following:
(i) Is it mandatory for the above company to appoint internal auditor for the financial year 2015-2016? («')
What are the qualifications of the Internal Auditor? CA (Final) - May 2015 (6 Marks)
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Ans.: As per Section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014, in case of unlisted public
company, appointment of internal auditor is mandatory in following cases:
- If paid-up share capital is ` 50 Crore or more during the preceding financial year or
- If turnover is t 200 Crore or more during the preceding financial year or
- If outstanding loans or borrowings from banks or public financial institutions exceeds ` 100 Crore or more at
any point of time during the preceding financial year or
- If outstanding deposits is ` 25 Crore or more at any point of time during the preceding financial year.
As per the facts given in the question, PQR Ltd is an unlisted public company with the paid-up share capital of ` 80
Crores during the preceding financial year with the turnover of ` 110 crores. Since PQR Ltd. fulfils one of the criteria
with paid up share capital of more than ` 50 Crore during the preceding financial year, it is mandatory for the PQR
Ltd. to appoint an internal auditor for the financial year 2015-2016.
Qualifications of Internal Auditor: Internal Auditor shall either be a Chartered Accountant or a Cost Accountant or
such other professional as may be decided by the Board to conduct internal audit of the functions and activities of
the company. The internal auditor may or may not be an employee of the company.
Que. No. 83] Which types of Companies are required to constitute audit committee? Also state the scope and
powers of audit committee.
Ans.: Constitution of Audit Committee [Section 177(1)]: The Board of Directors of every listed public company and
such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
As per Rule 6 of the Companies (Meetings of Board & its Powers) Rules, 2014, the Board of directors of every
listed companies and the following classes of companies shall constitute an Audit Committee and a Nomination
and Remuneration Committee of the Board-
(i) All public companies with a paid up capital of ` 10 Crore or more
(ii) All public companies having turnover of ` 100 Crore or more;
(iii) All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding ` 50 Crore or more.
The paid-up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case
may be, as existing on the date of last audited Financial Statements shall be taken into account.
Composition of Audit Committee [Section 177(2)]: The Audit Committee shall consist of a minimum of 3 directors
with independent directors forming a majority.
The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and
understand, the financial statement.
Scope of Audit Committee [Section 177(4)]: Every Audit Committee shall act in accordance with the terms of
reference specified in writing by the Board which shall, inter alia, include -
(i) The recommendation for appointment, remuneration and terms of appointment of auditors of the company.
(ii) Review and monitor the auditor's independence and performance, and effectiveness of audit process.
(iii) Examination of the financial statement and the auditors' report.
(iv) Approval or any subsequent modification of transactions of the company with related parties. However, the
audit committee may make omnibus approval for related party transactions proposed to be entered by the
company subject to such conditions as may be prescribed.
(v) Scrutiny of inter-corporate loans and investments.
(vi) Valuation of undertakings or assets of the company, wherever it is necessary.
(vii) Evaluation of internal financial controls and risk management systems.
(viii) Monitoring the end use of funds raised through public offers and related matters.
"Omnibus Approval" shall mean a blanket pre activity approval by the Audit Committee subject to compliance of
the conditions as laid in this Policy.
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Interaction with internal and statutory auditors [Section 177(5)]: The Audit Committee may call for the comments
of the auditors about internal control systems, the scope of audit, including the observations of the auditors and
review of financial statement before their submission to the Board and may also discuss any related issues with
the internal and statutory auditors and the management of the company.
Power to investigate and obtains professional advice [Section 177(6)]: The Audit Committee shall have authority
to investigate into any matter in relation to the items specified Section 177(4) or referred to it by the Board and
shall have power to obtain professional advice from external sources and have full access to information contained
in the records of the company.
Auditor and KMP right to be heard in the meetings of the Audit Committee [Section 177(7)]: The auditors of a
company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee
when it considers the auditor's report but shall not have the right to vote.
Disclosure in Board's report [Section 177(8)]: The Board's report Section 134(3) shall disclose the composition of
art Audit Committee and where the Board had not accepted any recommendation of the Audit Committee, the
same shall be disclosed in such report along with the reasons.
Que. No. 84] What are the provisions of the Companies Act, 2013 regarding establishment of Vigil Mechanism?
Ans.: Establishment of Vigil Mechanism [Section 177(9)]: Every listed company or prescribed classes of companies
shall establish a vigil mechanism for directors and employees to report genuine concerns in prescribed manner.
Requirements of Vigil Mechanism [Section 177(10)]: The vigil mechanism shall provide for adequate safeguards
against victimization of persons who use such mechanism and make provision for direct access to the chairperson
of the Audit Committee in appropriate or exceptional cases.
Disclosure: The details of establishment of vigil mechanism shall be disclosed by the company on its website and
in the Board's report.
As per Rule 7 of the.Companies (Meetings of Board & its Powers) Rule, 2014, every listed company and the
companies belonging to the following class or classes shall establish a vigil mechanism for their directors and
employees to report their genuine concerns or grievances-
(a) The Companies which accept deposits from the public
(b) The Companies which have borrowed money from banks and public financial institutions in excess of ` 50
Crore.
Audit committee to see the vigil mechanism: The companies which are required to constitute an audit committee
shall oversee the vigil mechanism through the committee and if any of the members of the committee have a
conflict of interest in a given case, they should rescue themselves and the others on the committee would deal
with the matter on hand.
In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for
the purpose of vigil mechanism to whom other directors and employees may report their concerns.
Safeguards against victimization and access to audit committee: The vigil mechanism shall provide for adequate
safeguards against victimization of employees and directors who avail of the vigil mechanism and also provide for
direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit
Committee in exceptional cases.
Safeguards against frivolous complaints: In case of repeated frivolous complaints being filed by a director or an
employee, the audit committee or the director nominated to play the role of audit committee may take suitable
action against the concerned director or employee including reprimand.
SECRETARIAL AUDIT
Que. No. 85] Which type of companies are required to conduct secretarial audit? By whom such audit will be
conducted? What is the penalty for or not conducting secretarial audit?
CS (Executive) - June 2015 (4 Marks) CS (Executive) - Dec 2015 (4 Marks)
216
Ans.: Secretarial Audit is a compliance audit and it is a part of total compliance management in an organization.
The Secretarial Audit is an effective tool for corporate compliance management. It helps to detect non-
compliance and to take corrective measures.
Secretarial audit for bigger companies [Section 204]: Every listed company and a company belonging to
prescribed class shall annex with its Board's report, a secretarial audit report, given by Practicing Company
Secretary (PCS) in prescribed form.
It shall be the duty of the company to give all assistance and facilities to the PCS, for auditing the secretarial and
related records of the company.
The Board of Directors, in their report shall explain in full any qualification or observation or other remarks made
by the PCS.
If a company or any officer or PCS, contravenes the provisions of this section, they shall be punishable with fine
which shall not be less than ` 1,00,000 but which may extend to ` 5,00,000.
Secretarial Audit Report [Rule 9 of the Companies (Appointment & Remuneration of Managerial Personnel)
Rules, 2014]: For the purposes Section 204(1), the other class of companies shall be as under-
(a) Every public company having a paid-up share capital of ` 50 Crore or more or
(b) Every public company having a turnover of ` 200 Crore or more.
The format of the Secretarial Audit Report shall be in Form MR-3.
Secretarial audit is a compliance audit and it is a part of total compliance management in an organization. The
secretarial audit is an effective tool for corporate compliance management. It helps to detect non-compliance
and to take corrective actions.
Que. No. 86] Distinguish between: 'Secretarial Audit' and 'Internal Audit'
Ans.: The following are the main points of distinction between secretarial and internal audit:
Points Secretarial Audit Internal Audit
Meaning Secretarial Audit is an audit to check Internal audit is the independent appraisal
compliance of various legislations including the activity within an organization for the review of
Companies Act, 2013 and other corporate and accounting, financial and other business
economic laws applicable to the company. practices as protective and constructive arms
of management.
By whom Secretarial Audit has to be carried out by Internal audit is conducted by the internal
Practicing Company Secretary. audit staff who may be Chartered Accountant,
Cost Accountant or officer of the company.
Companies As per Section 204(1) of Companies Act, 2013 The following class of companies shall be
covered read with Rule 9 of the Companies required to appoint an internal auditor:
(Appointment & Remuneration of Managerial (a) Every listed company
Personnel) Rules, 2014, the following
(b) Every unlisted public company having-
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companies are required to obtain Secretarial (i) Paid up share capital of ` 50 Crore or
Audit Report: (ii) Turnover of ` 200 Crore or more or
- Every listed company (iii) Outstanding loans or borrowings from
- Every public company having a paid-up banks or public financial institutions exceeding
share capital of ` 50 Crore or more ` 100 Crore or more or
- Every public company having a turnover (iv) Outstanding deposits of ` 25 Crore or more
of ` 200 Crore or more.
Points Secretarial Audit Internal Audit
(c) Every private company having-

(i) Turnover of ` 200 Crore or more or
(ii) Outstanding loans or borrowings from
banks or public financial institutions exceeding
` 100 Crore
Employee Secretarial Auditor can never be employee of Internal auditor may or may not be an
the company. employee of the company.
Form Secretarial Audit Report is required to be There is no Form prescribed for the internal
provided in the format prescribed in Form MR- audit.
3.
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CHAPTER
14
MEETINGS
Note: In this chapter, unless othenuise stated 'Rule' means the Companies (Management & Administration) Rules,
2014.
Que. No. 1] Enumerate the different types of meetings under the Companies Act, 2013.
Ans.: Meetings under the Companies Act, 2013 may be classified as:
I. Shareholders Meetings:
♦ Annual General Meetings [Section 96]
♦ Extraordinary General Meetings
- Convened by directors
- Convened by directors on the requisition of the shareholders u/ s 100
♦ Class Meeting of Shareholders.
II. Meetings of the Debenture holders
III. Meetings of creditors & contributories
- Meetings of creditors for purpose other than winding up.
- Meetings of creditors for winding up.
- Meetings of contributories in winding-up.
IV. Board Meetings of the Board of Directors
V. Meetings of the Board Committees
Que. No. 2] Every Company must hold annual general meeting in every calendar year.
CS (Inter) - Dec 2000 (8 Marks), Dec 2006 (5 Marks) CS (Executive) - June 2014 (5 Marks)
The gap between two AGM can never exceed 15 months.
Ans.: Annual general meeting (AGM) is an important annual event where members get an opportunity to discuss
the activities of the company.
Annual General Meeting [Section 96(1)]: Every company, other than OPC is required to hold an AGM every year.
Following are the key provisions regarding the holding of an AGM:
Holding of AGM:
1. Annual general meeting should be held once every year.
2. First AGM of the company should be held within 9 months from the closing of the first financial year. Hence,
it shall not be necessary for the company to hold any AGM in the year of its incorporation.
3. Subsequent AGM should be held within 6 months from the closing of the financial year.
4. The gap between two AGM should not exceed 15 months.
Que. No. 3] Write a short note on: Extension of validity period of AGM
Ans.: In case, it is not possible for a company to hold an annual general meeting within the prescribed time, the
Registrar may, for any special reason, extend the time within which any AGM shall be held. Such extension can be
for a period not exceeding 3 months. [Proviso to Section 96(1)]
No such extension of time can be granted by the Registrar for the holding of the first AGM.
It has been clarified by the Ministry of Corporate Affairs that delay in completion of audit of the annual accounts
of the company does not ordinarily constitute a 'special reason' justifying the extension of time for holding its
annual general meeting.
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Que. No. 4] Accounting year of Devdatta Ltd. ends on 30th June, 2014. It is required to hold an AGM by 31st
December, 2014. Due to some reason, the AGM could not be held in December, 2014. On an application, the
ROC granted permission to hold the meeting in February, 2015. The AGM was duly held in February, 2015. Has
the company complied with the requirements of holding AGM every year? Will it amount to contravention of
the provisions of Section 96?
CS (Inter) - Dec 2004 (5 Marks), June 2007 (5 Marks) CS (Executive) - Dec 2011 (4 Marks)
Ans.: As per Section 96, every company, other than OPC is required to hold an AGM every year. The AGM should
be held on the earliest of the following dates:
(1) 15 months frdm date of the last AGM
(2) The last day of the calendar year
(3) 6 months from the close of the financial year.
In the event of any difficulty in holding an AGM the ROC may grant an extension of time for any special reason by
3 months. In such situation if company doesn't hold AGM in particular year, it will not be treated that company has
contravened Section 96.
Thus, due to extension granted by ROC, if Devdatta Ltd. do not hold meeting in calendar year 2014, it will not
amount to contravention of Section 96.
Que. No. 5] Asia Pacific Co. Ltd., called its AGM on 30.9.2014 and adjourned it to 31.12.2014 due to delay in
completion of audit of accounts for the year ended 31.3.2014. At the adjourned meeting, the meeting was
further adjourned to 31.3.2015. Subsequently, the AGM was held on 28.1.2015. State whether the company has
complied with Section 96 and, if not, whether the company is liable to default and conviction.
Ans.: As per Section 96, every company, other than OPC is required to hold an AGM every year. The AGM should
be held on the earliest of the following dates:
(1) 15 months from date of the last AGM
(2) The last day of the calendar year
(3) 6 months from the close of the financial year.
An AGM can be adjourned but such adjourned AGM should also be held within the latest day on which meeting
should have held.
In given case, since Asia Pacific Co. Ltd. has not held adjourned AGM within statutory time, the company is liable
to default and conviction.
Que. No. 6] Shaky Commodities Private Ltd. could not hold its 10th annual general meeting for the year 2016 by
30th September, 2016. The company sought extension of time for holding the AGM from the Registrar of
Companies but failed to hold the meeting within the extended time too. Instead, it held the meeting on 31st
March, 2017 and passed resolutions thereat. Certain shareholders have challenged the validity of these
resolutions. Referring to the provisions of the Companies Act, 2013, examine whether the contention of the
shareholders shall be tenable. CS (Executive) - June 2017 (4 Marks)
Ans.: As per Section 96(1), every company, other than OPC is required to hold an AGM every year.
In case, it is not possible for a company to hold an annual general meeting within the prescribed time, the Registrar
may, for any special reason, extend the time within which any AGM shall be held. Such extension can be for a
period not exceeding 3 months.
Section 99 provides that if any default is made in complying or holding AGM of the company, the company and
every officer of the company who is in default shall be punishable with fine which may extend to ` 1 lakh and in
case of continuing default, with a further fine which may extend to ` 5,000 for each day during which such default
continues.
An AGM not held by company within the latest date on which AGM ought to have been held does not become
invalid. Such meeting is valid and the only consequence is that the company is liable to penalty as per Section 99.
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As per facts given in case last date of holding for Shaky Commodities Ltd. is 30th September, 2016 but it held its
meeting for year 2015-2016 in year 31st March 2017. Thus, the company could not hold any meeting in year 2016.
The AGM held on 31st March 2017 is valid. However, company can be penalized for holding its AGM beyond the
statutory period as per Section 99.
Thus, objection raised by shareholders is not tenable.
Que. No. 7] Write a short note on: Time & place for holding an AGM
Ans.: Time & place for holding an AGM [Section 96(2)]: An AGM can be called during business hours, that is,
between 9 a.m. and 6 p.m. on any day that is not a National Holiday.
An AGM can be held at the registered office of the company or at some other place within the city, town or village
in which the registered office of the company is situate.
However, AGM of an unlisted company may be held at place in India if consent is given in writing by all the members
in advance.
The Central Government is empowered to exempt any company from these provisions, subject to such conditions
as it may impose.
'National Holiday' means and includes a day declared as national holiday by the Central Government.
Some important points:
♦ If any day is declared by the Central Government to be a national holiday after the issue of the notice
convening such meeting, it shall not be deemed to be a national holiday.
♦ The prohibition does not extend to EGM. Thus, EGM can be held on national holiday. However, EGM called
by requisitionist has to be held on working day
♦ There is no contravention if an adjourned meeting accidentally comes to be held on a national holiday.
Que. No. 8] An AGM of a public company was called on a fixed day. After sending notice of the meeting, the
government notified that day of meeting as a national holiday. Can the meeting proceed as scheduled?
Ans.: An AGM can be called during business hours, that is, between 9 a.m. to 6 p.m. on any day that is not a
national holiday.
in which the registered office of the company is situate.
If any day is declared by the Central Government to be a national holiday after the issue of the notice convening
such meeting, it shall not be deemed to be a national holiday. Hence, there is no contravention and meeting can
proceed as scheduled.
Que. No. 9] XYZ Ltd. wants to hold its annual general meeting on Sunday, the 30th June to facilitate the
shareholder to attend. Advice the legal position. CS (Inter) - June 1999 (4 Marks)
Ans.: An AGM can be called during business hours, that is, between 9 a.m. to 6 p.m. on any day that is not a
National Holiday.
in which the registered office of the Company is situate.
As 30th June is not national holiday, XYZ Ltd. can hold its AGM on 30th June even if it is Sunday.
Que. No. 10] An adjourned AGM falls on a holiday. Is there any contravention of the Companies Act, 2013?
Ans.: An AGM can be called during business hours, that is, between 9 a.m. and 6 p.m. on any day that is not a
National Holiday. There is no contravention if an adjourned meeting accidentally comes to be held on a national
holiday.
Que. No. 11] There are seven shareholders in a private limited company having registered office in Chennai. Six
shareholders are French nationals and belong to the same family holding an aggregate of 95% voting rights.
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These shareholders are unable to come down to Chennai and wish to hold the company's annual general
meeting in Paris. Advise whether the meeting can be held in Paris.
Ans.: As per Section 96(2), an AGM can be held at the registered office of the company or at some other place
Within the city, town or village in which the registered office of the company is situate.
The Central Government is empowered to exempt any company from these provisions, subject to such conditions
as it may impose.
Thus, private company can held AGM outside India if it applies to the Central Government for relaxation of
provisions of Section 96 of the Companies Act, 2013.
Que. No. 12] What are the consequences if default is made in holding AGM?
Ans.: Consequences for making default in holding AGM are as follows:
(1) Power of Tribunal to call AGM [Section 97]: If any default is made in holding the AGM of a company, any
member of the company may make an application to the Tribunal to call or direct the calling of, an AGM of the
company and give such ancillary or consequential directions as the Tribunal thinks expedient. Such directions may
include a direction that one member of the.company present in person or by proxy shall be deemed to constitute
a meeting.
(2) Punishment for not holding AGM [Section 99]: If any default is made in complying or holding AGM of the
company, the company and every officer of the company who is in default shall be punishable with fine which may
extend to ` 1 lakh and in case of continuing default, with a further fine which may extend to ` 5,000 for each day
during which such default continues.
Judicial Views:
♦ Where the AGM has been stayed the orders of CLB/Tribunal, there is no default in holding AGM. [Ador-Samia
Ltd. v. lndocan Engineering Systems Ltd.]
♦ If at the time of holding the AGM there is only one shareholder (the other having died), no offence is
committed when the AGM is not held. [State of Kerala v. West Coast Planners Agencies Pvt. Ltd. (1958) 28 Com.
Cas. 13] .
Que. No. 13] WTiat do you understand by 'ordinary business' and 'special business'?
State the matters of ordinary business to be transacted at an annual general meeting.
Ans.: Ordinary & Special Business [Section 102(2)]: All businesses transacted at an AGM except the following are
special business:
(i) Consideration of financial statements & reports of the BOD and auditors (») Declaration of any dividend
(iii) Appointment of directors in place of those retiring
(iv) Appointment and the fixing remuneration of auditors.
In case of any other meeting all business shall be deemed to be special.
Que. No. 14] Distinguish between: Ordinary Business & Special Business
CS (Inter) - Dec 2006 (4,Marks)
Ans.: Following are the main points of distinction between ordinary & special business:
Points Ordinary Business Special Business
Meaning Following four business are ordinary business: All business to be transacted at an AGM shall
(1) The consideration of the accounts, be deemed special business except which are
balance sheet and the reports of the board of ordinary businesses.
directors arid auditors
(2) The declaration of dividend
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(3) The appointment of directors in the
place of those retiring
(4) The appointment and fixing of
remuneration of the auditors.
Where Ordinary businesses are transacted at AGM. Special businesses can be transacted at AGM or
transacted EGM.
Resolution Any matter to be dealt at AGM may be Any matter to be dealt at AGM or EGM may be
'ordinary business' but it may require passing 'Special business' but it may require passing of
of 'special resolution'. 'ordinary resolution'.
■■■ EXTRAORDINARY GENERAL MEETINGS

Que. No. 15] Write a short note on: Extraordinary General Meetings
State the provision and conditions for holding extraordinary general meeting on requisition.
Ans.: All general meetings other than AGM are called EGM.
EGM of the company other than of the wholly owned subsidiary of the company incorporated outside India shall be
held at a place within the India.
All businesses items can be transacted at the EGM are special business. Following are the key provisions, provided
in Section 100, regarding calling and holding of an EGM:
(I) By Board [Section 100(1)]: The Board may, whenever it deems fit, call an EGM of the company.
(II) By Board on Requisition [Section 100(2)]: The Board must call an EGM on receipt of the requisition from the
following number of members:
(a) In the case of a company having a share capital: Members who hold, on the date of the receipt of the
requisition, not less than l/10th of the paid-up share capital of the company as on that date carries the right of
voting.
(b) In the case of a company not having a share capital: Members who have, on the date of receipt of the
requisition, not less than 1/10th of the total voting power of all the members having on the said date a right to
vote. The requisition should set out the matters to be considered at the proposed meeting and the same should
be signed by the requisitionists and sent to the registered .office of the company.
The Board must, within 21 days from the date of receipt of a valid requisition, proceed to call a meeting on a day
not later than 45 days from the date of receipt of such requisition.
(III) By Requisitionists [Section 100(4)]: If the Board does not within 21 days from the date of receipt of a valid
requisition in regard to any matter, proceed to call a meeting for the consideration of that matter on a day not
later than 45 days from the date of receipt of such requisition, the meeting may be called and held by the
requisitonists themselves. However in such case, the meeting should be held within a period of 3 months from the
date of the requisition.
Reasonable expenses incurred by the requisitionists in calling such a meeting shall be reimbursed by the company
to the requisitionists. The company can in turn recover such expenses from any fee or other remuneration under
section 197 payable to such of the directors who were in default in calling the meeting. [Section 100(6)]
In case, the quorum is not present within half-an-hour from the time appointed for holding a meeting called by
requisitionists, the meeting shall stand cancelled. [Section 103(2) (b)]
Rules 17 of the Companies (Management & Administration) Rule, 2014 provides as under with regard to calling
of EGM by requisitionists:
♦ The members may requisition convening of an EGM by providing such requisition in writing or through
electronic mode at least clear 21 days prior to the proposed date of such EGM.
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♦ The notice shall specify the place, date, day and hour of the meeting and shall contain the business to be
transacted at the meeting. The requisitionists should convene meeting at Registered office or in the same city or
town where Registered office is situated and such meeting should be convened on working day.
♦ If the resolution is to be proposed as a special resolution, the notice shall be given as required by Section
114(2).
♦ The notice shall be signed by all the requisitionists or by a requisitionists duly authorized in writing by all
other requisitionists on their behalf or by sending an electronic request attaching therewith a scanned copy of such
duly signed requisition.
♦ No explanatory statement need be annexed to the notice of an EGM convened by the requisitionists and the
requisitionists may disclose the reasons for the resolution which they propose to move at the meeting.
♦ The notice of the meeting shall be given to those members whose names appear in the Register of members
of the company within 3 days on which the requisitionists deposit with the company a valid requisition for calling
an EGM.
♦ Where the meeting is not convened, the requisitionists shall have a right to receive list of members together
with their registered address and number of shares held and the company concerned is bound to give a list of
members together with their registered address made as on 21 day from the date of receipt of valid requisition,
before the expiry of the 45 days from the date of receipt of a valid requisition.
♦ The notice of the meeting shall be given by speed or registered post or through electronic mode. Any
accidental omission to give notice to, or the non-receipt of such notice by, any member shall not invalidate the
proceedings of the meeting.
(IV) By Tribunal [Section 98]: If for any reason it is impracticable to call a meeting of a company or to hold or
conduct the meeting of the company, the Tribunal may, either suo motu or on the application of any director or
member of the company who would be entitled to vote at the meeting order a meeting of the company to be
called, held and conducted in such manner as the Tribunal thinks fit.
The Tribunal may give such ancillary or consequential directions as it thinks expedient, including directions
modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the
provisions of this Act or articles of the company. Such directions may include a direction that one member of the
company present in person or by proxy shall be deemed to constitute a meeting.
Meeting held pursuant to such order shall be deemed to be a meeting of the company duly called, held and
conducted.
The Supreme Court has in the case of Life Insurance Corporation of lndia'x. Escorts Ltd. (1986) 59 Com Cases 548
held that every shareholder of a company has a right to requisition an extraordinary general meeting. He cannot
be restrained from requisitioning an extraordinary general meeting and he is not bound to disclose the reasons for
the resolutions proposed to be moved at the meeting.
Que. No. 16] IFFCO Ltd. has a registered office in New Delhi. The company desires to hold extraordinary general
meeting in Mumbai. Comment. CS (Final) - June 1995 (4 Marks), June 1997 (5 Marks)
Ans.. Extraordinary general meeting can be anywhere in India. EOGM need not be held in city where registered
office is situated. [Re. Metal Box India Ltd. (2000) 24 SCL 144]
Que. No. 17] 40 out of 100 members of a company submitted a requisition for holding of an extraordinary
general meeting in order to remove the managing director from the office. On the failure of the company to call
the meeting, the requisitionists themselves called the meeting at the registered office of the company. On the
appointed date, they could not hold the meeting at the registered office, as it was kept under lock and key by
the managing director himself. The members held the meeting elsewhere and adopted a resolution removing
the managing director from office. Is the resolution valid? Give reason. '
Ans.: Section 100 contains provisions regarding holding of EGM. It provides that if directors fail to call a properly
requisitioned meeting, the requisitionists as represent not less than l/10th of the total voting rights may call a
meeting to be held on a date fixed within 3 months of the date of the requisition.
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Where a meeting is called by the requisitionists and the registered office is not made available to them, it was held
that the meeting may be held anywhere else. Further, resolutions properly passed at such a meeting, are binding
on the company. [R. Chettiar v. M. Chettiar]
Thus, in the given case, since all the above mentioned provisions are duly complied with. Hence, the meeting with
the resolution removing the managing director shall be valid.
Que. No. 18] Distinguish between: Extraordinary General Meeting & Annual General Meeting
CS (Inter) - Dec 2006 (4 Marks), CS (Executive) - Dec 2016 (4 Marks)
Ans.: Following are the main points of distinction between extra ordinary general meeting & annual general
meeting:
Points Extra Ordinary General Meeting Annual General Meeting
Meaning All the general meetings of a company, with Annual General Meeting is to be convened
the exception of the AGM, are called pursuant to Section 96 and once in calendar
extraordinary general meetings (EGM). year.
Place EGM can be held anywhere in India. Every AGM called should be held at the
registered office or at some other place within
the city, town or village in which the registered
office of the company is situated. However,
AGM of an unlisted company may be held at
place in India if consent is given in writing by all
the members in advance.
Day of holding EGM can be held on national holiday. However, Every AGM called should be held on working
EGM called by requisitionists has to be held on day, during business hours.
working day. [Rule 17 of the Companies
(Management & Administration) Rule, 2014]
Business In the case of EGM, all business shall be In case of AGM ordinary as well as special
deemed special. business can be transacted.
CLASS MEETINGS
Que. No. 19] Write a short note on: Class Meetings CS (Executive) - Dec 2012 (4 Marks)
What is 'class meeting'? What are the purposes, provisions and procedure for holding class meeting?
Ans.; Class meetings are those meetings which are held, by holders of a particular class of shares, e.g. preference
shares. Need for such meetings arise when it is proposed to vary the rights of a particulars class of shares. The
various class meetings are as follows:
(1) Meetings of Debenture holders: When a company issues debentures it provides in the trust deed executed
for securing the issue for the holding of meetings of debenture holders and also gives power to them to vary the
terms of security or to alter their rights in certain circumstances. All matters connected with the holding, conduct
and proceedings of the meetings of the debenture holders are given in the Debenture Trust Deed. The decisions
arrived at such meetings with the requisite majority, are valid and binding upon the minority.
(2) Meeting of Creditors: Sometimes, a company, either as running concern or in the event of winding up, has
to make certain arrangements with its creditors, which has to be worked out in meetings of creditors. Strictly
speaking, meetings of creditors are not company meetings.
(3) Meetings of Board of Directors: Separately discussed in next chapter.
PROVISIONS RELATING TO GENERAL MEETINGS
225
Que. No. 20] Write a short note on: Notice of Meeting
Can an annual general meeting be called at a shorter notice? Would your answer be different if it were an extra
ordinary general meeting? CS (Inter) - June 2003 (4 Marks)
Ans.: Notice of Meeting [Section 101(1)]: A general meeting of a company may be called by giving not less than
21 clear days notice either in writing or through electronic mode. Notice through electronic mode shall be given in
prescribed manner.
Short Notice: A general meeting may be called after giving a shorter notice also if consent in writing or by electronic
mode is accorded from the members as given below.
In case of AGM Consent of 95% of the members entitled to vote thereat.
In case of other If company has a share capital then consent of holders of 95% paid-up share capital of the
general company.
meeting
If the company has no share capital the consent of members having 95% voting right.
Requirement of valid notice [Section 101(2)]: Every notice of a meeting shall specify the place, date, day and the
hour of the meeting and shall contain a statement of the business to be transacted at such meeting.
Person entitled to receive notice of the meeting [Section 101(3)]: The notice of every meeting of the company
shall be given to:
(a) Every member of the company, legal representative of any deceased member or the assignee of an insolvent
member
(b) The auditor or auditors of the company and
(c) Every director of the company.
Accidental omission [Section 101(4)]: Any accidental omission to give notice to, or the non-receipt of such notice
by, any member or other person who is entitled to such notice for any meeting shall not invalidate the proceedings
of the meeting.
Where a secretary or other officer issued notice calling a general meeting but he had no power to do so under the
AOA of the company, it was held that the notices were null & void and meeting held pursuant thereto was also null
& void. But it will be valid if before the meeting is held the board ratifies the act.
21 clear days explained: The date of posting and the date of the meeting are excluded while calculating the period
of 21 days. Intervening holidays are counted as period of notice. Further, if the notice is to be sent by post, another
48 hours are to be added. Hence, if notice is to be send on 1st January, meeting should be held on 25th January to
comply with the provisions of 21 clear days provision. (Thus, effectively meeting should be held after 24 days from
the date of sending the notice as explained below)
- 1st January will be excluded
- In the case of a notice of a meeting, if notice is send by post, service of notice shall be deemed to have been
effected at the expiration of 48 hours after the letter containing the same is posted. [Rule 35(6) of the Companies
(Incorporation) Rules, 2014] Hence notice effectively sent on 3rd January.
- Another 21 days will expire on 24th January.
- Thus, meeting can be held after 21 clear days on 25th January.
Que. No. 21] Mr. Monterio, a foreign shareholder of ABC Ltd., receives notice of the annual general meeting
after it was held. Comment. CS (Final) - June 1995 (4 Marks)
Ans.: When notices are posted in time, the fact that some of the members received it late will not affect the validity
of notice of the meeting. [Culcutta Chemical Co. Ltd. v. Dhiresh Chandra Roy (1985) 58 Comp Cas 275]
Que. No. 22] The notice of a general meeting to be held on 5th May a` 3.00 pm was posted on 13th April a` 2.00
pm. Examine the validity of the notice. CS (Inter) - June 1999 (4 Marks)
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Ans.: According to Section 101, a general meeting may be called by giving 21 clear days notice in writing. The date
of posting and the date of the meeting are excluded while calculating the period of 21 days. Intervening holidays
are counted as period of notice. Further, if the notice is to be sent by post, another 48 hours are to be added.
If meeting is held on 5th May by giving notice on 13th April, it is not valid meeting as gap is only 21 days and 21
clear days. 19 clear days notice is served. Notice falls short by 2 clear days.
Que. No. 23] Dev Ltd. issued a notice for holding of its AGM on 7th November, 2015. The notice was posted to
the members on 16.10.2015. Some members of the company allege that the company had not complied with
the provisions of the Companies Act, 2013 with regard to the period of notice and as such the meeting was not
validly called. Decide whether the meeting has been validly called?
If there is a short fall in the number of days by which the notice falls short of the statutory requirement, state
and explain by how many days does the notice fall short of the statutory requirement?
Ans.: According to Section 101, a general meeting of a company may be called by giving not less than 21 clear days
notice either in writing or through electronic mode. Notice through electronic mode shall be given in such manner
as may be prescribed.
As per the facts given in case, Dev Ltd. issued notice of holding AGM on 16.10.2015 and up to 7.11.2015 only 19
clear days notice is served. Thus, the meeting is, therefore, not validly convened. Notice falls short by 2 clear days.
Que. No. 24] Agile Ltd. called its AGM on 28th September, 2014. The notice of the meeting was posted on 6th
September, 2014. With reference to the provisions of the Companies Act, 2013, examine whether the notice
given by the company was valid. CS (Executive) - Dec 2014 (4 Marks)
Ans.: According to Section 101, a general meeting of a company may be called by giving not less than 21 clear days
notice either in writing or through electronic mode. Notice through electronic mode shall be given in such manner
as may be prescribed.
As per the facts given in case, Agile Ltd. issued notice of holding AGM on 6.9.2014 and up to 28.9.2014 only 19
clear days notice is served. Thus, the meeting is, therefore, not validly convened. Notice falls short by 2 clear days.
Que. No. 25] Articles of association of a company reserved the powers for calling the annual general meeting.
The Managing Director of the company, without reference to the Board, called an annual general meeting. Is the
annual general meeting validly called? If not, what should be done to make it valid? Discuss with reference to
case law, if any. CS (Executive) - June 2009 (5 Marks)
Pioneers Ltd. convened a Board meeting on 1st September, 2013. During the course of meeting, the date of next
AGM was discussed but no decision was taken. However, the Company Secretary issued the notice for AGM
without any specific authorization from the Board of directors. Decide the validity of notice of AGM.
Ans.: The annual general meeting of a company can be called by a proper authority i.e. board of directors in case
of company. However, the board of director can delegate the authority to call general meeting to the
company secretary. In such case meeting called by company secretary as per the direction of the board will be valid
meeting.
However, it was held that, where a secretary or other officer issued notice calling a general meeting but he had no
power to do so under the AO A of the company, the notices were null & void and meeting held pursuant thereto
was also null & void. [Al-Amin Seatrans Ltd. v. Owners and Party Interested in Vessel M.V. 'Loyal Bird' (1996) 1
Comp. LJ 258 (Cal.)]
But, it will be valid if before the meeting is held the board ratifies the act. [Hooper v. Kevr Stuart & Co. (1900) 83
Law Tunes 729]
Que. No. 26] Write a short note on: Contents of the notice
Ans.: Place of meeting [Section 96]: The notice.should state the place where the general meeting is scheduled to
be held. In case of an AGM, the place of the meeting has to be either the registered office of the company or some
other place within the city, town or village in which the registered office of the company is situated. For this purpose
the twin cities of Delhi and New Delhi and Hyderabad and Secunderabad will be deemed to be a single city.
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The requisitionists should convene meeting at registered office or in the same city or town where the registered
office is situated and such meeting should be convened on working day. [Rule 17]
Day of meeting [Section 96]: The day and date of the meeting should be clearly stated in the notice. In case of an
annual general meeting, the day should be one that is not a National Holiday. An extraordinary general meeting
can however be held on any day.
Time of meeting [Section 96]: Exact time of holding the meeting should be given in the notice. An annual general
meeting can be called during business hours only, that is, between 9 a.m. and 6 p.m. There is no need to follow
such timings in case of an extraordinary general meeting.
Agenda [Section 102]: A statement of the business to be transacted at the general meeting should be given in the
notice. In case, the meeting is to transact a special business, an explanatory statement should be attached about
such item.
Proxy clause with reasonable prominence [Section 105(2)]: Every notice calling a meeting of a company which
has a share capital, or the articles of which provide for voting by proxy at the meeting, should carry with reasonable
prominence, a statement that a member entitled to attend and vote is entitled to appoint a proxy, or, where that
is allowed, one or more proxies, to attend and vote instead of himself, and that a proxy need not be a member.
Que. No. 27] State the provisions relating to sending notice of the meeting through electronic mode.
Ans.i Notice of the meeting through electronic mode: [Rule 18]: A company may give notice through electronic
mode. Electronic mode means any communication sent by a company through its authorized and secured
computer programme which is capable of producing confirmation and keeping record of such communication
addressed to the person entitled to receive such communication at the last electronic mail address provided by
the member.
Conditions for notice send through e-mail are as under:
A notice may be sent through e-mail as a text or as an attachment to e-mail or as a notification providing electronic
link/Uniform Resource Locator (URL) for accessing such notice.
♦ The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of the company.
The company has to provide an advance opportunity at least once in a financial year, to the member to register his
e-mail address and changes therein and such request may be made by only those members who have not got their
email id recorded or to update a fresh email id and not from the members whose e-mail ids are already registered.
♦ The subject line in e-mail shall state the name of the company, notice of the type of meeting and the date
on which meeting is scheduled.
♦ If notice is sent in the form of an attachment to e-mail, such attachment shall be in the Portable Document
Format (PDF) or electronic documentation format together with a facility for recipient for downloading relevant
version of the software for accessing such notice along with instructions for downloading such
software and alternative contact details in case of inability of the recipient to open or read the attachment.
♦ There shall be no difference in the text of the physical version of the notice and electronic version except in
respect of mode of dispatch of notice.
♦ Sending of notice via e-mail shall be subject to such option being confirmed by the member and email
address being updated in writing at least 30 days prior to dispatch of notice. In such cases, the company shall not
be under obligation to deliver physical copy of the notice unless specifically requested by the member in writing
before the date of the meeting.
♦ When notice or notifications of availability of notice are sent by e-mail, the company should ensure that it
uses a system which produces confirmation of the total number of recipients e-mailed and a record of each
recipient to whom the notice has been sent. A copy of such record and any notices of any failed transmissions and
subsequent re-sending shall be retained by or on behalf of the company as 'proof of sending'.
♦ The company's obligation shall be satisfied when it transmits the e-mail and the company will not be held
responsible for a failure in transmission beyond its control. However the company shall, where it is aware of the
failure in delivery of the e-mail (and subsequent attempts do not rectify the situation), revert to sending physical
copy of the notice at the member's registered address within 72 hours of the original attempt.
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♦ If a member entitled to receive notice fails to provide or update relevant e-mail address to the company,
company shall not be in default for not delivering notice via e-mail.
♦ Company may send e-mail through in-house facility or authorize any third party agency providing bulk e-mail
facility.
♦ Notice made available on the electronic link/URL has to be readable, and the recipient should be able to
obtain and retain copies. The company shall give the complete URL/address of the website and full details of how
to access the document/information.
♦ The notice is taken to be 'sent' on the date the notification is sent. The notice must be available on the
electronic link/URL provided from the date of notification until the conclusion of the meeting.
♦ The failure to make notice available throughout the required period shall be disregarded if it is made
available for part of that period and the failure is wholly attributable to circumstances that the company could not
reasonably have prevented or avoided.
The notice of the general meeting of the company shall be simultaneously placed on the website of the company
and on the website as may be notified by the Central Government.
Que. No. 28] Who are entitled to the notices of meetings under the Companies Act, 2013?
Ans.: Person entitled to receive notice of the meeting [Section 101(3)]: The notice of every meeting of the
company shall be given to:
(a) Every member of the company, legal representative of any deceased member or the assignee of an insolvent
member
(b) The auditor or auditors of the company and
(c) Every director of the company.
Accidental omission [Section 101(4)]: Any accidental omission to give notice to, or the non-receipt of such notice
by, any member or other person who is entitled to such notice for any meeting shall not invalidate the proceedings
of the meeting.
Que. No. 29] A disabled shareholder, aged 70 years arrives at the venue of the AGM, escorted by his driver, who
help him climbing the steps and occupying a seat. Shareholders grand daughter, who is also a joint holder,
follows with her son aged 3 years and a baby in her arm. The company's security personnel try to stop her from
entering the venue of the meeting and also ask the driver to go out of the venue of the AGM. Advice on the
action of security personnel. CS (Inter) - June 2002 (4 Marks)
Ans.: Any meeting of the company can be attended by the persons who are entitled to receive the notice of the
meeting. Other person can attend the meeting with the prior permission of the chairman. Thus, after making the
disabled shareholder comfortable at his seat, his driver should be asked to leave the meeting. Granddaughter
should be allowed to attend the meeting as she is joint holder. However, she may be requested to make
arrangement to leave her son and baby outside the venue of the meeting.
Que. No. 30] State the provisions relating to "statement to be annexed to notices" of meetings under the
Ans.: Statement to be annexed to notice [Section 102]: In case of special business items to be transacted at a
general meeting, a statement setting out the following material facts, shall be annexed to the notice calling the
meeting:
(I) The nature of concern or interest, financial or otherwise in respect of each item of:
- Every director and the manager, if any
- Every other key managerial personnel and
- Relatives of the persons mentioned above.
(II) Any other information and facts that may enable members to understand the meaning, scope and
implications of the items of business and to take decision thereon.
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Where any item of special business relates to any other company, the extent of shareholding of every promoter,
director, manager and key managerial personnel in such other company shall also be set out in the statement. Such
disclosure is necessary if shareholding is 20% or more.
Any benefit arising to the promoter, director, manager, if any, or other key managerial personnel due
nondisclosure or insufficient disclosure, they should held it in trust for the company and are liable to compensate
the company to the extent of the benefit received by them.
QUORUM
Que. No. 31] Write a short note on: Quorum for general meeting
The required quorum is not present within 30 minutes of the scheduled time for holding of annual general
meeting. Advice with the help of relevant provisions of the Companies Act, 2013.
Ans.: Quorum refers to the minimum number of members required to constitute a valid meeting.
Quorum for meetings [Section 103]: Unless the articles of the company provide for a larger number, following
shall be the quorum for a meeting of the company -
(a) In case of a public company:
♦ 5 members personally present if the number of members as on the date of meeting is not more than 1,000
♦ 15 members personally present if the number of members as on the date of meeting is more than 1.000
but up to 5,000
♦ 30 members personally present if the number of members as on the date of the meeting exceeds 5.000
(b) In the case of a private company: Two members personally present.
If the quorum is not present within 30 minutes from the time appointed for holding a meeting of the company-
(a) The meeting shall stand adjourned to the same day in the next week at the same time and place, or to such
other date and such other time and place as the Board may determine or
(b) The meeting, if called by requisitionists shall stand cancelled.
However, in case of an adjourned meeting or of a change of day, time or place of meeting, the company shall give
not less than 3 days notice to the members either individually or by publishing an advertisement in the
newspapers one in English and one in vernacular language which is in circulation at the place where the registered
office of the company is situated.
If at the adjourned meeting also, a quorum is not present within 30 minutes from the time appointed for holding
meeting, the members present shall be the quorum.
Que. No. 32] The required quorum is not present within 10 minutes of the scheduled time of holding of annual
general meeting. Comment. CS (Inter) - June 2000 (4 Marks)
Ans.: As per Section 103, quorum is required to be present within 30 minutes from the time appointed for holding
a meeting of the company.
In given case, the people in meeting will have to wait for 20 minutes to ascertain whether requisite quorum is
present or not before any decision regarding the conduct of the meeting can be taken.
Que. No. 33] The Board of Directors of a company decides to adjourn a requisitioned general meeting for want
of quorum. Comment. CS (Final) - June 1996 (4 Marks)
Ans.: As per Section 103, if at the adjourned meeting, if the quorum is not present within 30 minutes from the time
appointed for holding a meeting of the company, the meeting, if called by requisitionists shall stand cancelled.
Thus, Board of Directors cannot adjourn a requisitioned general meeting for want of quorum.
Que. No. 34] At an adjourned extra ordinary general meeting of a public company only 3 members are personally
present. Comment. CS (Inter) - June 1999 (4 Marks)
Ans.: As per Section 103, if at the adjourned meeting, a quorum is not present within 30 minutes from the time
appointed for holding meeting, the members present shall be the quorum.
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Keeping in view above provision, if at an adjourned extra-ordinary general meeting of a public company only 3
members are personally present, then meeting is valid.
Que. No. 35] XYZ Ltd. a public company dealing in cosmetic products having 4,750 members has scheduled its
25th annual general meeting on 18th July 2015 at 11 a.m. On the appointed at 11.35 a.m. only 17 persons are
present out of which 3 persons are proxies. Comment.
In case of public company, if number of members as on the date of meeting is more than 1,000 but up to 5,000,
then 15 members personally present or higher number stated in Article will be the quorum.
As per facts stated in problem, only 14 members are personally present even after half-an-hour from the time
appointed for holding a meeting, hence meeting will be adjourned.
In case of an adjournment of meeting, the company shall give not less than 3 days notice to the members either
individually or by publishing an advertisement in the newspapers one in English and one in vernacular language
which is in circulation at the place where the registered office of the company is situated.
Que. No. 36] At the start of the general meeting of XYZ Ltd. (which has adopted Table F as its article and having
1,250 shareholders) there was quorum present. One of the directors, who was member of the company in his
personal capacity. After the item of agenda was taken up for consideration, some members left the venue. There
were only five members present in person including the director. One member objected the continuance of the
meeting and declared that as there is no quorum, there is no meeting and, thus, the proceedings are invalid.
Advice the chairman. CS (Final) - Dec 2000 (3 Marks)
Ans.: As per Section 103, in case of public company, if number of members as on the date of meeting is more than
1,000 but up to 5,000, then 15 members personally present or higher number stated in Article will be the quorum.
Companies Act, 2013 is silent about the situation when quorum is available at the beginning of meeting but quorum
is reduced in the middle of the meeting.
In Hartely Baird In re (1955) Ch 143, it was held that it is sufficient if the quorum is present at the beginning of the
meeting and it not necessary that quorum should present throughout the meeting.
Thus, objection raised by the member is incorrect and proceeding at the meeting can be continued.
Que. No. 37] You are the Company Secretary of the Hardluck Pvt. Ltd. Its annual general meeting was fixed to
be held at 10 AM on 30th September, 2015 in the Grand Hall. Due to unusual traffic congestion, only one
shareholder Hari managed to arrive on time. He was only shareholder present for the first 10 minutes after the
meeting was due to start. The chairman of the meeting arrived after 40 minutes and by that time the quorum
for the meeting was also present. The chairman upon his arrival and finding that the quorum is present, called
the meeting to order. Hari was not certain whether the belated holding of the meeting would be valid. He
requests you to explain the legal position in this regard. Advise Hari. CS (Final) - Dec 2002 (6 Marks)
If the quorum is present but meeting could not start within half an hour as chairman was late, the meeting started
after arrival of chairman is valid. [Janaki Printing (P) Ltd. v. Nadar Press Ltd. (2000) 24 SCL 81]
In view of above, meeting continued by Hardluck Pvt. Ltd., upon his arrival of chairman 40 minutes after the
meeting was due to start is valid.
Que. No. 38] Innovative Energies Limited has 2,505 members as on the date of the company's extraordinary
general meeting. The Executive Director, Mr. Avinash has asked you, the Secretary of the Company, what is the
required quorum for the meeting. Referring to the provisions of the Companies Act, 2013, inform the Executive
Director, Mr. Avinash, the quorum that must be present for holding the Extra-Ordinary General Meeting of the
company. State whether the required quorum must be present throughout the meeting.CS (Executive) - June
2017 (4 Marks)
Ans.: Quorum refers to the minimum number of members required to constitute a valid meeting.
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As per Section 103, in case of public companies, unless the articles of the company provide for a larger number,
following shall be the quorum for a meeting of the company -
♦ 5 members personally present if the number of members as on the date of meeting is not more than
1,000
♦ 15 members personally present if the number of members as on the date of meeting is more than 1,000 but
up to 5,000
♦ 30 members personally present if the number of members as on the date of the meeting exceeds 5,000.
Innovative Energies Limited has 2,505 members. Thus, in its extra-ordinary general meeting 15 members must be
present personally in order constitute valid quorum.
Companies Act, 2013 is silent about the situation when quorum is available at the beginning of meeting but quorum
is reduced in the middle of the meeting.
In Hartely Baird In re (1955) Ch 143, it was held that it is sufficient if the quorum is present at the beginning of the
meeting and it not necessary that quorum should present throughout the meeting.
Note: Students should that quorum for general meeting is required at the beginning of the general meeting and it
is not necessary that quorum should present throughout the general meeting but for Board Meeting quorum should
be present throughout the board meeting.
Que. No. 39] The Articles of Association of X Ltd. require the personal presence of 7 members to constitute
quorum of general meetings. The following persons were present in the extra ordinary general meeting to
consider the appointment of Managing Director:
- A, the representative of Governor of Madhya Pradesh.
- B & C, shareholders of preference shares
- D, representing Y Ltd. & Z Ltd.
- E, F, G & H as proxies of shareholders
Can it be said that the quorum was present in the meeting?
Ans.: For the purpose of quorum, only those members are counted who are entitled to vote on resolution proposed
to be passed in the meeting.
Only members present in person and not by proxy are to be counted.
As per Sections 112 & 113, representative of President or Governor and representative of company are deemed
to be a member present in person and counted for the purpose of quorum.
Where two or more companies which are members of another company, appoint a single person as their
representative then each such company will be counted as quorum at a meeting of the latter company.
As per Section 47(2), preference shareholders have voting rights only in respect of resolutions which directly affect
the rights attached to his preference shares.
In view of the above there are only three members are personally present.
'A' will be included for the purpose of quorum. B & C have to be excluded for the purpose of quorum because they
represent the preference shares and since the agenda being the appointment of Managing Director, their rights
cannot be said to be directly affected and therefore, they shall not have voting rights. D will have two votes for the
purpose of quorum as he represents two companies Y Ltd. and Z Ltd. E, F, G and H are not to be included as they
are not members but representing as proxies for the members.
Que. No. 40] A single member does not constitute quorum for a meeting. Comment.
Under what circumstances can one person from a valid quorum? CS (Inter) - Dec 2000 (4 Marks)
Ans.: Normally a single member cannot constitute a quorum. The MCA has also clarified that a single member
present cannot by himself constitute quorum. Even at an adjourned meeting, one member present will not
constitute quorum, for the section says that the members actually present shall be a quorum.
However, exceptions to this rule do exist.
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(1) Where all the preference shares in the company were held by one shareholder only it was held that`a
meeting of preference shareholders attended by only him was valid. [East v. Bennet Bros. Ltd.]
(2) If there is one creditor or debenture holder, he constitute quorum for the creditor and debenture holders
meeting.
(3) As per Section 167, when default is made in holding an AGM the Tribunal may direct tha` 1 member present
in person or by proxy shall be deemed to constitute a meeting.
As per Section 186, the Tribunal may direct a meeting of a company to be called and held for any reason if it is
impracticable to call a meeting, and also direct tha` 1 member of the company present in person or by proxy shall
be deemed to constitute a meeting.
PROXY
Que. No. 41] Write a short note on: Proxy
Discuss briefly the voting rights of a proxy. CS (Executive) - June 2010 (4 Marks)
Ans.: Proxies [Section 105]: Any member of a company entitled to attend and vote at a meeting of the company
shall be entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf.
Various provisions relating to 'proxies' are discussed below:
♦ Every notice calling a meeting of a company which has a share capital, or the articles of which provide for
voting by proxy at the meeting, should carry with reasonable prominence, a statement that a member entitled to
attend and vote is entitled to appoint a proxy, or, where that is allowed, one or more proxies, to attend and vote
instead of himself, and that a proxy need not be a member. Hence, a company not having a share capital can abstain
from complying with this provision by incorporating necessary clause in its articles of association.
♦ A proxy shall not have the right to speak at the meeting.
♦ A proxy shall be entitled to vote only on a poll.
♦ A member of a company registered u/s 8 shall not be entitled to appoint any other person as his proxy unless
such other person is also a member of such company.
♦ A person appointed as proxy shall not act as proxy on behalf of more than 50 members and members holding
in the aggregate more than 10% of the total share capital of the company carrying voting rights. However, a
member holding more than 10%, of the total share capital of the company carrying voting rights may appoint a
single person as proxy and such person shall not act as proxy for any other person or shareholder.
♦ The instrument appointing the proxy must be deposited with the company, 48 hours before the meeting.
Any provision contained in the articles, requiring a longer period than 48 hours shall have effect as if a period of
48 hours had been specified.
♦ The instrument appointing a proxy must be in Form No. MGT. 11. It needs to be in writing and signed by the
appointer or his attorney duly authorized in writing. If the appointer is a body corporate, the instrument should be
under its seal or be signed by an officer or an. attorney duly authorized by the body corporate. For execution of
proxy, the AOA of a company can not specify any special requirement to be complied with.
♦ Every member entitled to vote at a meeting of the company, or on any resolution to be moved thereat, is
entitled to inspect the proxies lodged with the company, if at leas` 3 days notice is given to the company. Such
inspection can be taken during the period beginning 24 hours before the time fixed for the commencement of the
meeting, during the business hours of the company, and ending with the conclusion of the meeting.
Que. No. 42] A and B are joint holders of 1,000 equity shares in MNO Ltd. which adopted Table F as its article.
For the general meeting of the company, A whose name stands first in the order of names in the register of
members, execute a proxy authorizing X to attend the meeting. On the other hand B appoints Y as the proxy for
the meeting.
(i) Of the two proxies X and Y, who will have the right to attend and vote at the meeting?
(ii) Would it make any difference to you answer if A's proxy is registered with the company and thereafter B's
proxy is registered?
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(iii) What would be your answer if B personally attends the meeting.
CS (Final) - June 1997 (7 Marks)
Ans.:
(i) As per Regulation 52 of the Table F, in the case of joint holders, the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this
purpose, seniority shall be determined by the order in which the names stand in the register of members. Thus, of
the two proxies X and Y, proxy X will have the right to attend and vote at the meeting.
(ii) Normally, where two proxy instruments have been lodged in respect of same shares before the expiry of the
time for lodging the proxies, the second in time will be entertained. However, in view of specific provision of
Regulation 52 of Table F, answer will not change and still proxy X is valid and will have the right to attend and vote
at the meeting.
(iii) In Cousins v. International Bricks Co. Ltd., (1931) 2 Ch 90 (CA) at 101, it was held that there was nothing in the
articles of a company to stop a shareholder to attend a meeting and vote in person, even though he had appointed
a proxy to vote for him at the same meeting; the fact that the proxy was not revoked in the manner laid down in
the articles did not prevent the member recording his vote in person to the exclusion of the proxy holder. But in
Narayanan Chettiar's case (Supra), it was held that a shareholder's mere presence at the meeting will not have the
effect of revocation. The revocation should be communicated before the meeting. Thus, if B revoke the authority
of proxy and attends the meeting he will have right to vote at the meeting.
Que. No. 43] A was appointed as proxy by B to attend an AGM of XYZ Ltd. Later, B lodged another proxy
appointing C to attend the same AGM. A & C both intend to attend the AGM. Decide.
Abhijeet is a shareholder of Kutumb Ltd. on receipt of notice of an AGM to be held on 28th September 2014,
Abhijeet issued a proxy in favour of Baljeet on 25th September 2014. Abhijeet again issued another proxy in
favour of Charanjeet on 26th September 2014. Both Baljeet and Charanjeet attended the meeting on 28th
September 2014. Decide who is entitled to vote on a poll. CS (Inter) - Dec 2005 (4 Marks)
Ans.: Every member of a company having share capital has a right to appoint a proxy to attend and vote at a general
meeting on his behalf. A member can appoint one or more proxies to vote in respect of the different shares held
by him or he may appoint one or more proxies in the alternative, so that if the first named proxy fails to vote, the
second one may do so, and so on.
When one person appoints two or more proxies, following rule will apply:
♦ Where two proxy instruments have been lodged in respect of same shares before the expiry of the time for
lodging the proxies, the second in time will be entertained.
♦ Where one is lodged before and other after the expiry of the time for lodging proxy, the former will be
accepted.
In present case, both the proxies were lodged in time, the second proxy i.e. C will be entertained.
Que. No. 44] The chairman of the meeting of a company received a proxy 54 hours before the time fixed for the
start of the meeting. He refused to consider it although company's article required to a proxy to be filed before
60 hours of the start of the meeting. Can the holder of the proxy compel the chairman to admit it?
CS (Final) - Dec 2000 (4 Marks)
Ans.; According to Section 105, the instrument appointing the proxy must be deposited with the company, 48
hours before the meeting. Any provision contained in the articles, requiring a longer period than 48 hours shall
have effect as if a period of 48 hours had been specified.
As per the facts given in case, since proxy form has been filed before 48 hours of the start of the meeting, proxy is
valid and chairman must allow the proxy to attend the meeting.
Que. No. 45] X wants to appoint ABC Ltd. as its proxy to attend and vote for him at a general meeting of a listed
company. Advice X. CS (Final) - June 2002 (4 Marks)
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Ans.: Only natural person can be appointed as a proxy. Artificial legal person like body corporate cannot be
appointed as proxy, as proxy has to be physically present at the meeting. [United Western Bank Ltd. In re. (2002)
38 SCL 24 (CLB)]
Que. No. 46] A proxy was appointed by a member on an instrument duly executed. Will the vote cast by the
proxy be valid in the following cases:
(a) When the member himself attended and cast his vote at the meeting without revoking the authority of
the proxy and
(b) When the member died in the meantime? CS (Inter) - June 2007 (6 Marks)
Ans.: The relationship between the proxy and the person appointing him is that of an agent and principal, and the
former must act in accordance with the instructions of the latter. As their relationship is governed by the
law of agency, proxy can be revoked by the member at any time and is automatically revoked by the death or
insolvency of the member.
A member may revoke the proxy's authority by attending and voting himself before the proxy has voted. However,
a shareholder's mere presence at the meeting will not have the effect of revocation. [ICSI Guidance Note on General
Meeting]
The revocation should be communicated before the meeting. Revocation will be too late if communicated after
the meeting commenced. In such a case the votes cast by the proxy will be valid in a poll.
Que. No. 47] Yash, a member of Omar Ltd., appoints Jolly to attend a general meeting of the company. At the
meeting, voting takes place by show of hands. However, Jolly does not know whether he (as a proxy) can vote
by show of hands at the meeting. Advise. CS (Executive) - June 2012 (4 Marks)
Ans.: As per Section 105, a proxy shall not have the right to speak at such meeting and shall not be entitled to vote
except on a poll. A proxy can vote on show of hands only if there is specific provision in the article of the company.
In view of above provisions, the Jolly as a proxy can vote by show of hands at the meeting if the article of the
company provides for the same.
Que. No. 48] A member of a company has statutory right to appoint proxy for attending the general meeting of
the company. Similarly, a director can also appoint his proxy for attending the meetings of Board of directors of
the company. CS (Executive) - Dec 2016 (5 Marks)
Ans.: As per Section 105, any member of a company entitled to attend and vote at a meeting of the company shall
be entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf.
However, same provision is not applicable for director and hence director cannot appoint proxy for attending board
meeting.
Que. No. 49] Robert, a member of MLM Ltd. submitted his proxy to the company before the scheduled time of
the Annual General Meeting. The Articles of the company provided that proxy can be submitted to the company
70 hours before the scheduled time of the meeting. The chairman of the company rejects the proxy on the
ground that it is in violation of the Articles. Referring to the provisions of the Companies Act, examine the validity
of the chairman's decision to reject the proxy.
Ans.: As per Section 105, the instrument appointing the proxy must be deposited with the company, 48 hours
before the meeting. Any provision contained in the articles, requiring a longer period than 48 hours shall have
effect as if a period of 48 hours had been specified.
As per facts given in case, the Article of MLM Ltd. provided in its article that proxy can be submitted to the company
70 hours before the scheduled time of the meeting. Such provision is not valid.
As per Section 105 all the proxy form presented before 48 hours of the meeting are valid and must be accepted by
the company. Thus, Chairman's decision to reject the proxy form on the ground that it is not submitted before 70
hours before the scheduled time of the meeting is not valid.
VOTING
Que. No. 50] In which circumstances voting rights of members can be restricted?
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Ans.: Restriction on voting rights [Section 106]: A member shall not exercise any voting right in respect of any
shares registered in his name on which any calls or other sums presently payable by him have not been paid or on
which company has exercised any right of lien. No member can be prohibited from exercising his voting right on
any other ground.
When a poll is taken a member or a proxy need not to use all his votes or cast in the same way.
Que. No. 51] C, a member of LS & Co. Ltd., holding some shares in his own name on which final call money has
not been paid, is denied by the company voting right at a general meeting on the ground that the articles of
association do not permit a member to vote if he has not paid the calls on the shares held by him. With reference
to the provisions of the Companies Act, 2013, examine the validity of company's denial to C of his voting right.
Ans.: As per Section 106, a member shall not exercise any voting right in respect of any shares registered in his
name on which any calls or other sums presently payable by him have not been paid or on which company has
exercised any right of lien. No member can be prohibited from exercising his voting right on any other ground.
Since, the stipulation in the Articles relates to one of the grounds permitted u/s 106, the same is valid C's protest
is not valid.
Que. No. 52] State the provisions relating to "voting by show of hand" of the Companies Act, 2013?
Ans.: Voting by show of hands [Section 107]: At any general meeting, a resolution put to the vote of the meeting
shall in the first instance be decided on a show of hands.
A declaration by the Chairman of the meeting of the passing of a resolution by show of hands shall be conclusive
evidence of the fact of passing of such resolution, unless a poll is demanded before or immediately on declaration
by Chairman.
Que. No. 53] State the provisions relating to "voting through electronic means" of the Companies Act, 2013?
Ans.: Voting through electronic means [Section 108]: The Central Government may prescribe the class or classes
of companies and manner in which a member may exercise his right to vote by the electronic means.
Every listed company or a company having not less than 1,000 members, shall provide to its members facility to
vote on resolutions by electronic means. [Rule 20 of the Companies (Management & Administration) Rule, 2014]
Note: Rule 20 is discussed in detail in Chapter No.: Virtual Meetings
Que. No. 54] PQR Ltd. is an unlisted company and has 400 shareholders in all. The shareholders of the company
propose voting by electronic mode. Chairman of the company rejected the shareholders' proposal. Explaining
the provisions of the Companies Act, 2013, examine the validity of rejection of the shareholders' proposal by
the Chairman. CS (Executive) - June 2015 (4 Marks)
Ans.: As per Rule 20 of the Companies (Management & Administration) Rule, 2014, every listed company or a
company having not less than 1,000 members, shall provide to its members facility to vote on resolutions by
electronic means. In given case PQR Ltd. (an unlisted company) has only 400 shareholders. Thus, it not mandatory
for the PQR Ltd. to conduct voting by electronic voting system.
Que. No. 55] Distinguish between: 'E-voting' & 'Voting by show of hands'
Ans.: Following are the main points of difference between 'E-voting' & 'voting by show of hands':
Points E-voting Voting by show of hands
Meaning Electronic voting is a form of machine based Vote given by members personally presenting
voting in which voters make their selections at the meeting by raising their hands is known
with the aid of machine or computer. as voting by show of hands.
Applicability The Central Government may prescribe the At any general meeting, a resolution put to the
class or classes of companies and manner in vote of the meeting shall in the first instance be
decided on a show of hands.
236
which a member may exercise his right to vote
by the electronic means.
Section Section 108 of the Companies Act, 2013 makes Section 107 of the Companies Act, 2013 makes
provisions relating to e-voting. provisions relating to show of hands.
Mandatory Every listed company or a company having not Voting by show of hands can be adopted by any
less than 1,000 members shall provide to its company and it is optional.
members facility to vote on resolutions by
electronic means.
Physical Physical presence of members at meeting is Physical presence of members at meeting is

presence not necessary in case of e-voting. necessary in case of voting by show of hands.
Que. No. 56] Write a short note on: Demand for Poll
Ans.: Demand for Poll [Section 109]: Before or on the declaration of the result of the voting on any resolution on
show of hands, a poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall be
ordered to be taken by him on a demand made in that behalf by the following persons:
(a) In the case a company having a share capital: By the members present in person or by proxy, and having
not less than 1 / 10th of the total voting power or holding shares on which an aggregate sum of not less than `
5,00,000 or such higher amount as may be prescribed, has been paid-up and
(b) In the case of any other company: By any member or members present in person or by proxy, where
allowed, and having not less than l/10th of the total voting power.
The demand for a poll may be withdrawn at any time by the persons who made the demand.
Time for taking poll and declaring the result: A poll shall be taken forthwith, if it is demanded for adjournment of
the meeting or appointment of Chairman of the meeting.
A poll shall be taken at such time, not being later than 48 hours from the time when the demand was made on any
other question.
Where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons, as he deems
necessary, to scrutinize the poll process and votes given on the poll and to report thereon to him in the manner as
may be prescribed.
The result of the poll shall be deemed to be the decision of the meeting on the resolution on which the poll was
taken.
Que. No. 57] Write a short note on: Voting rights of equity shareholders
Ans.: Voting rights of equity shareholders [Section 47(1)]: Every member of a company limited by shares and
holding equity share capital shall have a right to vote on every resolution placed before the company.
Voting right on a poll shall be in proportion to share in the paid-up equity share capital of the company.
Que. No. 58] Write a short note on: Voting rights of preference shareholders Jolly is one of the preference
shareholders of Jack & Jill Ltd., a company registered under the Companies Act, 2013. The annual general
meeting of the said company is scheduled to be held on 8th January, 2015. In this context, Jolly wants to exercise
his voting rights at the scheduled general meeting. Can he do so? If so, state whether he can vote on every
resolution placed before the meeting.
Ans.: Voting rights of preference shareholders [Section 47(2)]: Preference shareholders have voting rights only in
respect of following:
(a) Resolutions which directly affect the rights attached to his preference shares.
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(b) Any resolution for the winding up of the company or for the repayment or reduction of its equity or
preference share capital.
(c) Where the dividend in respect of a class of preference shares has not been paid for a period of 2 years or
more years.
In a poll, the proportion of the voting rights of equity shareholders to the voting rights of the preference
shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the
paid-up capital in respect of the preference shares.
POSTAL BALLOT
Que. No. 59] Write a short note on: Passing of resolutions by postal ballot
"A limited company will have to get certain resolutions passed only through postal ballot instead of transacting
the business in the general meeting of the company." Discuss.
Ans.: Postal Ballot [Section 2(65)]: Postal ballot means voting by post or through any electronic mode.
Postal Ballot [Section 110]: A company has to pass certain resolution notified by Central Government the by way
of postal ballot. However, the company can also pass resolution by postal ballot of any other business except
following:
- Ordinary business
- Any business in respect of which directors or auditors have a right to be heard at any meeting
If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot, it shall be
deemed to have been duiy passed at a general meeting convened in that behalf.
Resolution to be passed by postal ballot only [Rule 22(16)]: The following items of business shall be transacted
only by means of voting through a postal ballot:
(a) Alteration of the objects clause of the MOA.
(b) Alteration of AOA in relation to insertion or removal of provisions which, are required to be included in the
articles of a company in order to constitute it a private company.
(c) Change in place of registered office outside the local limits of any city, town or village.
(d) Change in objects for which a company has raised money from public through prospectus and still has any
unutilized amount out of the money so raised.
(e) Issue of shares with differential rights as to voting or dividend or otherwise.
(f) Variation in the rights attached to a class of shares or debentures or other securities.
(g) Buy-back of shares by a company.
(h) Election of a director.
(i) Sale of the whole or substantially the whole of an undertaking of a company.
(j) Giving loans or extending guarantee or providing security in excess of the limit prescribed under Section 186.
Any item of business required to be transacted by means of postal ballot under clause (a) to (j), may be transacted
at a general meeting by a company which is required to provide the facility to members to vote by electronic means
u/s 108.
Thus, option to company either to transact the business by means of postal ballot or provide the facility to
members to vote by electronic vote is now available.
Procedure for conducting business through postal ballot [Rule 22 (1) to (15)]:
(1) Where a company is required or decides to pass any resolution by way of postal ballot, it shall send a notice
to all the shareholders, along with a draft resolution explaining the reasons and requesting them to send their
assent or dissent in writing on a postal ballot or by electronic means within a period of 30 days from the date of
dispatch of the notice.
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(2) The notice shall be sent by Registered Post or speed post, or through electronic means or through courier
service for facilitating the communication of the assent or dissent of the shareholder to the resolution within the
said period of 30 days.
(3) An advertisement shall be published at least once in a vernacular language newspaper and in English
language newspaper, about having dispatched the ballot papers and specifying the following matters:
- A statement to the effect that the business is to be transacted by postal ballot which includes voting by
electronic means.
- The date of completion of dispatch of notices.
- The date of commencement of voting.
- The date of end of voting.
- The statement that any postal ballot received from the member beyond the said date will not be valid and
voting whether by post or by electronic means shall not be allowed beyond the said date.
- A statement to the effect that members, who have not received postal ballot forms may apply to the
company and obtain a duplicate thereof.
- Contact details of the person responsible to address the grievances connected with the voting by postal
ballot including voting by electronic means.
• (4) The notice of the postal ballot shall also be placed on the website of the company forthwith after the notice
is sent to the members and such notice shall remain on such website till the last date for receipt of the postal
ballots from the members.
(5) The Board of directors shall appoint one scrutinizer, who is not in employment of the company and who, in
the opinion of the Board can conduct the postal ballot voting process in a fair and transparent manner. The
scrutinizer shall be willing to be appointed and be available for the purpose of ascertaining the requisite majority.
(6) If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot including
voting by electronic means, it shall be deemed to have been duly passed at a general meeting convened in that
behalf.
(7) Postal ballot received back from the shareholders shall be kept in the safe custody of the scrutinizer. After
the receipt of assent or dissent of the shareholder in writing on a postal ballot, no person shall deface or destroy
the ballot paper or declare the identity of the shareholder.
(8) The scrutinizer shall submit his report as soon as possible after the last date of receipt of postal ballots but
not later than seven days thereof.
(9) Register of postal ballot: The scrutinizer shall maintain a register either manually or electronically to record
their assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the
shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential
voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot
forms which are invalid.
(10) The postal ballot and all other papers relating to postal ballot including voting by electronic means, shall be
under the safe custody of the scrutinizer till the chairman considers, approves and signs the minutes. Thereafter,
the scrutinizer shall return the ballot papers and other related papers/register to the company who shall preserve
such ballot papers and other related papers/register safely.
(11) The assent or dissent received after 30 days from the date of issue of notice shall be treated as if reply from
the member has not been received.
(12) The results shall be declared by placing it, along with the scrutinizer's report, on the website of the company.
(13) The provisions regarding voting by electronic means shall apply, as far as applicable, mutatis mutandis in
respect of the voting by electronic means.
deemed to have been duly passed at a general meeting convened in that behalf. In case of OPC and other
companies having members up to 50 are not required to transact any business through postal ballot.
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Que. No. 60] Postal ballot mechanism improves shareholders' participation in corporate decision-making.
Ans.: Postal ballot means voting by post or through any electronic mode.
A company has pass to certain resolution notified by Central Government by way of postal ballot. However, the
company can also pass resolution by postal ballot of any other business except following:
- Ordinary business
- Any business in respect of which directors or auditors have a right to be heard at any meeting
deemed to have been duly passed at a general meeting convened in that behalf.
The idea behind postal ballot is 'corporate democracy'. Presently, many listed companies have lakhs of
shareholders spread all over India. It is not possible for most of them to attend general meeting and vote thereat.
Thus, resolutions are passed at general meeting only by few members who attend the meetings. To remedy this
situation, concept of postal ballot was first brought into force on 15.6.2001 vide Section 192A of the Companies
Act, 1956. These provisions are continued in Section 110 of the Companies Act, 2013.
Thus, through postal ballot process shareholder who cannot attend the meeting can also vote by sending postal
ballot and large number of shareholders are involved in decision making; hence postal ballot mechanism improves
shareholders' participation in corporate decision-making.
■ ■■ REPRESENTATIVE MEMBERS
Que. No. 61] Write a short note on: Representation of President & Governors in meetings
Ans.: Representation of President & Governors in meetings [Section 112]: President of India or the Governor of
a State, if he is a member of a company, may appoint such person as he thinks fit, to act as his representative at
any meeting of the company. The person so appointed shall be deemed to be a member and have the same rights
including the right to vote by proxy or postal ballot, as the President or Governor could exercise as a member of
the company.
Que. No. 62] Write a short note on: Representation of corporations at meeting of companies and of creditors
Global India Ltd. holds 2,000 shares in Atlanta Co. Ltd. Prem, a director of Global India Ltd., has been appointed
as its representative to attend the annual general meeting of the Atlanta Co. Ltd. Prem falls ill. Advice the
company. CS (Final) - Dec 2000 (4 Marks)
Ans.: Representation of corporations at meeting of companies and of creditors [Section 113]: At the general
meeting of the members, the body corporate will be represented by an authorized representative. Such
representative should be appointed by resolution of a Board meeting or other governing body of that body
corporate. Presence of representative is as good as presence of a company.
Such representative shall be entitled to exercise the same rights and powers, including the right to vote by proxy
and by postal ballot, on behalf of the body corporate which he represents as that body could exercise if it were an
individual member of the company. The representative at the meeting can do what an ordinary member can do at
the meeting i.e. speak at the meeting, propose resolution, vote on shoe of hands, demand poll, appoint proxy etc.
Similarly, if company or body corporate is creditor or debenture holder of other company, it can appoint
representative for the meetings of the creditors or debenture holders.
Prem, a director of Global India Ltd. is advised to appoint a proxy if he is not able to attend the meeting of Atlanta
Co. Ltd.
■■■ RESOLUTIONS
Que. No. 63] Distinguish between: Motion & Resolution CS (Inter) - June 2007 (4 Marks)
CS (Executive) - Dec 2009 (4 Marks), June 2011 (4 Marks) CS (Executive) - June 2012 (4 Marks)
Ans.: Following are the main points of distinction between motion & resolution:
Points Motion Resolution
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Meaning Motion is a proposal submitted for a discussion A resolution is the formal expression of the
and a decision adopted by means of a decision of the meeting when a motion has
resolution. A motion becomes a resolution been duly voted and passed by the requisite
only after the requisite majority of members majority.
have adopted it.
Official Every motion is not the official decision of the A resolution once adopted and recorded in the
decision company. minutes becomes the official decision of the
company.
Significance in In case of company meetings, only such A resolution relates to only such matters that
meeting motions are proposed as are covered by the are covered in notice of the meeting. No
agenda. However, certain motions may arise resolution can be passed in respect of matters
out of the discussion and the standing orders which are not covered in notice of the meeting.
of various bodies allow such motions to be
discussed at the meeting without proper
notice in writing.
Que. No. 64] Write a short note on: Ordinary Resolution and Special Resolution
Ans.: Ordinary & Special Resolution [Section 114]: A resolution shall be an ordinary resolution if the notice has
been duly given and it is required to be passed by the votes cast, in favour of the resolution, including the casting
vote, if any, of the Chairman, exceed the votes, if any, cast against the resolution.
A resolution shall be a special resolution when:
(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling
the general meeting or other intimation given to the members of the resolution.
(b) The notice required under this Act has been duly given and
(c) The votes cast in favour of the resolution, are required to be not less than 3 times the number of the votes,
if any, cast against the resolution.
Que. No. 65] At a General meeting of a company, a matter was to be passed by a special resolution. Out of 40
members present, 20 voted in favour of the resolution, 5 voted against it and 5 votes were found invalid. The
remaining 10 members abstained from voting. The Chairman of the meeting declared the resolution as passed.
Ans.: As per Section 114, while passing a special resolution, the votes cast in favour of the resolution should be at
leas` 3 times of the vote cast against the resolution.
Thus, in terms of the requisite majority, votes cast in favour have to be compared with votes cast against the
resolution. Accordingly, in the given problem, the votes cast in favour (20) being more than 3 times of the votes
cast against (5), the decision of the Chairman is in order.
Que. No. 66] For a special resolution in a company general meeting, 9 voted in favour, 2 against and 4 abstained.
The chairman declared the resolution as passed. Is it a valid resolution?
Ans.: As per Section 114, while passing a special resolution, the votes cast in favour of the resolution should be at
leas` 3 times of the vote cast against the resolution.
Thus, in terms of the requisite majority, votes cast in favour have to be compared with votes cast against the
resolution. Accordingly, in the given problem, the votes cast in favour (9) being more than 3 times of the votes cast
against (2), the resolution is validly passed as special resolution.
Que. No. 67] A company has 120 members. It sends notice of general meeting to all of them. 20 members did
not attend the meeting. Out of remaining 100 members who were present, 20 members abstained from voting.
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Advice the company, how many members should vote in favour of a resolution, if it has to be passed as a special
resolution? CS (Executive) - Dec 2017 (4 Marks)
Ans.: As per Section 114, a resolution shall be a special resolution when:
(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling
the general meeting or other intimation given to the members of the resolution.
(b) The notice required under the Act has been duly given and
(c) The votes cast in favour of the resolution, are required to be not less than 3 times the number of the votes,
if any, cast against the resolution.
As per the facts given in case, a company has total 120 members. 20 members did not attend the meeting. Out of
reaming 100 members, 20 members abstained from voting.
Total number of members voting is 80. Thus, in order to pass special resolution company needs 60 or more votes
in favour of resolution.
Que. No. 68] Write a short note on: Resolutions requiring special notice
Ans.: Resolutions requiring special notice [Section 115]: A special notice required to be given to the company shall
be signed, either individually or collectively by such number of members holding not less than 1% of total voting
power or holding shares on which an aggregate sum of not less than ` 5,00,000 been paid up on the date of the
notice.
Procedure for special notice [Rule 23]:
♦ A special notice shall be sent by members to the company not earlier than 3 months but at least 14 days
before the date of the meeting at which the resolution is to be moved, exclusive of the day on which the notice is
given and the day of the meeting.
♦ The company shall immediately after receipt of the notice, give its members notice of the resolution at leas`
7 days before the meeting in the same manner as it gives notice of any general meetings.
♦ Where it is not practicable to give the notice, the notice shall be published in English language newspaper
and in vernacular language newspaper. Notice shall also be posted on the website of the Company. Such notice
shall be published at leas` 7 days before the meeting.
Following resolution requires special notice under the Companies Act, 2013:
(1) A resolution at an AGM appointing as auditor a person other than a retiring auditor, or providing expressly
that a retiring auditor shall not be re-appointed. [Section 140]
(2) A resolution to remove a director or to appoint somebody in place of a director so removed, at the meeting
at which he is removed. [Section 169]
Que. No. 69] Distinguish between: Special resolution & Resolutions requiring special notice
Ans.: Following are the main points of distinction between special resolution & resolutions requiring special notice:
Points Special Resolution Resolutions requiring special notice
Meaning A special resolution is one passed at a general According to Section 115, where by any
meeting of a company when: provision of the Act or in the articles, special
- Notice of the meeting specifying the notice is required of any resolution, notice of
intention to propose the resolution as a special the intention to move the resolution shall be
resolution has been duly given and given to the company not earlier than 3 months
but at least 14 days before the date of the
- The votes cast in favour are 3 times of
meeting.
the vote cast against it.
Points Special Resolution Resolutions requiring special notice
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Form No. Every special resolution is required to be filed Every resolution requiring special notice is also
in Form MGT-14 to the ROC. required to be filed with ROC, but no Form No.
has been prescribed.
Dependence Every special resolution does not require Resolutions requiring special notice may be
special notice. passed as ordinary resolution.
Examples Following are some of the transactions which Following are some of the transactions which
requires special resolution: requires special notice:
♦ Alteration of the name of the company ♦ A resolution at an AGM appointing as
with the approval of the Central Government. auditor a person other than a retiring auditor,
♦ Shifting of registered office from one or providing expressly that a retiring auditor
city, town or village to another city, town or shall not be re-appointed.
village within the same State. ♦ A resolution to remove a director or to
♦ Change of registered office from one appoint somebody in place of a director so
State to another State. removed, at the meeting at which he is
removed.
♦ Change in object clause.
Que. No. 70] Write a short note on: Adjournment of meeting

A new business cannot be dealt within an adjourned meeting without permission of chair. Do you agree with
the statement? Give reasons. CS (Executive) - June 2011 (4 Marks)
Ans.: When meeting is called and started but suspended to resume at later time on the same date or some another
date it is known as adjournment of meeting.
Adjournment of meeting [Regulation 49 of Table F]:
(1) The Chairperson may, with the consent of any meeting at which a quorum is present, and shall, if so directed
by the meeting, adjourn the meeting from time to time and from place to place.
(2) No business shall be transacted at any adjourned meeting other than the business left unfinished at the
meeting from which the adjournment took place.
(3) When a meeting is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting.
(4) It shall not be necessary to give any notice of an adjournment or of the business to be transacted at an
adjourned meeting.
Resolutions passed at adjourned meeting [Section 116]: Where a resolution is passed at an adjourned meeting of
a company; or the holders of any class of shares in a company; or the Board of Directors, the resolution shall be
treated as passed on the day it was actually passed and not on any earlier date.
Que. No. 71] Zolta Ltd., whose year ended on 31st March, held its annual general meeting on 30th September.
However, as the accounts were not ready, the meeting transacted all other business except accounts and
adjourned the meeting to 24th December for consideration of accounts. The Registrar of Companies issued a
show cause notice for violation of Section 129 of the Companies Act, 2013. Advise. CS (Final) - June 2001 (5
Marks)
Ans.: It was held that even adjourned meeting must be held within the time allowed under the Companies Act.
Since adjourned meeting is continuance of the original meeting, even adjourned meeting must be completed
within time specified under the Companies Act. [MD Mundra v. Assistance ROC (1986) 59 Comp Cas 822 (Cal)]
In AGM one point on agenda is adoption of audited accounts. Department has clarified that if audited accounts are
not ready, AGM can be adjourned. However, even adjourned meeting should be held within the stipulated time
or, within the extension allowed, if any.
243
One of the condition for the AGM is that, it must be held within 6 months from the end of the accounting year.
Since, Zolta Ltd. had not completed its adjourned meeting within 6 months from the end of the accounting period
it has committed the default of not holding the AGM within statutory time period.
Que. No. 72] Distinguish between: Postponement of meeting & Adjournment of meeting
Ans.: Following are the main points of distinction postponement & adjournment of meeting:
Points Postponement of Meeting Adjournment of Meeting

—
Meaning When it is decided by the directors to cancel When meeting is called and started but
the duly called meeting and to take it on some suspended to resume at later time on the same
other day it is known as postponement of date or some another date it is known as
meeting. adjournment of meeting.
Effect Postponement means cancelling the meeting Adjourned meeting mere continuance of
itself and hold fresh meeting on some other original meeting.
date.
Power Directors who have issued notice of general The chairman may, with the consent of any
meeting for a particular date have the power meeting at which a quorum is present and
to postpone the date for valid, bona fide and shall, if so directed by the meeting, adjourn the
proper reasons. meeting from time to time and from place to
place.
Notice Fresh notice will be required in case meeting is For an adjourned meeting fresh notice is not
postponed. necessary, if time, date and place are decided
and declared at the time of adjourning. The
rules may provide for notice to be given for
adjourned meeting if the interval exceeds a
fixed time, e.g., 30 days.
If the meeting is adjourned sine die, fresh
notice of the adjourned meeting is necessary.
Que. No. 73] Whether the chairman of meeting has a power to dissolve the meeting before the business of the
meeting is over? CS (Inter) - Dec 2004 (4 Marks)
Ans.: The chairman may, with the consent of any meeting at which a quorum is present and shall, if so directed by
the meeting, adjourn the meeting from time to time and from place to place. The chairman has no power to stop
the meeting and dissolve it before the business of the meeting is over. (Vakil v. Bombay Residency)
Que. No. 74] Write a short note on: Circulation of Members Resolution * 1 2
Ans.: Some members may themselves want to put certain resolution for consideration at the AGM. Sometimes, in
respect of certain resolution, members may like to issue a statement to all members. Such members have to submit
a requisition to the company. This facility is provided in Section 111 which is also known as 'Circulation of Members
Resolution'.
Circulation of Members Resolution [Section 111]:
(1) A company shall, on requisition in writing from members, as required in Section 100:
(a) Give notice to members of any resolution which may properly be moved and is intended to be moved at a
meeting and
(b) Circulate to members any statement with respect to the matters referred to in proposed resolution or
business to be dealt with at that meeting.
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(2) A company shall be bound to give notice of any resolution or to circulate any statement only if-
(a) A two or more copies of the requisition signed by the requisitionists is deposited at the registered office of
the company
- In the case of a requisition requiring notice of a resolution, not less than 6 weeks before the meeting
- In the case of any other requisition, not less than 2 weeks before the meeting and
(b) There is deposited or tendered with the requisition, a sum reasonably sufficient to meet the company's
expenses in giving effect thereto.
However, if an annual general meeting is organized by the company after the receipt of requisition, the proposed
resolution at the general meeting must be circulated even if notice falls short by 6 weeks.
(3) The company shall not be bound to circulate any statement, if on the application either of the company or
of any other person who claims to be aggrieved, the Central Government, by order, declares that the rights
conferred by this section are being abused to secure needless publicity for defamatory matter.
(4) An order made by the Central Government may also direct that the cost incurred by the company by virtue
of this section shall be paid to the company by the requisitionists, notwithstanding that they are not parties to the
application.
■ ■■ MINUTES
Que. No. 75] Discuss the requirements for keeping the minutes book of general meetings.
Ans.: Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and
resolutions passed by postal ballot [Section 118]: Every company shall prepare, sign and keep minutes of
proceedings of every general meeting, including the meeting called by the requisitionists and all proceedings of
meeting of any class of shareholders or creditors or Board of Directors or committee of the Board and also
resolution passed by postal ballot within 30 days of the conclusion of every such meeting concerned.
In case of meeting of Board of Directors or of a committee of Board, the minutes shall contain name of the directors
present and also name of dissenting director or a director who has not concurred the resolution.
The chairman shall exercise his absolute discretion in respect of inclusion or non-inclusion of the matters which is
regarded as defamatory of any person, irrelevant or detrimental to company's interest in the minutes.
Minutes kept shall be evidence of the proceedings recorded in a meeting.
Every company shall observe Secretarial Standards with respect to General and Board Meetings specified by the
ICSI and approved as such by the Central Government.
Rule 25 of the Companies (Administration & Management) Rules, 2014 contains the following provisions with
regards to minutes of meetings:
♦ A distinct minute book shall be maintained for each type of meeting.
♦ It may be noted that resolutions passed by postal ballot shall be recorded in the minute book of general
meetings as if it has been deemed to be passed in the general meeting. In no case the minutes of proceedings of a
meeting or a resolution passed by postal ballot shall be pasted to any such book.
♦ In case of every resolution passed by postal ballot, a brief report on the postal ballot conducted including
the resolution proposed, the result of the voting thereon and the summary of the scrutinizer's report shall be
entered in the minutes book of general meetings along with the date of such entry within 30 days from the date
of passing of resolution.
♦ Minutes of proceedings of each meeting shall be entered in the books maintained for that purpose along
with the date of such entry within thirty days of the conclusion of the meeting.
♦ Each page of every such book shall be initialled or signed and the last page of the record of proceedings of
each meeting or each report in such books shall be dated and signed by:
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■ In the case of minutes of proceedings of a meeting of the Board or of a committee thereof, by the chairman
of the said meeting or the chairman of the next succeeding meeting;
■ In the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the
aforesaid period of 30 days or in the event of the death or inability of that chairman within that period, by a director
duly authorized by the Board for the purpose;
■ In case of every resolution passed by postal ballot, by the chairman of the Board within the aforesaid period
of 30 days or in the event of there being no chairman of the Board or the death or inability of that chairman within
that period, by a director duly authorized by the Board for the purpose.
♦ Minute books of general meetings shall be kept at the registered office of the company. Minutes of the Board
and committee meetings shall be kept at the registered office or at such other place as may be approved by the
Board.
♦ Minutes books shall be preserved permanently and kept in the custody of the Company Secretary or any
director duly authorized by the Board shall be kept in the registered office or such place as the members may
decide by passing special resolution pursuant to requirement of Section 88 read with Section 94.
Que. No. 76] A director insists that his note of dissent be recorded in the minutes of the Board meeting which
he attended and did not agree to some of the points of the agenda.
Ans.: As per Section 118, in case of meeting of Board of Directors or of a committee of Board, the minutes shall
contain name of the directors present and also name of dissenting director or a director who has not concurred
the resolution.
Thus, contention of director is correct and his note of dissent must be recorded in minutes of the board meeting.
Que. No. 77] Can the Chairman direct exclusion of any matter from the minutes? Some of the shareholders insist
on inclusion of certain matters which are regarded as defamatory of a Director of the company. The Chairman
declines to do so. State how the matter can be resolved.
Ans.: As per Section 118, the chairman shall exercise his absolute discretion in respect of inclusion or noninclusion
of the matters which is regarded as defamatory of any person, irrelevant or detrimental to company's interest in
the minutes.
Que. No. 78] Minutes of the company can be maintained in loose leaf form.
Ans.: Minutes are required to be recorded in minute book. A distinct minute book shall be maintained for each
type of meeting.
The Tribunal may not object if the minutes are maintained in the loose leaf form provided all other procedural
requirements are complied with and all possible safeguards against manipulation or interpolation of the minutes
are ensured. The loose leaves can be got bound at reasonable interval say, 6 months. Entering the minutes in the
bound minute book by a chemical process which does not amount to attachment to any book by pasting or
otherwise is permissible; provided the original signatures of the Chairman are given on each page.
Que. No. 79] The minutes of 24th Annual General Meeting of Poly Bank Ltd. are to be signed by the chairman.
However, the chairman of Poly Bank Ltd. met with an acciden` 2 days after the AGM was held. Minutes of AGM
are, therefore, pending for signatures. Advise the company secretary of Poly Bank Ltd. about the procedure for
signing of minutes in such a case as if the chairman has become permanently in capable of signing. Will your
answer be different if chairman suffers only minor injury and gets back to his office in one week?CS (Executive)
- Dec 2017 (4 Marks)
Ans.: Rule 25 of the Companies (Administration & Management) Rules, 2014 contains the following provisions
with regards to signing of minutes of meetings.
Each page of every such book shall be initialled or signed and the last page of the record of proceedings of each
meeting or each report in such books shall be dated and signed by:
246
♦ In the case of minutes of proceedings of a meeting of the Board or of a committee thereof, by the chairman
of the said meeting or the chairman of the next succeeding meeting;
♦ In the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the
aforesaid period of 30 days or in the event of the death or inability of that chairman within that period, by a director
duly authorized by the Board for the purpose;
♦ In case of every resolution passed by postal ballot, by the chairman of the Board within the aforesaid period
of 30 days or in the event of there being no chairman of the Board or the death or inability of that chairman within
that period, by a director duly authorized by the Board for the purpose.
The Chairman of the Poly Bank Ltd. met with acciden` 2 days after the AGM and become permanently in capable
of signing. Thus as per above provisions, in such case minutes of the AGM will be signed by the director duly
However, if the Chairman of the Poly Bank Ltd. suffers only minor injury and gets back to office in one week the
minutes of the AGM has to be signed by the Chairman of the AGM within the period of 30 days from the date of
AGM.
Que. No. 80] Write short note on: Inspection of minute book of general meeting
Ans.: Inspection of minute-books of general meeting [Section 119]: The minute's book of general meetings shall
be kept at the registered office and shall be open for inspection to members during business hours without any
charge subject to such restrictions as the company may impose.
A member shall be entitled for a copy of any minutes subject to payment of fees as may be specified in the AOA of
the company, but not exceeding a sum of ` 10 for each page or part of any page. The copy should be made available
to him within 7 days of his making request.
A member who has made a request for provision of soft copy in respect of minutes of any previous general
meetings held during a period of immediately preceding 3 financial years shall be entitled to be furnished, with the
same free of cost.
Remedy for refusal to inspection or give copies of minute book: Where the company refuses inspection or fails
to furnish a copy of minutes within specified time, the Tribunal is empowered to direct immediate inspection or
sending a copy of minutes in the matter and the company and every officer of the company shall be punishable
with fine.
Que. No. 81] Write a short note on: Maintenance and inspection of document in electronic form
Ans.: Maintenance and inspection of documents in electronic form [Section 120]: The documents, records,
registers, minutes may be kept and inspected in electronic form.
According to Rule 27, every listed company or a company having not less than 1,000 shareholders, debenture
holders and other security holders, shall maintain its records, as required to be maintained under the Act or rules
made thereunder, in electronic form.
The records in electronic form shall be maintained in such manner as the Board of directors of the company may
think fit, provided that-
♦ The records are maintained in the same formats and in accordance with all other requirements as provided
in the Act or the rules made thereunder.
♦ The information as required under the provisions of the Act or the rules made thereunder should be
adequately recorded for future reference.
♦ The records must be capable of being readable, retrievable and reproducible in printed form.
♦ The records are capable of being dated and signed digitally wherever it is required under the provisions of
the Act or the rules made thereunder.
♦ The records, once dated and signed digitally, shall not be capable of being edited or altered.
♦ The records shall be capable of being updated, according to the provisions of the Act or the rules made there
under, and the date of updation shall be capable of being recorded on every updation.
247
It may be noted that the term "records" means any register, index, agreement, memorandum, minutes or any
other document required by the Act or the rules made thereunder to be kept by a company.
Security of records maintained in electronic form: The Managing Director, Company Secretary or any other
director or officer of the company as the Board may decide shall be responsible for the maintenance and security
of electronic records.
Inspection and copies of records maintained in electronic form: Where a company maintains its records in
electronic form, any duty imposed by the Act or rules made thereunder to make those records available for
inspection or to provide copies of the whole or a part of those records, shall be construed as a duty to make
the records available for inspection in electronic form or to provide copies of those records containing a clear
reproduction of the whole or part thereof, as the case may be.
Que. No. 82] Write a short note on: Report on annual general meeting
Ans.: Report on AGM [Section 121]: Every listed public company required to prepare a report on each AGM
including the confirmation to the effect that the meeting was convened, held and conducted as per the provisions
of the Act and the rules made thereunder. A copy of the report is to be filed with the Registrar in Form MGT- 15
within 30 days of the conclusion of AGM along with the prescribed fee.
The report shall be prepared in the following manner [Rule 31]:
(a) A report u/s 121 shall be prepared in addition to the minutes of the general meeting.
(b) The report shall be signed and dated by the Chairman of the meeting or in case of his inability to sign, by any
two directors of the company, one of whom shall be the managing director, if there is one.
(c) Such report shall contain the details in respect of the following:
- The day, date, hour and venue of the annual general meeting.
- Confirmation with respect to appointment of Chairman of the meeting.
- Number of members attending the meeting.
- Confirmation of quorum.
- Confirmation with respect to compliance of the Act and the Rules, secretarial standards made thereunder
with respect to calling, convening and conducting the meeting.
- Business transacted at the meeting and result thereof.
- Particulars with respect to any adjournment, postponement of meeting, change in venue.
- Any other points relevant for inclusion in the Report.
(d) Such report shall contain fair and correct summary of the proceedings of the meeting.
If the company fails to file the report on annual general meeting before the expiry of the period specified-
- The company shall be punishable with fine which shall not be less than ` 1 lakh but which may extend to ` 5
lakhs and
- Every officer of the company who is in default shall be punishable with fine which shall not be less than `
20,000 but which may extend to ` 1 lakh.
Que. No. 83] DEF Ltd., a company listed at Bombay Stock Exchange, failed to file its report on the AGM for the
financial year ended 31st March, 2013 with the ROC, Mumbai. The company further abstained from filing the
said report for another 2 years, viz. financial years ended 31st March, 2014 and 2015 respectively.
Examining the provisions of the Companies Act, 2013, state whether the default committed by the company
amounts to an offence. If so, to what extent it is possible to get the offences compounded.
Ans.: As per Section 121, if the company fails to file the report on annual general meeting before the expiry of the
period specified-
- The company shall be punishable with fine which shall not be less than ` 1 lakh but which may extend to` 5
lakhs and
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- Every officer of the company who is in default shall be punishable with fine which shall not be less than `
20,000 but which may extend to ` 1 lakh.
Section 441 deals with 'compounding of offences'. As per this section only offence punishable with fine can be
compounded.
If an offence is compounded in favour of a person and if that person commits the same offence once again within
a span of 3 years from the previous compounding, then the subsequent offence shall not be eligible for
compounding.
Thus, if offence of not filing of report on annual general meeting is compounded for the year ended 31st March,
2013, same offence for the year ending 31st March, 2014 & 2015 cannot be compounded.
CHAIRMAN
Que. No. 84] Write a short note on: Chairman
Explain the provision relating to appointment of chairman of general meeting.
Ans.: The Chairman plays a crucial role in a company meeting and is usually appointed by the articles. Following
are some of the important provisions relating to 'Chairman': -
(1) Unless the articles of the company otherwise provide, the members personally present at the meeting shall
elect one of themselves to be the Chairman thereof on a show of hands. [Section 104(1)]
(2) If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with the
provisions of this Act and the Chairman elected on a show of hands shall continue to be the Chairman of the
meeting until some other person is elected as Chairman as a result of the poll, and such other person shall be the
Chairman for the rest of the meeting. [Section 104(2)]
(3) A declaration by the Chairman of the meeting of the passing of a resolution or otherwise by show of hands
and an entry to that effect in the books containing the minutes of the meeting of the company shall be conclusive
evidence of the fact of passing of such resolution or otherwise. [Section 107(2)]
(4) Before or on the declaration of the result of the voting on any resolution on show of hands, a poll may be
ordered to be taken by the Chairman of the meeting on his own motion, and shall be ordered to be taken by him
on a demand made in that behalf by the following persons:
- In the case a company having a share capital: By the members present in person or by proxy, and having not
less than l/10th of the total voting power or holding shares on which an aggregate sum of not less than ` 5,00,000
or such higher amount as may be prescribed, has been paid-up and
- In the case of any other company: By any member or members present in person or by proxy, where allowed,
and having not less than l/10th of the total voting power.
(5) A poll demanded for adjournment of the meeting or appointment of Chairman of the meeting shall be taken
forthwith. [Section 109(3)]
(6) A poll demanded on any question other than adjournment of the meeting or appointment of Chairman shall
be taken at such time, not being later than 48 hours from the time when the demand was made, as the Chairman
of the meeting may direct. [Section 109(4)]
(7) The Chairman of the meeting shall have power to regulate the manner in which the poll shall be taken.
[Section 109(5)]
(8) Where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons, to scrutinize
the poll process and votes given on the poll and to report thereon to him in the manner as may be prescribed.
[Section 109(5)]
(9) In case of ordinary resolution, chairman has casting vote. [Section 114(1)]
(10) There shall not be included in the minutes, any matter which, in the opinion of the Chairman of the meeting:
(a) Is or could reasonably be regarded as defamatory of any person or
(b) Is irrelevant or immaterial to the proceedings or
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(c) Is detrimental to the interests of the company. [Section 118(5)]
(11) The Chairman shall exercise absolute discretion in regard to the inclusion or non-inclusion of any matter in
the minutes on the grounds specified Section 118(5). [Section 118(6)]
(12) Questions arising at any meeting of a committee shall be determined by a majority of votes of the members
present, and in case of an equality of votes, the chairman shall have a second or casting vote. [Regulation 25 of
the Table F]
(13) The chairperson, if any, of the Board shall preside as Chairperson at every general meeting of the company.
[Regulation 45 of the Table F]
(14) If there is no Chairperson, or if he is not present within 15 minutes after the time appointed for holding the
meeting, or is unwilling to act as chairperson of the meeting, the directors present shall elect one of their members
to be Chairperson of the meeting. [Regulation 46 of the Table F]
(15) If at any meeting no director is willing to act as Chairperson or if no director is present within 15 minutes
after the time appointed for holding the meeting, the members present shall choose one of their members to be
Chairperson of the meeting. [Regulation 47 of the Table F]
(16) The Chairperson may, with the consent of any meeting at which a quorum is present, and shall, if so directed
by the meeting, adjourn the meeting from time to time and from place to place. [Regulation 49 of the Table F]
(17) In case of an equality of votes at the Board meeting, the Chairperson of the Board, shall have a second or
casting vote. [Regulation 68 of the Table F]
(18) The Board may elect a Chairperson of its meetings and determine the period for which he is to hold office. If
no such Chairperson is elected, or if at any meeting the Chairperson is not present within 5 minutes after the time
appointed for holding the meeting, the directors present may choose one of their number to be Chairperson of the
meeting. [Regulation 70 of the Table F]
(19) A committee may elect a Chairperson of its meetings. If no such Chairperson is elected, or if at any meeting
the Chairperson is not present within 5 minutes after the time appointed for holding the meeting, the members
present may choose one of their members to be Chairperson of the meeting. [Regulation 72 of the Table F]
Que. No. 85] The chairman at a Board meeting counts 6 votes in favour and 7 votes against the resolution. Can
the chairman cast his own vote, which he had not exercised earlier, in favour of the resolution and also the
casting vote which the articles of association authorize, and declare the resolution as passed?
Ans.: As per Regulation 68 of the Table F, questions arising at any meeting of the Board shall be decided by a
majority of votes. In case of an equality of votes, the Chairperson of the Board, if any, shall have a second or casting
vote.
A casting vote is a second vote exercised by a chairman of a meeting in addition to his own vote as a member.
Casting vote can be given by chairman in case of equality of votes. In given case there is no equality of vote hence,
there is no case for excising casting vote. If Chairman does not vote at the time voting, then subsequently he cannot
give his vote after the result of voting.
Some important points relating to 'casting vote':
♦ Casting vote is additional vote in case of equality of vote. Chairperson has full discretion in using his casting
vote. He can vote in different way than in which he exercised first vote. He may even decide not to use his casting
vote.
♦ In case of ordinary resolution the chairperson has a casting vote. [Section 114(1)]
♦ In case of general meeting, chairperson has casting vote even if he is not member of the company.
♦ Casting vote can be exercised by the chairperson at the show of hands or by electronic mode or on a poll.
Que. No. 86] Amol, a non-member of Shristhi Ltd., has been appointed as a director of the company. Later on,
he has become the chairman of the company. In an annual general meeting of Shristhi Ltd., Amol presided over
the meeting. Zahir, a member of the company, objected to his chairmanship on the ground that Amol is not a
member of the company. Discuss the validity of the objection.
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Ans.: As per Section 104, unless the articles of the company otherwise provide, the members personally present
at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.
As per Regulation 45 of the Table F, The chairperson, if any, of the Board shall preside as Chairperson at every
general meeting of the company.
- If Shristhi Ltd. has adopted Table F or its articles contains similar provision like that of Table F, then Amol can
be appointed as chairperson if he is also chairperson of the Board.
- If Shristhi Ltd. has not adopted Table F or its articles do not contains similar provision like that of Table F,
then Amol, being non-member cannot be appointed as chairperson as provided in Section 104.
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CHAPTER
15
INSTITUTION OF DIRECTORS
Note: hi this chapter, unless otherwise stated, Rule means the Companies (Appointment & Qualification of
Directors) Rules, 2014.
MEANING & LEGAL POSITION OF DIRECTOR
Que. No. 1] Define the term 'Director'. State the legal position of directors.
Examine the position of directors as its trustee, agent and employee. According to you, what is the true
relationship between the company and directors. CS (Inter) - June 2001 (10 Marks)
Directors ought not to misuse the trust entrusted on them. CS (Executive) - Dec 2010 (5 Marks)
Ans.: Director [Section 2(36)]: Director means a director appointed to the Board of a company.
The directors of a company are its eyes, ears, brain, hands, nerves and other essential limbs, upon whose efficient
functioning depend the success of the company. The directors formulate policies and establish organizational set
up for implementing those policies and to achieve the objectives as contained in the memorandum.
The position of director in relation to company is given below:
(1) Director as employee: Directors are not the employees of the company. However, in addition to his
directorship, he may hold a salaried employment in the company and in such case he will enjoy all the rights
available to an employee of the company.
(2) Director as agent: The position of company directors is to some extent is that of agent and apart from the
provisions of the various corporate laws which bind them, they have certain rights and obligations which make
them liable for defaults for violations on behalf of company.
(3) Director as trustee: To some extent, directors are also trustees for the properties of the company. Directors
are accountable for their proper use and are required to refund or restore the same if improperly used.
Directors stand in fiduciary position towards the company in regard to the powers conferred on them by the
Companies Act, 2013 and by the articles of the company and also with regard to the funds of the company, which
are under their control.
Que. No. 1A] Directors ought not to misuse the trust entrusted on them. Comment.
Ans.: Directors stand in fiduciary position towards the company in regard to the powers conferred on them by the
Companies Act, 2013 and by the articles of the company and also with regard to the funds of the company, which
are under their control.
Director as trustee: To some extent, directors are also trustees for the properties of the company. Directors are
accountable for their proper use and are required to refund or restore the same if improperly used.
A trustee is a person who is the owner of the property, deals with it as principal, as owner and a master, subject
only to an equitable obligation to account to some person to whom he stands in relation of trustee.
Directors are have always been considered and treated as trustees of money which comes to their hands or which
is actually under their control; and ever since joint stock companies were invented directors have been held liable
to make good, moneys which they have misapplied upon the same footing as if they were trustees.
As regards the position of directors as trustees, the directors are persons selected to manage the affairs of the
company for the benefit of the shareholders. It is an office of trust which if they undertake, it is their duty to
perform fully and entirely. A resolution by the shareholders that shares or any other property of the company shall
be at the disposal of the director, binds them and they must deal with it within the scope of the functions delegated
to them and in the manner that suited to benefit the shareholders.
To sum up, directors are trustees of the moneys of the company, but not of the debts due to the company. They
are trustees also in respect of powers of the company that are conferred upon them, e.g. powers of: (a) issuing
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and allotting shares, (b) approving transfers of shares (c) making calls on shares and (d) forfeiting shares for non-
payment of calls. They must exercise these powers solely for the benefit of the company.
Thus, directors ought not to misuse the trust entrusted on them.
Que. No. 2] Write a note on: Types of Directors
Write a short note on: Independent Directors CS (Executive) - June 2010 (4 Marks), Dec 2011 (4 Marks)
Distinguish between: Executive Director & Independent Director CS (Inter) - June 2015 (4 Marks)
Ans.: Various types of directors are follows:
(1) Executive Director: Executive director is a common post in many organizations, but the Companies Act, 2013
does not define the phrase.
Directors who are in whole time employment or those who are entrusted with day to day operations of a company
are termed as 'executive director'. He is a person responsible for the administration of a business. Executive
directors perform operational and strategic business functions such as managing people, looking after assets,
entering into contracts. Executive directors are usually employed by the company and paid a salary, so are
protected by employment law. Managing Director, Whole Time Directors are executive directors.
(2) Managing Director [Section 2(54)]: Managing director means a director who, by virtue of the articles of a
company or an agreement with the company or a resolution passed in its general meeting, or by its Board of
Directors, is entrusted with substantial powers of management of the affairs of the company and includes a
director occupying the position of managing director, by whatever name called.
(3) Whole Time Director [Section 2(94)]: Whole time director includes a director in the whole-time employment
of the company. Thus, a whole-time director means a director who devotes all his time and attention to the
management of the company. Where a director is appointed to act as Technical Director, Legal Director, Work
Director and Sales Director on full time basis he is a whole-time director of the company. A whole-time director is
also a managerial person.
(4) Non-executive Director: Non-executive directors do not get involved in the day-to-day running of the
business. Non-executive directors participate and execute work through board meetings.
(5) Nominee Directors: Nominee directors are appointed by financial institutions or banks, which extend term
loans or working capital assistance or any other type of financial assistance to companies. Nominee directors are
a powerful tool of project supervision, monitoring and control, particularly following the issue of Government
guidelines enjoining financial institutions to nominate directors on the boards of companies enjoying substantial
assistance.
(6) Independent Directors [Section 149(5)]: Discussed separately.
(7) Interested Director [Section 2(49)]: Interested director means a director who is in any way, whether by
himself or through any of his relatives or firm, body corporate or other association of individuals in which he or
any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed
contract or arrangement, entered into or to be entered into by or on behalf of a company.
Interested director's presence cannot be counted for the purpose of forming a quorum at a meeting of the Board,
at the time of the discussion or vote on any matter.
Que. No. 3] Can a company or body corporate be appointed as director of the company?
Ans.: As per Section 149(1), only an individual can be a director of a company.
Only an individual should be a director, as the office of a director is to some extent an office of trust and there
should be somebody available on whom responsibility could be fixed. Fixing such responsibility might be dif-
ficult if the director is a corporation or an association or firm. [Oriental Metal Pressing Works Pvt. Ltd. v. Bhaskar
Kashinath Thakore (AIR 1961 SC 573)]
QUALIFICATION & DISQUALIFICATION FOR DIRECTOR
Que. No. 4] What is the qualification for a person to be appointed as director of any company?
Ans.: The Companies Act, 2013 does not lay down any qualifications for a person to be appointed as a director of
a company.
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Que. No. 5] Enumerate the disqualifications of a director mentioned in Section 164.
CS (Inter) - June 2002 (10 Marks), June 2006 (6 Marks) CS (Executive) - Dec 2010 (8 Marks)
Ans.: Disqualifications for appointment of director [Section 164(1)]: A person shall not be eligible for appointment
as a director of a company, if -
(i) He is of unsound mind and stands so declared by a competent Court.
(ii) He is an undischarged insolvent.
(iii) He has applied to be adjudicated as an insolvent and his application is pending.
(iv) He has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and
sentenced in respect thereof to imprisonment for not less than 6 months and a period of 5 years has not elapsed
from the date of expiry of the sentence. If a person has been convicted of any offence and sentenced to
imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as a director in any company.
(v) An order disqualifying him for appointment as a director has been passed by a Court or Tribunal and the
order is in force.
(vi) He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with
others, and 6 months have elapsed from the last day fixed for the payment of the call.
(vii) He has been convicted of the offence dealing with related party transactions u/s 188 at any time during the
last preceding 5 years.
(viii) He has not complied Section 152(3) (i.e. not allotted DIN)
Disqualification by reason of default made by a company [Section 164(2)]: A person who is or has been a director
of a company shall not be eligible to be re-appointed as a director of that company or appointed in other company
for a period of 5 years which-
(a) has not filed financial statements or annual returns for any continuous period of 3 financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the
due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for
1 year or more.
Disqualification for 5 years starts from the date on which the said company fails comply with the clause (a) or (b).
However, where a person is appointed as a director of a company which is in default of clause (a) or (b), he shall
not incur the disqualification for a period of 6 months from the date of his appointment.
Additional grounds for disqualification by private company [Section 164(3)]: A private company may by its articles
provide additional grounds for disqualifications for appointment of a director in addition to those specified above.
No postponement of disqualification [Section 164(4)]: The disqualifications referred to in clauses (d), (e) and (g)
of the Section 164(1) shall continue to apply even if the appeal or petition has been filed against the order of
conviction or disqualification.
Provisions contained in Rule 14:
(1) Every director shall inform to the company concerned about his disqualification under Section 164(2) in Form
DIR-8 before he is appointed or re-appointed.
(2) Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit,
interest, dividend, or fails to redeem its debentures, the company shall immediately file Form DIR-9, to the ROC
furnishing therein the names and addresses of all the directors of the company during the relevant financial years.
(3) Upon receipt of the Form DIR-9, the ROC shall immediately register the document and place it in the
document file for public inspection.
(4) Any application for removal of disqualification of directors shall be made in Form DIR-10.
Vacation of office of director due to disqualification [Section 167(l)(a)]: The office of director become vacant,
where he incurs any of the disqualification specified in Section 164.
Que. No. 6] State with reference to the relevant provisions of the Companies Act, 2013 whether the following
persons can be appointed as a director of a public company:
254
(i) Mr. A, who has huge personal liabilities far in excess of his assets and properties, has applied to the Court
for adjudicating him as an insolvent and such application is pending.
(ii) Mr. B, who was caught red-handed in a shop lifting case 2 years ago, was convicted by a Court and sentenced
to imprisonment for a period of 8 weeks.
(iii) Mr. C, former bank executive, was convicted by a Cour` 8 years ago for embezzlement of funds and
sentenced to imprisonment for a period of 1 year.
(iv) Mr. D is a director of DLT Ltd., which has not filed its annual returns pertaining to the annual general
meetings held in the calendar years 2014, 2015 and 2016. CA (Final) - May 2004 (8 Marks)
Ans.: The given problem is discussed as under:
(i) As per Section 164(1) (iii), if any person has applied to be adjudicated as an insolvent and his application is
pending, he is disqualified to be appointed as director. Since, Mr. A has himself applied to the Court for adjudicating
himself as an insolvent, he is disqualified to be appointed as director, even if his application is pending.
(ii) As per Section 164(1) (iv), if any person has been convicted by a Court of any offence, whether involving
moral turpitude or otherwise, and sentenced to imprisonment for 6 months or more, he is disqualified to be
appointed as director. In the present case Mr. B was caught red-handed in a shop lifting case and was sentenced
to imprisonment for a period of 8 weeks i.e. less than 6 months, he is not disqualified and can be appointed as
director.
(iii) As per Section 164(l)(iv), if any person has been convicted by a Court of any offence, whether involving moral
turpitude or otherwise, and sentenced to imprisonment for 6 months or more, he is disqualified to be appointed
as director for nex` 5 years from the date of expiry of the sentence. Since, more than 5 years has been elapsed
form the date of expiry of the sentence, Mr. C can be appointed as a director.
(iv) As per Section 164(2); a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which has not filed
financial statements or annual returns for any continuous period of 3 financial years. Since, Mr. D has not filed
annual returns for continuous period of 3 financial years; he is disqualified to be appointed as director for nex` 5
years.
Que. No. 7] Nalin is a director of ABC Ltd. which has failed to repay matured deposit from 1st April, 2014 onwards
and the default continues. But ABC Ltd. is regular in filing annual accounts and annual returns. Nalin is also
director of PQR Ltd. and XYZ Ltd.
Answer the following question with reference to the relevant provisions of the Companies Act, 2013:
(i) Whether Nalin is disqualified and if so, whether he is required to vacate his office of director in PQR Ltd. and
XYZ Ltd.?
(ii) Is it possible for the board of director of DEF Ltd. to appoint Nalin as an additional director at the board
meeting to be held on 15th May 2015? Would your answer be different if Nalin ceased to be director of ABC Ltd.
by resignation on 1st March 2015? CA (Final) - May 2002 (6 Marks)
Ans.: As per Section 164(2), a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which has failed to
repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay
interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1 year or more.
In the given case ABC Ltd. has failed to repay its deposits on the due date i.e. 1.4.2014 and such default continues
for more than 1 year i.e. beyond 31.3.2015. Therefore -
- Nalin shall not be eligible to appointed as director in any other company after 31.3.2015 for a period of 5
years. Thus, DEF Ltd. cannot appoint Nalin as an additional director on 15.5.2015.
- As per Section 167(l)(a), due disqualification under Section 164, Nairn's office of director in ABC Ltd, PQR
Ltd. & XYZ Ltd. shall become vacant on the expiry of 31.3.2015.
If Nalin had ceased to be director of ABC Ltd. by resignation on 1.3.2015, he would have escaped the disqualification
specified in Section 164(2) and thus, DEF Ltd. could appoint Nalin as an additional director on 15.5.2015.
255
Que. No. 8] Mr. Ramanthan is a Director of Fraudulent Ltd., Honest Ltd. and Regular Ltd. For the financial year
ended on 31.3.2014 two irregularities were discovered against fraudulent Ltd. For the financial year ended on
31.3.2014 Fraudulent Ltd. did not file its annual accounts for the year ended 31.3.2014 and failed to pay interest
on loans taken from a financial institution for the las` 3 years.
On 1.6.2015 Mr. Ramanthan is proposed to be appointed as additional director of Goodwill Ltd., which company
has sought a declaration from Mr. Ramanthan and he also submitted the declaration stating that the
disqualification specified in Section 164 of the Companies Act, 2013 is not attracted in his case. Decide under the
provisions of the Companies Act, 2013:
(i) Whether the declaration submitted by Mr. Ramanthan to Goodwill Ltd. is in order?
(ii) Whether Mr. Ramanthan can continue as a Director in Honest Ltd. and Regular Ltd.?
CA (Final) - June 2009 (7 Marks)
Ans.: The given problem is discussed as under:
(i) As per Section 164(2), a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which has not filed
financial statements or annual returns for any continuous period of 3 financial years. As per the facts given in case,
failure to file annual accounts has not been for 3 continues years and therefore Mr. Ramanthan is not disqualified
for his directorship and can be appointed as director in Goodwill Ltd.
The declaration submitted by Mr. Ramanthan to Goodwill Ltd. is in order and valid.
Failure to pay interest on loans taken from a financial institution is not covered in Section 164, since defaults
specified in 164 covers default of repayment of 'public deposit', 'interest on public deposit' and 'non-filing of annual
accounts or annual returns' and not non-payment of 'loan' or 'interest on loan' obtained from financial institution.
(ii) Since Mr. Ramanthan is not disqualified under Section 164, he is not required to vacate his office of
directorship in any company as per Section 167(l)(a).
Que. No. 9] A private company may by its articles provide additional disqualification in respect of directorship
of the company. Comment. CS (Inter) - June 2004 (4 Marks)
Ans.: A private company may by its articles provide additional grounds for disqualifications for appointment of a
director in addition to those specified in Section 164(1) & (2).
However, public companies cannot provide additional grounds for disqualification for appointment of a director
other than those specified in Section 164(1) & (2)..
Que. No. 10] Mr. X is a director in Greenfield Industries Ltd. He is a man of wide knowledge of commercial
matters. The company has not filed financial statements with the Registrar of Companies for the years ended
31st March, 2014, 31st March, 2015 and 31st March, 2016. However, it has filed the annual returns for those
years in compliance of the provisions of the Companies Act, 2013. Considering Mr. X's huge experience, Redfield
Industries Ltd. wants to induct him as a director on its Board. Referring to the provisions of the Companies Act,
2013, examine the validity of such proposition.
Ans.: As per Section 164(2), a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which -
(a) has not filed financial statements or annual returns for any continuous period of 3 financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the
due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for
1 year or more.
Keeping in view of above provision, Mr. X, director of Greenfield Ltd. is disqualified to be reappointed as director
in that company as well as in other companies. Thus, Mr. X cannot be appointed as director in Redfield Ltd.
Que. No. 11] Is it mandatory for all directors to obtain DIN? Discuss.
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Ans.: Director Identification Number (DIN) to be obtained by all existing directors and every other person, intending
to become a director.
MCA 21 has introduced the concept of Director Identification Number (DIN) which is mandatory, unique and life
time identification for all existing and prospective directors. In the scenario of e-filing, DIN is a pre-requisite for
filing of certain company related documents. Any individual who is a director or intends to be a director of a
company should apply for DIN first. DIN has to be obtained by the directors of the company before commencing
the procedure for incorporation of a company.
Que. No. 12] A foreign national was intended to be appointed to the Board of MNC in India. He contends that,
director identification number (DIN) is not required for him as he is a foreign national. Whether his contention
is correct? CS (Executive) - Dec 2013 (4 Marks)
Ans.: Director Identification Number (DIN) is a unique Identification Number allotted to an individual who is an
existing director of a company or intends to be appointed as director of a company.
All existing and any person intending to be appointed as a director are required to obtain the Director Identification
Number (DIN). DIN is also mandatory for directors of Indian Companies who are not citizens of India. However, DIN
is not mandatory for directors of foreign company having branch offices in India.
VACATION OF OFFICE OF DIRECTORS
Que. No. 13] When is the office of a director deemed to be vacated? CS (Inter) - Dec 1999 (4 Marks)
Ans.: Vacation of office of director [Section 167]: The office of a director shall become vacant in case-
(a) He incurs any of the disqualifications specified in Section 164. However, where he incurs disqualification under
section 164(2), the office of the director shall become vacant in all the companies, other than the company which
is in default under Section 164(2).
(b) He absents himself from all the meetings of the Board of Directors held during a period of 12 months with
or without seeking leave of absence of the Board.
(c) He acts in contravention of the provisions of Section 184 relating to entering into contracts or arrangements
in which he is directly or indirectly interested.
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested,
in contravention of the provisions of Section 184.
(e) He becomes disqualified by an order of a Court or the Tribunal.
(f) He is convicted by a Court of any offence, whether involving moral turpitude or otherwise and sentenced in
respect thereof to imprisonment for not less than 6 months.
However, the office shall not be vacated by the director in case of orders referred to in clauses (e) and
(f)-
(i) For 30 days from the date of conviction or order of disqualification
(ii) Where an appeal or petition is preferred within 30 days until expiry of 7 days from the date on which such
appeal or petition is disposed of or
(iii) where any further appeal or petition is preferred against order or sentence within 7 days, until such further
appeal or petition is disposed of.
(g) He is removed in pursuance of the provisions of the Companies Act, 2013.
(h) He, having been appointed a director by virtue of his holding any office or other employment in the holding,
subsidiary or associate company, ceases to hold such office or other employment in that company.
Penalty [Section 167(2)]: If a person, functions as a director even when he knows that the office of director held
by him has become vacant on account of any of the disqualifications specified Section 167(1), he shall be
punishable:
- with fine which shall not be less than ` 1 lakh but which may extend to ` 5 lakh or
- with both.
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Consequences of vacation of office of all the directors [Section 167(3)]: Where all the directors of a company
vacate their offices under any of the disqualifications specified in Section 167(1), the promoter or, in his absence,
the Central Government shall appoint the required number of directors who shall hold office till the directors are
appointed by the company in the general meeting.
Judicial Views:
♦ It was held that when the law provides that a director shall vacate office on the happening of some event
the director automatically vacates his office on the happening of that event, the board has no power to waive that
event. [Fateh Chand Kad v. Hindsons (Patiala) Ltd. (1986) 3 Comp L J 234 (MP)]
♦ A private company which is not a subsidiary of a public company may by its articles provide additional
grounds for vacation of office of director. A public company cannot, however, add to the disqualifications
mentioned in Section 167. [Cricket Club of India Ltd. v. Madhav L. Apte, (1975) 45 Com Cases 574]
Que. No. 14] Iqbal Sons Ltd. issued shares of the nominal value of ` 10 per share, out of which ` 5 was payable
on application and balance ` 5 was payable on call. The call money was invited by the Board of Directors but
some shareholders, including a non-executive director, failed to pay the same within the prescribed period.
Explain the status of director who defaulted in paying call money. CA (Final) - May 2005 (3 Marks)
Ans.: As per Section 164(1) (vi), person shall not be eligible for appointment as a director of a company, if he has
not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and 6
months have elapsed from the last day fixed for the payment of the call
As per Section 167(1) (a), the office of a director shall become vacant in case he incurs any of the disqualifications
specified in Section 164.
Thus, due to disqualification u/s 164, non-executive director's office shall become vacant on the expiry of the last
day fixed for the payment Of the call. Further, he shall also be disqualified to be appointed as director in Iqbal Sons
Ltd.
Que. No. 15] Azad, the managing director of a company, fails to attend three board meeting in a year. Should he
vacate his office? CS (Inter) - Dec 2001 (2 Marks)
Ans.: As per Section 167(l)(b), the office of a director shall become vacant, if he absents himself from all the
meetings of the Board of Directors held during a period of 12 months with or without seeking leave of absence
of the Board. Azad, need not vacate office as did not absent from all the meetings of the Board of Directors held
during a period of 12 months.
Que. No. 16] Five Board meetings were held in Asha Ltd. during the period from January to June in the calendar
year 2017. Rajeev, an additional director, attended none of these meetings. For the first two meetings he sought
leave of absence from the Board but did not inform the Board for the remaining three meetings. Examining the
provisions of the Companies Act, 2013, decide whether he is disqualified to act as a director.CS (Executive) -
Dec 2016 (4 Marks)
Ans.; As per Section 161, the additional director shall hold office up to the date of the next AGM or the last date
on which the AGM should have been held, whichever is earlier.
As per Section 167, the office of a director shall become vacant if he absents himself from all the meetings of the
Board of Directors held during a period of 12 months with or without seeking leave of absence of the Board.
Thus, office of Rajeev, Director of Asha Ltd. will be vacated if he remains absent for all board meeting in calendar
year 2017. If he attends any board meeting during the period July 2017 to Dec 2017 his office will not be vacated.
However, he is not disqualified to become director as per Section 164.
■ ■■ NUMBER OF DIRECTORS & INCREASE IN NUMBER OF DIRECTORS
Que. No. 17] State the provision relating to 'number of directors' under the Companies Act, 2013.
Write a short note on: Resident Director CS (Executive) - June 2016 (4 Marks)
Ans.: Company to have Board of Directors [Section 149(1)]: Every company shall have a Board of Directors
consisting of individuals as directors and shall have-
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(a) Minimum 3 directors in the case of a public company, 2 directors in the case of a private company, and 1
director in the case of OPC and
(b) Maximum of 15 directors
A company may appoint more than 15 directors after passing a special resolution. Prescribed classes of companies
shall have at leas` 1 woman director.
Resident Director [Section 149(3)]: Every company shall have at least one director who stays in India for a total
period of not less than 182 days during the financial year. However, in case of a newly incorporated company the
requirement under section shall apply proportionately at the end of the financial year in which it is incorporated.
No. of independent directors in case of listed company [Section 149(4)]: Every listed public company shall have
at least l/3rd of the total number of directors as independent directors and the Central Government may prescribe
the minimum number of independent directors in case of any class or classes of public companies. Any fraction
contained while computing l/3rd shall be rounded off as one.
Que. No. 18] LKG Ltd. was incorporated on 5th May, 2014 under the Companies Act, 2013. Mr. Ramanujam was
appointed as the first resident director of the company in the board meeting held on 30th September,
2014. Examine the validity owing appointments with reference to the provisions of the Companies Act, 2013.
CA (Final) - May 2015 (3 Marks)
Ans.: As per Section 149(3), every company shall have at least one director who stays in India for a total period of
not less than 182 days during the financial year.
The MCA vide General Circular No. 25/2014 has given a clarification on applicability of requirement for resident
director in the current calendar/financial year. Regarding newly incorporated companies, it is clarified that
companies incorporated between 1st April, 2014 to 30th September, 2014 should have a resident director either
at the incorporation stage itself or within 6 months of their incorporation.
Since, LKG Ltd., was incorporated on 5th May 2014, it should have a resident director either at the incorporation
stage itself or within 6 months of their incorporation. Thus accordingly, the appointment of Mr. Ramanujam as a
first resident director of the company in the board meeting held on 30th September, 2014 is valid.
Que. No. 19] Three Singapore nationals who have been to India have decided to be shareholders holding, 100%
equity shares and the only directors of a private company in India in the year 2015 which is not subsidiary of a
public company. Comment. CS (Executive) - June 2016 (4 Marks)
Ans.: As per Section 149, every company shall have a Board of Directors consisting of individuals as directors and
shall have minimum 3 directors in the case of a public company, 2 directors in the case of a private company, and
1 director in the case of OPC.
Every company shall have at least one director who stays in India for a total period of not less than 182 days during
the financial year.
As per facts given in case all the three Singapore national who are also shareholder of the company are directors
also and all the three never been India. Thus, they should appoint at least one director who should be present in
India for at least 182 days in the year.
Que. No. 20] Write a short note on: Woman directors
Ans.: Woman director on the Board [Rule 3]: The following class of companies shall appoint at leas` 1 woman
director-
(i) Every listed company
(ii) Every other public company having -
(a) Paid-up share capital of ` 100 Crore or more or
(b) Turnover of ` 300 Crore or more.
It is clarified that the paid up share capital or turnover, as on the last date of latest audited financial statements
shall be taken into account.
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Vacancy of a woman director: Any intermittent vacancy of a woman director shall be filled-up by the Board at the
earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy whichever is
later.
Que. No. 21] The Board of Directors of MNP Ltd. appointed Neha as a women director in the board meeting held
on 10th September, 2014. The said appointment was made to fill the vacancy of the woman director, which had
occurred as a result of resignation of Sheela on 30th June, 2014. Will your answer differ if the board meeting of
the company was held on 8th November, 2014? CA (Final) - May 2015 (4 Marks)
Ans.: As per Rule 3 of the Companies (Appointment & Qualification of Directors) Rule, 2014 any intermittent
vacancy of a woman director shall be filled up by the Board at the earliest but not later than immediate next Board
meeting or three months from the date of such vacancy, whichever is later.
As per the above provisions, the appointment of Neha is valid. The vacancy of a woman director of MNP Ltd. which
arose on 30th June 2014, due to the resignation of Ms. Sheela, should be filled up latest by 29th September 2014
or the day of the next board meeting, whichever is later. Since, Neha was appointed in the next board meeting
after the vacancy arose, i.e. on 10th September 2014, her appointment is valid.
The answer will remain the same, even if MNP Ltd. appoints Neha in the board meeting held on 8th November
2014, provided the said meeting is the first meeting of the Board after 30th June 2014 i.e. after the resignation of
Sheela.
Que. No. 22] Divine Industries (Pvt.) Ltd. has a turnover of ` 350 Crore during the financial year 2016-2017. The
bankers of the company have advised the company to compulsorily appoint a woman director in the company
as required under the Companies Act, 2013. Referring to the provisions of the Act, examine the validity of the
banker's advice. What would be your answer in case the company in question is a public limited company? CS
(Executive) - Dec 2016 (4 Marks)
Ans.: As per Rule 3 of the Companies (Appointment & Qualification of Directors) Rule, 2014, the following class
of companies shall appoint at leas` 1 woman director-
(i) Every listed company
(ii) Every other public company having -
(iii) Paid-up share capital of ` 100 Crore or more or
(iv) Turnover of ` 300 Crore or more.
It is clarified that the paid-up share capital or turnover, as on the last date of latest audited financial statements
shall be taken into account.
Considering above provisions private limited companies are not required to appoint woman director irrespective
of its turnover. Thus, advice given by bankers to Divine Industries (Pvt.) Ltd. is not as per law.
If Divine Industries is public company then it has to appoint woman director.
Que. No. 23] Write a short note on: Number of independent directors
Ans.: Number of independent directors [Rule 4]: The following class or classes of companies shall have at leas` 2
directors as independent directors -
(i) Public companies having paid up share capital of ` 10 Crore or more or
(ii) Public companies having turnover of ` 100 Crore or more or
(ii) Public companies having outstanding loans, debentures and deposits, exceeding ` 50 Crores
However, if a company is required to appoint a higher number of independent directors due to composition of its
audit committee, such higher number of independent directors shall be applicable to it.
Where a company ceases to fulfil any of the 3 conditions laid down Rule 4(1) for 3 consecutive years, it shall not be
required to comply with these provisions until such time as it meets any of such conditions.
Vacancy of an independent director: Any intermittent vacancy of an independent director shall be filled-up by the
Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy,
whichever is later.
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Explanation: The paid up share capital or turnover or outstanding loans, debentures and deposits, as existing on
the last date of latest audited financial statements shall be taken into account.
A company belonging to any class of companies for which a higher number of independent directors has been
specified in the law for the time being in force shall comply with the requirements specified in such law.
INDEPENDENT DIRECTORS
Que. No. 24] Write a short note on: Independent Directors
Distinguish between: Executive Director & Independent Director CS (Inter) - June 2005 (4 Marks) * (i)
Ans.: Independent Directors [Section 149(6)]: An independent director in relation to a company, means a director
other than a managing director or a whole-time director or a nominee director -
(a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) Who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) Who is not related to promoters or directors in the company, its holding, subsidiary or associate Company;
(c) Who has or had no pecuniary relationship, other than remuneration as such director or having transaction
not exceeding ten per cent of his total income or such amount as may be prescribed, with the company, its holding,
subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial
years or during the current financial year;
(d) None of whose relatives -
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the 2
immediately preceding financial years or during the current financial year. (However, the relative may hold security
or interest in the company of face value not exceeding ` 50 lakh or 2% of the paid-up capital of the company, its
holding, subsidiary or associate company or such higher sum as may be prescribed)
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in
excess of such amount as may be prescribed during the two immediately preceding financial years or during the
current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to
the company, its holding, subsidiary or associate company or their promoters, or directors of such holding
company, for such amount as may be prescribed during the 2 immediately preceding financial years or during the
current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or
associate company amounting to 2% or more of its gross turnover or total income singly or in combination with
the transactions referred to in sub-clause (i), (ii) or (iii);
(e) Who, neither himself nor any of his relatives -
(i) holds or has held the position of a KMP or is or has been employee of the company or its holding, subsidiary
or associate company in any of the three financial years immediately preceding the financial year in which he is
proposed to be appointed; Provided that in case of a relative who is an employee, the restriction under this clause
shall not apply for his employment during preceding three financial years.
(ii) is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding
the financial year in which he is proposed to be appointed, of -
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary
or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or
associate company amounting to 10% or more of the gross turnover of such firm;
(iii) holds together with his relatives 2% or more of the total voting power of the company;
(iv) is a Chief Executive or director, by whatever name called, of any non-profit organization that receives 25%
or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate
company or that holds two per cent or more of the total voting power of the company;
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(f) Who possesses such other qualifications as may be prescribed.
Que. No. 25] What kind of declaration is required to be given by independent director each year to the
Board of directors as per the Companies Act, 2013?
Ans.: Declaration by Independent Director [Section 149(7)]: Every independent director shall at the first meeting
of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial
year or whenever there is any change in the circumstances which may affect his status as an independent director,
give a declaration that he meets the criteria of independence as provided Section 149(5).
Que. No. 26] Write a short note on: Stock option and other remuneration to an independent director.
Ans.: An independent director shall not be entitled to any stock options. However, he may receive remuneration
by way of sitting fees.
The company may reimburse to the independent director the expenses for participation in the Board and other
meetings.
An independent director may be paid profit related commission as may be approved by the members.
Que. No. 27] Write a short note on: Term of office of independent director
Ans.: Term of office of independent director [Section 149(10) & (11)]: An independent director shall hold office
for a term up to 5 consecutive years on the Board of a company. He shall be eligible for reappointment on passing
of a special resolution by the company and disclosure of such appointment in the Board's report.
No independent director shall hold office for more than 2 consecutive terms. An independent director shall be
eligible for appointment after the expiration of 3 years of ceasing to become an independent director.
An independent director shall not be appointed in or be associated with the company in any other capacity, , either
directly or indirectly during the said period of 3 years.
Que. No. 28] In terms of the provisions of the Companies Act, 2013, answer the following:
(i) Which companies are required to have independent directors?
(ii) What is the tenure of independent directors and the number of terms for which such a director can be
appointed? Are independent directors required to hold meetings of their own without the presence of non -
independent directors? CS (Executive) - Dec 2015 (4 Marks)
Ans.: As per Section 149, every listed public company shall have at leas` 1 /3rd of the total number of directors as
independent directors and the Central Government may prescribe the minimum number of independent directors
in case of any class or classes of public companies. Any fraction contained while computing 1 / 3rd shall be rounded
off as one.
Number of independent directors [Rule 4]: The following class or classes of companies shall have at leas` 2
directors as independent directors -
(i) Public companies having paid up share capital of ` 10 Crore or more or (ii) Public companies having turnover of
` 100 Crore or more or
(iii) Public companies having outstanding loans, debentures and deposits, exceeding ` 50 Crore
However, if a company is required to appoint a higher number of independent directors due to composition of its
audit committee, such higher number of independent directors shall be applicable to it.
Where a company ceases to fulfil any of the 3 conditions laid down Rule 4(1) for 3 consecutive years, it shall not
be required to comply with these provisions until such time as it meets any of such conditions.
Vacancy of an independent director: Any intermittent vacancy of an independent director shall be filled up by the
Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy,
whichever is later.
Term of office of independent director [Section 149(10) & (11)]: An independent director shall hold office for a
term up to 5 consecutive years on the Board of a company. He shall be eligible for reappointment on passing of a
special resolution by the company and disclosure of such appointment in the Board's report.
Que. No. 29] Write a short note on: Exemption from liability to an independent director
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Ans.: An independent director or a non-executive director (not being promoter or key managerial personnel) shall
be held liable, only in respect of such acts of omission or commission by a company which had occurred with his
knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted
diligently.
Que. No. 30] Explain the provisions of the Companies Act, 2013 relating to maintenance of data bank of
independent directors.
Ans.: Manner of selection of independent directors and maintenance of databank of independent directors
[Section 150 & Rule 6]:
♦ An independent director may be selected from a data bank containing names, addresses and qualifications
of persons who are eligible and willing to act as independent directors.
♦ The data bank may be maintained by any body, institute or association, as may be notified by the Central
Government, having expertise in creation and maintenance of data bank.
♦ Such data bank will be put on the website for the use by the companies making the appointment of
♦ The responsibility of exercising due diligence before selecting a person from the data bank, as an
independent director shall lie with the company making such appointment.
♦ The appointment of independent director shall be approved by the company in general meeting and the
explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall
indicate the justification for choosing the appointee for appointment as independent director.
♦ The data bank agency shall create and maintain data of persons willing to act as independent director in
accordance with rules as may be prescribed.
♦ The Central Government may prescribe the manner and procedure of selection of independent directors
who fulfil the qualifications and requirements specified under section 149.
♦ Any person who desires to get his name included in the data bank of independent directors shall make an
application to "the agency" in Form DIR-1.
♦ The agency may charge a reasonable fee from the applicant for inclusion of his name in the data bank of
♦ Any person who has applied for inclusion of his name in the data bank of independent directors or any person
whose name appears in the data bank, shall intimate to the agency about any changes in his particulars within
fifteen days of such change.
■ ■■ SMALL SHAREHOLDER DIRECTOR
Que. No. 31] Define 'small shareholder'. Which types of companies are required to appoint small shareholder?
Can a person hold office as small shareholder director in three companies at the same time?
Ans.: Small Shareholder [Section 151]: Small Shareholder means a shareholder holding shares of nominal value of
` 20,000 or less or such other sum as may be prescribed.
A listed company may have one director elected by small shareholders in prescribed manner and with prescribed
terms and conditions.
Rule 7 of the Companies (Appointment & Qualification) Rules, 2014 makes the following provisions with regard
to small shareholder director:
(1) A listed company, may upon notice of not less than 1,000 small shareholders or l/10th of the total number
of small shareholders, whichever is lower, have a small shareholders director elected by the small shareholders.
(2) A listed company may appoint small shareholders director voluntary.
(3) The small shareholders intending to propose a person as a candidate for the post of small shareholders
director shall leave a notice of their intention with the company at least 14 days before the meeting under their
signatures specifying the name, address, shares held and folio number of the person whose name is being proposed
for the post of director and of the small shareholders who are proposing such person for the office of director.
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However, if the person being proposed does not hold any shares in the company, the details of shares held and
folio number need not be specified in the notice.
(4) The notice shall be accompanied by a statement signed by the person whose name is being proposed for the
post of small shareholders director stating -
(a) His Director Identification Number
(b) That he is not disqualified to become a director and
(c) His consent to act as a director of the company
(5) Small shareholders director shall be considered as an independent director, if eligible for appointment as an
independent director as per Section 149(6) and he gives a declaration of his independence in as per Section 149(7).
(6) The appointment of small shareholders director shall be subject to the provisions of section 152 except that
-
(a) He shall not be liable to retire by rotation
(b) His tenure shall not exceed a period of 3 consecutive years
(c) On the expiry of the tenure, small shareholder director shall not be eligible for re-appointment.
(7) A person shall not be appointed as small shareholders director, if the person is not eligible for appointment
in terms of Section 164. (Section 164 deals with disqualification for appointment of directors)
(8) A person appointed as small shareholders director shall vacate the office if -
(a) He incurs any of the disqualifications specified in Section 164
(b) He vacates the office of director as per Section 167
(c) He ceases to meet the criteria of independence as provided in Section 149(6).
(9) No person shall hold the position of small shareholders' director in more than 2 companies at the same time.
However, the second company in which he has been appointed shall not be in a business which is competing or is
in conflict with the business of the first company.
(10) A small shareholders director when ceases to hold office as a small shareholders director in a company, he
shall not be appointed in that company or associated company in any other capacity, either directly or indirectly
for nex` 3 years.
Voting by postal ballot: In case of listed companies, the resolution to appoint small shareholder director is required
to be passed through postal ballot. [Section 110(l)(a) read with Rule 22(16)(h) of the Companies (Management &
Administration) Rule, 2014]
Que. No. 32] The Board of Directors of ABC Ltd., an unlisted company having a paid-up capital of ` 6 Crores
consisting of equity share capital of ` 5 Crores and preference share capital of ` 1 Crore and also 1,100 small
shareholders holding equity shares seeks your advice on the following:
(i) It is necessary for the company to appoint a director to represent the 'Small Shareholders'?
(ii) In case the company decides to appoint such a director. The procedure to be followed by the company for
such appointment and the period for which such appointment can be made.
Advise explaining the relevant provisions of the Companies Act, 2013 and the Rules.
Ans.:
(i) The provisions of Section 151 read with Rule 7 of the Companies (Appointment & Qualification) Rules, 2014
relating to appointment of small shareholder director is applicable only to listed company. Thus, ABC Ltd. being an
unlisted company need not appoint small shareholder director.
(ii) However, even unlisted company by making provision in its article can appoint small shareholder director.
(As there is no prohibition under the Companies Act, 2013 that unlisted company should not appoint small
shareholder director)
The small shareholder director will be appointed by the small shareholder in accordance with the provisions of the
Article of such unlisted company.
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Que. No. 33] Mr. Solid, a young professional of 29 years, has stayed in India for 150 days in the previous financial
year. He does not hold any shares in Happy Retails Ltd., which is a quoted (listed) company. Small shareholders
have decided amongst themselves that he is proposed to be appointed as small shareholders director who shall
not be liable to retire by rotation and his tenure shall be for 5 years from the date of joining the office of director.
Examining the provisions of the Companies Act, 2013, state whether Mr. Solid can be so appointed as small
shareholders director. CS (Executive) - June 2017 (4 Marks)
Ans.: As per Section 151, small Shareholder means a shareholder holding shares of nominal value of ` 20,000 or
less or such other sum as may be prescribed.
A listed company may have one director elected by small shareholders in prescribed manner and with prescribed
terms and conditions.
As per Rule 7 of the Companies (Appointment & Qualification) Rules, 2014, the appointment of small shareholders
director shall be subject to the provisions of Section 152 except that -
(a) He shall not be liable to retire by rotation.
(b) His tenure shall not exceed a period of 3 consecutive years.
(c) On the expiry of the tenure, small shareholder director shall not be eligible for re-appointment.
Keeping in view of above provisions, Mr. Solid can be appointed as small shareholder director for 3 years and not
for 5 years.
Que. No. 34] State the provisions relating to increase in number of directors of public company.
Ans.: As per Section 149(1), a company shall have maximum 15 directors. A company may appoint more than 15
directors after passing a special resolution. The provisions of Section 149 apply to both private and public company.
Que. No. 35] Write a short note on: Restrictions on number of directorships
Ans.: Number of directorships [Section 165]: A person shall not hold office as a director, including any alternate
directorship, in more than 20 companies at the same time. However, the maximum number of public companies
in which a person can be appointed as a director shall not exceed 10.
Explanation: For reckoning the limit of public companies in which a person can be appointed as director,
directorship in private companies that are either holding or subsidiary company of a public company shall be
included.
For reckoning the limit of directorship of 20 companies, the directorship of dormant company shall not be included.
The members of a company may specify lesser number of companies in which a director of the company may act
as directors by passing special resolution.
Penalty: If a person accepts an appointment as a director in contravention of Section 165(1), he shall be punishable
with fine which shall not be less than ` 5,000 but which may extend to ` 25,000 for every day after the first during
which the contravention continues.
Restriction on number of small shareholder directorships [Rule 7]: No person shall hold the position of small
shareholders director in more than 2 companies at the same time.
Que. No. 36] Mr. Naksh is already a director of 19 companies. Out of which, 10 are public companies and 5 are
private companies. He is being appointed as director of another company named XYZ Ltd. Advise Mr. Naksh.CA
(Final) - Nov 2001 (3 Marks)
Ans.: As per Section 165, a person shall not hold office as a director, including any alternate directorship, in more
than 20 companies at the same time. Further, a person can be appointed a director in maximum 10 companies.
Mr. Naksh is already a director of 10 public companies and if he is appointed a director in XYZ Ltd. (public company)
there will be contravention of provisions of the Section 165. Thus, he cannot be appointed as director in XYZ Ltd.
■ ■■ APPOINTMENT & RE-APPOINTMENT OF DIRECTORS
Que. No. 37] What are the modes in which a director of a company can be appointed?
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Ans.: Directors may be appointed in the following ways:
♦ Subscribers of the Memorandum [Deemed as first directors; Section 152]
♦ By members in general meeting
♦ By Board of directors
- Additional Director [Section 161]
- Director appointed to fill up the casual vacancy [Section 161]
- Alternate Director [Section 161]
♦ By third-parties if the articles provide (i.e. Nominee Director) [Section 161]
♦ By small shareholders [Section 151]
Que. No. 38] Write a short note on: Appointment of first directors
Ans.: First Directors [Section 151(1)]: Where no provision is made in the articles of a company for the appointment
of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first
directors of the company until the directors are duly appointed. In case of OPC an individual being member shall
be deemed to be its first director until the director or directors are duly appointed by the member as per provisions
of this section.
Que. No. 39] Newly incorporated Abhay Ltd. has not mentioned names of first directors of the company in the
Articles of Association. Referring to the provisions of the Companies Act, 2013, advise the Board of Directors
regarding the appointment of first directors of the company. What would be your answer in case the company
is a One Person Company? Also state whether provisions of the Act are applicable to a Private Ltd. Company.
Ans.: As per Section 152(1), where no provision is made in the articles of a company for the appointment of the
first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of
the company until the directors are duly appointed.
In case of OPC an individual being member shall be deemed to be its first director until the director or directors
are duly appointed by the member as per provisions of this section.
Thus, subscribers of Abhay Ltd. who are individuals shall be deemed to be the first directors of the company until
the directors are duly appointed in general meeting.
Section 152(1) applies to all companies, whether public or private.
Que. No. 40] Explain the law relating to appointment of directors at the general meeting. The annual general
meeting of a company was adjourned sine die and retiring director, who was otherwise eligible for
reappointment, could not be appointed before adjournment. State the legal position and suggested action.
Ans.: Appointment of directors at the general meeting [Section 152(2) to (7)]:
(1) Every director shall be appointed by the company in general meeting.
(2) No person shall be appointed as a director of a company unless he has been allotted the Director
Identification Number.
(3) Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall
furnish his Director Identification Number and a declaration that he is not disqualified to become a director under
the Act.
(4) Every person who has been appointed to hold the office of a director shall on or before the appointment
furnish to the company a consent in writing to act as such in Form DIR-2. The company shall, within 30 days of the
appointment of a director, file such consent with the Registrar in Form DIR-12 along with prescribed fee.
(5) In the case of appointment of an independent director in the general meeting, an explanatory statement
annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils
the conditions specified for an appointment of independent director.
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(6) Unless the articles provide for the retirement of all directors at every AGM, not less than 2/3rd of the total
number of directors of a public company shall be persons whose period of office is liable to determination by
retirement of directors by rotation. Directors retired by rotation can be reappointed in general meeting, (such
2/3rd directors are rotational directors)
(7) At every subsequent AGM, 1/3rd of rotational directors shall retire at every AGM. The directors to retire by
rotation at every AGM shall be those who have been longest in office since their last appointment, but as between
persons who became directors on the same day, those who are to retire shall, in default of and subject to any
agreement among themselves, be determined by lot.
(8) ' At the AGM at which a director retires, the company may fill up the vacancy by appointing the retiring
director or some other person. However, independent directors are not liable to retire by rotation.
(9) If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill
the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or
if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.
If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not
expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the
adjourned meeting, unless-
(i) At that meeting or at the previous meeting a resolution for the re-appointment of such director has been
put to the meeting and lost;
(ii) The retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed
his unwillingness to be so re-appointed;
(iii) He is not qualified or is disqualified for appointment;
(iv) A resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any
provisions of this Act; or
(u) Section 162 is applicable to the case.
Example on computation of 'Rotational Directors', 'Non-Rotational Directors' & 'Directors that retire at AGM:
Total Directors 3 4 5 6 7 8 9 10 11 12 13 14
Rotational Directors Total Director x 2/3 (rounded up to 2 3 4 4 5 6 6 7 8 8 9 10

next)
Non-Rotational Directors Total Director - Rotational 1 1 1 2 2, 2 3 3 3 4 4 4

directors
Director that retire at AGM Rotational Directors * 1/3 1 1 1 1 2 2 2 2 3 3 3 3

(rounded to nearest)
Que. No. 41] A Public limited company has 10 directors as under.

Non-retiring directors 2
Directors liable to retire by rotation 4
Additional directors 4
State the number of directors retiring by rotation at the next annual general meeting and the number of
directors vacating office. CS (Inter) - June 2001 (4 Marks) 1
Ans.: As per Section 152(6) (a), unless the articles provide for the retirement of all directors at every AGM, not less
than 2/3rd of the total number of directors of a public company, shall retire by rotation. While calculating 2/3rd
any fraction is to be rounded off to next higher number.
As per Section 152(6) (c), at every subsequent AGM, l/3rd of rotational directors shall retire at every AGM. While
calculating l/3rd it has to be rounded up to nearest to l/3rd.
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Of the 10 directors mentioned in problem 2 directors are non-retiring directors and are not liable to retire by
rotation. The position in regard to remaining director is as under:
(1) Four directors appointed as additional directors shall vacate the office at the AGM because additional
directors hold office till the next AGM or the last date on which the annual general meeting should have been held,
whichever is earlier. [Section 161]
(2) Of the 4 rotational directors l/3rd i.e. 4 x 1/3 = 1.33 j.e. 1 (rounded up to nearest) director will retire. Director
who was longest in office will retire. If all the four directors were appointed on same date then the decision shall
be made by mutual consent or by draw of lots.
Hence, total number of directors vacating the office is 5.
Que. No. 42] Write a short note on: Appointment of person other than retiring director
X, who is not shareholder of company, sent a notice to the company of his candidature for the office of director
in the place of a retiring director at the ensuing annual general meeting of the company. The same company
received another notice from Y, a member, holding only one share signifying his intention to propose the
candidature of Z for the office of director in the place of retiring director. As a secretary of the company, how
will you deal with these notices? Can any member present at the meeting proposes the aforesaid proposals for
the consideration of the meeting? CS (Inter) - June 2000 (16 Marks)
Ans.: Right of persons other than retiring directors to stand for directorship [Section 160]: A person who is not a
retiring director shall be eligible for appointment to the office of a director at any general meeting.
Such person or some member intending to propose him as a director has to give a notice in writing at least 14 days
before the meeting. A sum of X 1 lakh shall be deposited along with notice.
However, requirement of deposit of amount of` 1 lakh shall not apply in case of appointment of an independent
director or director recommended by the Nomination & Remuneration Committee.
Amount deposited will be refunded to such person or to the member, if the person proposed gets elected as a
director or gets more than 25% of total valid votes cast either on show of hands or on poll on such resolution.
Duty of the company to inform members: On receipt of notice as stated above, the company shall inform its
members about the candidature of the person proposed as a director in prescribed manner.
Que. No. 43] Whether it is possible to appoint two or more directors by single resolution in public company?
The appointment of several directors cannot be clubbed together. Comment.
Ans.: Appointment of directors to be voted individually [Section 162]: At a general meeting of a company, only
one director can be appointed by a single resolution. If resolution appointing more than one director is passed, the
appointment is void, even if no objection was raised.
A single resolution for appointment of two or more director can be moved only if a proposal to move such a motion
has first been agreed to at the meeting without any vote being cast against it.
Example 1: In general meeting, 100 members were present. All the 100 members passed a single resolution
appointing 2 directors Gopal & Suresh. The single resolution appointing 2 directors is void since a resolution was
not first been agreed to by the meeting that appointment of 2 directors shall be made by single resolution.
Example 2: In general meeting, 20 members were present. A resolution to the effect that Ram & Shy am shall be
appointed was passed with the consent of 16 members, bu` 4 members abstained from voting. At the time of voting
on single resolution for the appointment of Ram & Shyam, 14 members voted in favour of resolution and 6 members
voted against the resolution. The single resolution appointing the 2 directors is valid.
This section is not applicable to private company. [MCA Notification dated 5.6.2015]
Thus, in case of private company, more than one director can be appointed by single resolution.
ADDITIONAL DIRECTOR
Que. No. 44] Write a short note on: Additional Directors
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Ans.: Appointment of additional director [Section 161(1)]: The articles of a company may confer on its Board of
Directors the power to appoint any person as an additional director at any time who shall hold office up to the
date of the next AGM or the last date on which the AGM should have been held, whichever is earlier.
However, a person who fails to get appointed as a director in a general meeting cannot be appointed as additional
director.
Some important points relating to 'Additional Director':
♦ An additional director can be appointed by passing a resolution by circulation.
♦ Section 161(1) applies to all companies, whether public or private.
♦ An additional director has same rights, powers, duties and liabilities as any other director. The provisions relating
to disqualification, vacation of office, disclosure of interest etc. are also applicable to additional director as they
apply to any other director.
Que. No. 45] Mohan, who was appointed as additional director at the board meeting held on 15th June 2014
continues to be in his office on the ground that the AGM for the financial year 2013-2014 was not held as
required under the Act. Whether continuance of Mohan in the office is valid? Will your answer be different if
Mohan was also managing director for a period of five years with effect from 1st June 2014 at the same board
meeting? CA (Final) - May 1996 (5 Marks)
Ans.: As per Section 161(1), an additional director holds office up to the date of the next AGM or the last date on
which the AGM should have been held, whichever is earlier. Thus, Mohan would vacate the office of director on
the last day on which AGM ought to have been held.
Only director can be appointed as managing director. Since, Mohan vacates the office of director, the office of
managing director is also vacated irrespective of the fact that he was appointed as managing director for a period
of 5 years.
Que. No. 46] Suresh, an additional director appointed by the board of directors of a public company, is proposed
to be appointed as a regular director in the AGM. Explain the requirement under the Companies Act, 2013 to
give effect to the proposed appointment. CA (Final) - Nov 2008 (5 Marks)
which the AGM should have been held, whichever is earlier. If an additional director seeks appointment as a regular
director, he must comply with requirements of Section 160.
- Suresh or some member intending to propose him as a director has to give a notice in writing under his hand
signifying his candidature as a director or, as the case may be, the intention of member to propose him as a
candidate for that office at least 14 days before the meeting.
- A sum of 71 lakh or such higher amount as may be prescribed shall be deposited along with notice.
- Amount deposited will be refunded to Suresh or to the member, if he gets elected as a director or gets more
than 25% of total valid votes cast either on show of hands or on poll on such resolution.
- On receipt of notice as stated above, the company shall inform its members about the candidature of the
person proposed as a director in prescribed manner.
- On the appointed date meeting will be held and resolution to appoint him will be passed at the general
meeting.
Que. No. 47] The Board of directors of Zest Ltd. appoints Pavan as a director under section 161 by passing a
resolution by circulation. The appointee now seeks your advice about the tenure of his appointment. Advise
him. CS (Executive) - June 2012 (4 Marks)
Ans.: According to Section 161(1), the articles of a company may confer on its board of directors the power to
appoint any person as an additional director at any time who shall hold office up to the date of the next AGM or
the last date on which the AGM should have been held, whichever is earlier. The appointment of additional director
may be made either at a meeting of the Board or by circular resolution.
Que. No. 48] Vinay was appointed as an additional director by the Board of directors of Prudent Ltd. in its
meeting held on 20th July, 2015. Further, Vinay was appointed as a director by members of the company in its
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annual general meeting held on 2nd September, 2015. Comment whether Vinay is again required to file consent
to act as a director. CS (Inter) - June 2006 (4 Marks)
Ans.: MCA has clarified that where an additional director is appointed as director of the company in the AGM, the
nature of his appointment changes radically. It would, therefore, be in the interest of such directors that such
changes are notified to the Registrar in Form No. DIR -12.
Que. No. 49] X was appointed as an additional director in the board meeting held on 15th January, 2015 of ABC
Ltd. and was to hold office until the next annual general meeting of the said company. The next annual general
meeting which should have been held by 30th September, 2015 could not be held due to circumstances beyond
control. The board declares that X should continue on the board after 30th September, 2015. Advice the board.
which the AGM should have been held, whichever is earlier. Thus, X would vacate the office of director on the last
day on which AGM ought to have been held.
In view of above X cease to be director on 30th September, 2015 and declaration by the board is not valid.
Que. No. 50] Krugen Holdings Ltd. promoted Ms. Bhavna and designated her as the Director (Administration).
Examine the validity of such a designation under the provisions of the Companies Act, 2013.
Ans.: As per Section 2(36), director means a director appointed to the Board of a company. Mere giving designation
as director is not relevant. If company wants to appoint any person as director then it can appoint him in AGM or
if during two AGM director has to be appointed then such person can be appointed as additional director as per
Section 161(1).
As per Section 161(1), the articles of a company may confer on its Board of Directors the power to appoint any
person as an additional director at any time who shall hold office up to the date of the next AGM or the last date
on which the AGM should have been held, whichever is earlier.
Thus, it is advised to the Krugen Holdings (P) Ltd. to appoint Ms. Bhavna as additional director in Board meeting
and she will hold the office till the next AGM. In next AGM she can be appointed as regular director.
As far as designation of "Director (Administration)" is cornered, the company can use any suitable designation to
identify the work of director.
ALTERNATE DIRECTOR
Que. No. 51] Explain the law relating to alternate director.
ABC Ltd. wishes to appoint an alternate director in place of B, who has gone to USA for one year. Advice the
procedure to be followed by the company. CS (Inter) - Dec 1999 (4 Marks)
Ans.: Appointment of alternate director [Section 161(2)]: The Board of Directors of a company may, if so
authorized by its articles or by a resolution passed by the company in general meeting, appoint an alternate
director for a director during his absence for a period of not less than 3 months from India. A person can be
appointed as alternate director only for one director and not for more than one director.
However, following person cannot be appointed as alternate director:
(a) A person already appointed as alternate director in place of any other director
(b) A person who is director in the same company.
Alternate director for an independent director: A person can be appointed as an alternate director for an
independent director only if he is qualified to be appointed as an independent director as per Section 149(6).
Term of office of alternate director: An alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India.
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Automatic reappointment applies to original director: If the term of office of the original director is determined
before he so returns to India, any provision for the automatic re-appointment of retiring directors shall apply to
the original, and not to the alternate director.
Some important points relating to 'Alternate Director':
♦ An alternate director cannot be appointed by passing a resolution by circulation.
♦ Section 161(2) applies to all companies, whether public or private.
Que. No. 52] X, an employee of the ABC Ltd. was appointed as an alternate director. In the meantime, the original
director returned and wanted to attend the board meeting. Advice.
CS (Final) - June 1996 & Dec 1999 (3 Marks)
Ans.: As per Section 161(2), an alternate director shall not hold office of director for a longer period than that are
permissible to the original director. The alternate director shall vacate his office when original director return back
to India, irrespective of the fact that as to whether the original director attends the Board meetings or not. Thus,
after an original director comes to India, only he can attend the Board meetings. The alternate director would
automatically cease to be director.
Que. No. 53] Mr. Q a director of PQR Ltd. proceeding to a long foreign tour, appointed Mr. Y as an alternate
director to act for him during his absence. The article of the company contains the provision for appointment of
alternate director by the board of director. Mr. Q claims that he has right to appoint alternate director. Examine
the given case in the light of the provisions of the Companies Act, 2013.
Ans.: The appointment of Mr. Y as alternate director by Mr. Q would amount to assignment of office which is
prohibited under Section 166(6) and therefore, the appointment of Mr. Y as an alternate director by Mr. Q is void.
Further, as per Section 161(2), the alternate director is appointed by the Board of Directors and not by the director
in whose place he is appointed.
Que. No. 54] Mr. P who is not qualified to be appointed as an independent director is appointed by the Board of
Directors of XYZ Company Limited, for an independent director, as an alternate director. Comment.
CA (Final) - Nov 2014 (2 Marks)
Ans.: As per Section 162, a person can be appointed as an alternate director for an independent director only if Jie
is qualified to be appointed as an independent director as per Section 149(6).
Thus, appointment of Mr. P as alternate director for an independent director is void.
Que. No. 55] Johnson, a director in Disha Ltd. proceeds on leave for 8 months to France for personal reasons.
Board of directors at a meeting appoints Peter for a period of two months, as an alternate director. Articles of
association of the company do not confer upon the Board of directors any such power to appoint anyone as
alternate director. Referring to the provisions of the Companies Act, 2013, examine the validity of the above
appointment. What shall be your answer in case the Board appoints Peter for the entire period of Johnson's
leave? CS (Executive) - Dec 2015 (4 Marks)
Ans.: As per Section 161(2), the Board of Directors of a company may, if so authorized by its articles or by a
resolution passed by the company in general meeting, appoint an alternate director for a director during his
absence for a period of not less than 3 months from India. A person can be appointed as alternate director only for
one director and not for more than one director.
A person can be appointed as an alternate director for an independent director only if he is qualified to be
appointed as an independent director as per Section 149(6).
In view of above provisions, answer to given case is as follows:
Even though article of the Disha Ltd. not confer power to appoint alternate director, Disha Ltd. can appoint
alternate director in place of Mr. Johnson by passing a resolution in general meeting. However, even in such case
alternate director can be appointed for 3 months and not for 8 months.
Que. No. 56] The Board of Directors of Goodwill (India) Ltd. wish to appoint an alternate director on the
Company's Board in the absence of Mr. Prince, a director, who proceeded on leave. Referring to the provisions
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of the Companies Act, 2013, state the conditions to be satisfied before Board appoints such a director. What
shall be the tenure of such alternate director in case Mr. Prince incurs a disqualification and ceases to be a
director? CS (Executive) - Dec 2017 (4 Marks)
Ans.: As per Section 161(2), the Board of Directors of a company may, if so authorized by its articles or by a
resolution passed by the company in general meeting, appoint an alternate director for a director during his
absence for a period of not less than 3 months from India. A person can be appointed as alternate director only for
one director and not for more than one director.
Alternate director for an independent director: A person can be appointed as an alternate director for an
independent director only if he is qualified to be appointed as an independent director as per Section 149(6).
Term of office of alternate director: An alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India.
Automatic reappointment applies to original director: If the term of office of the original director is determined
before he so returns to India, any provision for the automatic re-appointment of retiring directors shall apply to
the original, and not to the alternate director.
As per Section 167, the office of a director shall become vacant in case he incurs any of the disqualifications
specified in Section 164. Thus, if original director incurs disqualification and cease to be director, the person
appointed as alternate director in place of original director also cease to be director.
Que. No. 57] Distinguish between: Additional Director & Alternate Director
Ans.: Following are the main points of distinction between additional & alternate director:
Points Addition Director Alternate Director
Appointment The articles of a company may confer on its The board of directors of a company may, if so
board of directors the power to appoint any authorized by its articles or by a resolution
person as an additional director at any time passed by the company in general meeting,
who shall hold office up to the date of the next appoint an alternate director for a director
AGM or the last date on which the AGM should during his absence for a period of not less than
have been held, whichever is earlier. 3 months from India.
Period of office Additional director holds the position of An alternate director shall hold office as such
director from the date of appointment to next for a period during absence of original director.
AGM.
Section Appointment of additional director is governed Appointment of alternate director is governed

by Section 161(1). by Section 161(2).
Who appoints Additional director can be appointed at board Alternate director can be appointed at board
meeting or by passing a resolution by meeting or general meeting.
circulation.
■■ NOMINEE DIRECTOR
Que. No. 58] Write a short note on: Nominee Director
Ans.: Nominee director means a director appointed by a third parties e.g. a director appointed by a financial
institutions or a bank which has provided financial assistance to the company.
Nominee Director [Section 161(3)]: Subject to the articles of a company, the Board may appoint following types
of nominee director:
- Person nominated by any institution in pursuance of any law for the time being in force.
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- Person nominated by any institution in pursuance of any agreement.
- Person nominated by the Central or State Government by virtue of its shareholding in a Government
company.
Sometimes financial institutions or banks or other lenders, etc., nominate a director to represent their interest on
the Board. Such Financial Institutions have to safeguard their interests. They have to ensure that the money is only
used for the purposes for which it was borrowed. The right and the terms of nominating the directors on the boards
of companies are usually contained in the agreement itself.
Nominee Directors are of two types:
(1) Nominee Directors appointed by the Public Financial Institutions and companies established under the Acts
of Parliament having non-obstante provisions over the Companies Act, like IDBI, L1C, UTI, IIBI etc., in their
respective statutes. Such directors can be appointed by the companies even if there is no provision in their article.
They are governed by respective Acts under which they are appointed. After appointment the company has to take
note of- such appointment in the board meeting.
(2) Nominee Directors appointed on the boards of assisted concerns or other public companies by public
financial institutions, Central or State Government and banking companies. Such directors can be appointed as
nominee director only if there is provision in article of association otherwise article is required to amended.
Que. No. 59] On the request of bank providing financial assistance the board of directors of PQR Ltd. decides to
appoint on its Board Mr. Peter, as nominee director. Articles of Association of the Company do not confer upon
the Board of Director any such power. Further, there is no agreement between the company and the bank for
any such nomination. CA (Final) - Nov 2014 (2 Marks)
Ans.: According to Section 161(3), the Board may appoint any person as a director nominated by any institution in
pursuance of the provisions of any law for the time being in force, subject to the articles of a company.
In the present case, on the request of bank providing financial assistance the board of directors of PQR Ltd. decides
to appoint on its Board Mr. Peter, as nominee director. Articles of the company do not confer upon the board of
directors any such power and further there is no agreement between the company and the bank. Thus, the
appointment of Mr. Peter as nominee director is not valid as Articles do not confer upon the board of directors any
such power.
Que. No. 60] Humlog Ltd. received a letter from IDBI on 1st March, 2015 which has financed the project
requesting the company to appoint Madhavan, General Manager (Operations), IDBI, as a director on its Board
with immediate effect, as per the terms of sanction. Does his appointment require any other approval? Is h e
liable for retirement by rotation? CS (Inter) - Dec 2003 (4 Marks)
Ans.: Nominee Directors appointed by the Public Financial Institutions and Companies established under the Acts
of Parliament having non-obstante provisions over the Companies Act, 2013, like IDBI, LIC, UTI, IIBI etc., in their
respective statutes. Such directors can be appointed by the companies even if there is no provision in their article.
They are governed by respective Acts under which they are appointed. After appointment the company has to take
note of such appointment in the board meeting.
In view of above appointment of Madhvan as nominee director is effective from the date of letter viz. 1.3.2015 is
received in the office of the company.
CASUAL VACANCIES
Que. No. 61] Write a short note on: Filling up casual vacancies
Ans.: Casual vacancy means any vacancy, which occurs by reason of death, resignation, disqualification, failure of
an elected director to accept the office or for any reason other than retirement by rotation.
Filling up casual vacancies [Section 161(4)]: If the office of any director appointed by the company in general
meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in
default of and subject to any regulations in the articles of the company, be filled by the board of directors at a
meeting of the Board, which shall be subsequently approved by the members in the immediate next general
meeting.
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Term of office of director filling casual vacancy: Any person so appointed to fill the causal vacancy shall hold office
only up to the date up to which the director in whose place he is appointed would have held office if it had not
been vacated.
Some important points:
♦ Casual vacancy cannot be filled up by circular resolution.
♦ It is not obligatory for the company to fill a casual vacancy and the Board may resolve to keep vacancy
unfilled.
♦ A director filling a casual vacancy is not a retiring director and he is to be regular director only on compliance
of Section 160.
♦ Where a casual vacancy is filled by the Board and the person appointed to such casual vacancy also vacates,
then the resulting vacancy is not a casual vacancy and cannot be filled by the Board. It may be noted that the
Section 161(4) applies only to a casual vacancy in the office of a director appointed by the company in general
meeting. The Board in such a case can only appoint an additional director, if the Article has any provision in this
regard.
Que. No. 62] X, a director of a company, was appointed at the AGM. X resigned and casual vacancy was filled by
the appointment of Y at a meeting of the Board. Later on, Y resigned and the directors again invited X to fill the
vacancy created by the resignation of Y. Is the action of the Board in appointing X, in the second instance, in
accordance with the provisions of the Companies Act, 2013?
Ans.: As per Section 164(4), in the case of a public company, if the office of any director appointed by the company
in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy
may be filled by the board of directors at a meeting of the Board.
Thus, casual vacancy created by the resignation of Y cannot be filled by the board of director. In such case X can be
appointed as additional director and in next AGM he can be appointed as regular director by complying provisions
of Section 160.
Que. No. 63] Mohan, a director of XYZ Ltd. died in air crash. It has been decided to appoint Murari in his place.
Will the company be required to call extraordinary general meeting to approve the latter's appointment as a
director? When appointed, how long Murari would be in office?
Ans.: As per Section 164(4), in the case of a public company, if the office of any director appointed by the company
in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy
may be filled by the board of directors at a meeting of the Board. Any person so appointed to fill the causal vacancy
shall hold office only up to the date up to which the director in whose place he is appointed would have held office
if it had not been vacated.
Thus, vacancy caused to death of Mohan can be filled up by board of directors at board meeting there is no need
to call extraordinary general meeting and Murari will continue in office up to the date up to which Mohan in whose
place he is appointed would have held office if it had not been vacated.
However, the appointment of Murari must be approved by members in immediate next general meeting.
Que. No. 64] In Bright Ltd., vacancy of a director is caused by the death of Mohan, a director of the company,
after 3 months of his joining the company as director. The Board of the company, therefore, appointed Sumit in
his place but did not seek approval of the company in general meeting. Referring to the provisions of the
Companies Act, 2013, examine the validity of Sumit's appointment.
Ans.: Casual vacancy means any vacancy, which occurs by reason of death, resignation, disqualification, failure of
an elected director to accept the office or for any reason other than retirement by rotation.
As per Section 161(4), in the case of a public company, if the office of any director appointed by the company in
general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may,
in default of and subject to any regulations in the articles of the company, be filled by the board of directors at a
meeting of the Board.
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Any person so appointed to fill the causal vacancy shall hold office only up to the date up to which the director in
whose place he is appointed would have held office if it had not been vacated.
In view of above provisions, vacancy caused by the death of Mohan can be filled by board of directors at board
meeting. However, the appointment of Sumit must be approved by members in immediate next general meeting.
■ ■■ REMOVAL, RETIREMENT & RESIGNATION OF DIRECTORS
Que. No. 65] Removal of directors by shareholders
A company may remove director before expiry of his term, but there are certain exceptions. Comment.
Clover Ltd. has received a notice from its shareholders holding in all 8% of the paid-up capital for the removal of
one of the directors. Advise the company. CS (Inter) - Dec 2005 (4 Marks)
Ans.: Removal of directors [Section 169]:
(1) A company may remove a director by passing ordinary resolution before the expiry of the period of his office
after giving him a reasonable opportunity of being heard. However, the company cannot remove director who is
appointed by the Tribunal under Section 242 or director appointed by way of proportional representation under
Section 163.
(2) A special notice shall be required of any resolution, to remove a director or to appoint somebody in place of
a director so removed, at the meeting at which he is removed.
(3) On receipt of notice of a resolution to.remove a director, the company shall forthwith send a copy to the
director concerned, and the director shall be entitled to be heard on the resolution at the meeting.
(4) Where notice has been given of a resolution to remove a director, the director concerned can make
representation in writing to the company.
If he makes such requests, the company shall, if the time permits it to do so,-
(a) In any notice of the resolution given to members of the company, state the fact of the representation having
been made and
(b) Send a copy of the representation to every member of the company to whom notice of the meeting is sent
(whether before or after receipt of the representation by the company)
If a copy of the representation is not sent as aforesaid due to insufficient time or for the company's default, the
director may without prejudice to his right to be heard orally require that the representation shall be read out at
the meeting.
Copies of the representation need not be sent out and the representation need not be read out at the meeting if,
on the application either of the company or of any other person who claims to be aggrieved, the Tribunal is satisfied
that the rights of making representation are being abused to secure needless publicity for defamatory matter. In
addition, Tribunal may order the company's costs on the application to be paid in whole or in part by the director
notwithstanding that he is not a party to it.
(5) A vacancy created by the removal of a director appointed by the company in general meeting or by the
Board, be filled by the appointment of another director in his place at the meeting at which he is removed.
However, special notice of the intended appointment has to be given.
(6) A director so appointed shall hold office till the date up to which his predecessor would have held office if
he had not been removed.
(7) If the vacancy is not filled, it may be filled as a casual vacancy in accordance with the provisions of this Act.
However, the director who was removed from office shall not be re-appointed as a director by the Board of
Directors.
(8) Director removed can claim compensation or damages if the terms of contract or terms of his appointment
as director.
(9) This section shall not be taken as derogating from any power to remove a director under other provisions of
the Act.
(10) On removal of director Form DIR-12 is required to be filed with ROC.
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Directors that cannot be removed under Section 169:
(a) A director appointed by the Tribunal under Section 242.
(b) A director appointed according to the principle of proportional representation u/ s 163.
(c) A nominee director appointed by a Financial Institution/Bank constituted under Special Act of parliament.
Judicial Views:
♦ A company has full power u/s 169 to remove a permanent director even if articles of association put
restrictions on removal of permanent directors. The shareholders cannot be restrained from calling a general
meeting to remove existing directors and appoint new directors. [L/C v. Escorts Ltd. (1986) 59 Com Cases 548 (SQJ
♦ The provisions of explanatory statement are not applicable in respect of the resolution for the removal,
because the company is merely acting in pursuance of a special notice received by it to move the resolution, it is
not a resolution proposed by the company [L/C v. Escorts Ltd. (1986) 59 Com Cases 548 (SC)]
♦ The Civil Court has no jurisdiction to entertain the suit for removal of directors of a limited company as it
relates to the internal management of the company which is governed by the Act. [Khetan Industries Private Ltd.
v. Manju Ravindra Prasad Khetan AIR 1995 Bom. 43]
♦ Where articles of association confer power on the board of directors to remove a director, such power is not
affected by the provisions of section 169. The articles of association are in the nature of an agreement between
the shareholders who are the joint owners of the company. If some specific methodology is devised by consent,
nothing precludes the members/shareholders from doing so. [RAW Prakash Singh v. Venus Sugar Ltd. [(2008) 84
SCL 75 (Del)]
♦ If the appointment of a managing or other director was revoked by the Board of directors, Section 169 would
not be attracted. Hence, there is no scope of applying Section 169 when the director was not to be disturbed from
his office as a director and the business proposed to be transacted related only to the removal from his managerial
position. He could not question the meeting on that ground, nor could any other person do so on that cause. [Major
General Shanta Shamsher v. Kamani Brothers, AIR 1959 Bom 201: (1959) 29 Com Cases 501]
♦ Articles may empower the Board to remove a director. [Bsersel Manufacturing Co. Ltd. v. Berry (1968) 2 All
ER 522 (HL)]
Que. No. 66] Write a short note on: Resignation of Directors
Ans.: Resignation of director [Section 168]: A director may resign from his office by giving a notice in writing to
the company. The Board shall on receipt of such notice take note of the same and shall also place the fact of such
resignation in the report of directors laid in the immediately following general meeting by the company.
The resignation of a director shall take effect from
- The date on which the notice is received by the company or
- The date, if any, specified by the director in the notice, whichever is later.
However, the director who has resigned shall be liable even after his resignation for the offences which occurred
during his tenure.
Where all the directors of a company resign from their offices, or vacate their offices u/s 167, the promoter or, in
his absence, the Central Government shall appoint the required number of directors who shall hold office till the
directors are appointed by the company in general meeting.
Notice of resignation of director [Rule 15]: The company shall within 30 days from the date of receipt of notice of
resignation from a director, intimate the Registrar in Form DIR-12 and post the information on its website, if any.
Copy of resignation of director to be forwarded by him [Rule 16]: Where a director resigns from his office, he shall
within a period of 30 days from the date of resignation, forward to the Registrar a copy of his resignation along
with reasons for the resignation in Form DIR-11 along with the prescribed fees.
However, in case a company has already filed Form DIR-12 with the ROC, a foreign director of such company
resigning from his office may authorize in writing Practicing CA or Cost Accountant or CS or any other resident
director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the
resignation.
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Que. No. 67] Smart, a director, verbally resigned from his office at the board meeting. His resignation was
accepted although the article provided for resignation in writing. Is the resignation valid?
Ans.: As per Section 168, a director may resign from his office by giving a notice in writing to the company. Thus,
verbal resignation given by Smart, a director at the board meeting is not valid even if it was accepted by meeting.
For valid resignation, the Smart is advised to give the resignation in writing to the company. He should also forward
a copy of his resignation giving reasons for the resignation in Form DIR-11 along with the prescribed fees to the
ROC.
Que. No. 68] A director, aged 71 years, due to retire by rotation in the AGM, declares at the AGM that he is
resigning due to old age and ill health when the resolution for his appointment is taken up. In spite of persuasion
by many shareholder, he does not agree to continue as director. However, he send his resignation in writing to
the board subsequently, till the next board meeting. Advice the chairman.
Ans.: As per Section 168, a director may resign from his office by giving a notice in writing to the company. A
declaration at the AGM by the director that he is resigning is not valid.
However, written resignation sent subsequently before the next Board meeting is valid. He should also forward a
copy of his resignation along with reasons for the resignation in Form DIR-11 along with the prescribed fees to the
ROC.
The company shall within 30 days from the date of receipt of notice of resignation from a director, intimate the
Registrar in Form DIR-12 and post the information on its website, if any.
Que. No. 69] The Managing Director of Progressive Ltd. resigned on 6th May, 2015 as such, but the company
filed Form No. DIR-12 with the ROC stating the date of resignation as 15th March 2016. The company issued
various cheques to its investors in repayment of their deposits after 6th May, 2015 which were bounced. The
investors filed a complaint against the former managing director. Will the managing director be liable in the
instant case? CS (Executive) - Dec 2011 (4 Marks), June 2014 (8 Marks)
Ans.: As per Section 168, the director who has resigned shall be liable even after his resignation for the offences
which occurred during his tenure. Thus, director is not liable for the transaction entered by the company after his
resignation.
As managing director of Progressive Ltd. has resigned on 6th May, 2015 he is not liable for the transaction entered
by the company after 6th May 2015.
■ ■■ REGISTER OF DIRECTORS & KMP
Que. No. 70] Write a short note on: Register of directors and Key Managerial Personnel (KMP) and their
shareholding
Ans.: Register of directors/KMP and their shareholding [Section 170]: Every company shall keep at its registered
office a register containing prescribed particulars of its directors and key managerial personnel, which shall include
the details of securities held by them in the company or its holding, subsidiary, subsidiary of company's holding
company or associate companies.
A return in Form DIR-12 and prescribed documents of the directors and the KMP shall be filed with the Registrar
within 30 days from the appointment of every director and KMP and within 30 days of any change taking place.
As per Rule 17 of the Companies (Appointment and Qualification of Directors) Rules, 2014, every company shall
keep at its registered office a register of its directors and key managerial personnel containing the following
particulars, namely:
(a) DIN (optional for KMP)
(b) Present name and surname in full
(c) Any former name or surname in full
(d) Father's name, mother's name and spouse's name (if married) and surnames in full
(e) Date of birth
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(f) Residential address (present as well as permanent)
(g) Nationality (including the nationality of origin, if different)
(h) Occupation
(i) Date of the board resolution in which the appointment was made
(j) Date of appointment and reappointment in the company
(k) Date of cessation of office and reasons
(l) Office of director or key managerial personnel held or relinquished in any other body corporate
(m) Membership number of the ICSI in case of Company Secretary
(n) PAN (mandatory for KMP if not having DIN)
In addition to the details of the directors or KMP, the company shall also include the details of securities held by
them in the company, its holding company, subsidiaries, subsidiaries of the company's holding company and
associate companies relating to -
(a) The number, description and nominal value of securities
(b) The date of acquisition and the price or other consideration paid
(c) Date of disposal and price and other consideration received
(d) Cumulative balance and number of securities held after each transaction
(e) Mode of acquisition of securities
(f) Mode of holding - physical or in dematerialized form and
(g) Whether securities have been pledged or any encumbrance has been created on the securities.
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CHAPTER
16
POWERS S DUTIES OF DIRECTORS
POWERS OF BOARD OF DIRECTORS
Que. No. 1] Can shareholders interfere in the exercise of powers delegated to the board of directors? Can
decision of the board of directors be changed by the shareholders?
Powers of the directors of a company are co-extensive with those of the company. Comment.
Ans.: Power of Board [Section 179]: The Board of Directors of a company shall be entitled to exercise all such
powers, and to do all such acts and things, as the company is authorized to exercise and do. However, in exercising
such power or doing such act or thing, the Board shall be subject to the provisions contained in Companies Act,
2013, or in the memorandum or articles or in any regulations made by the company in general meeting.
Thus, the Board shall not exercise any power or do any act or thing which is to be exercised or done by the company
in general meeting.
It is also provided that the company by making regulation in general meeting cannot invalidate any prior act of the
Board.
The directors shall exercise their powers bona fide and in interest of the company. The directors while exercising
their powers do not act as agents for the majority or even all the members and so the members cannot by
resolution passed by a majority or even unanimously supercede the director's powers, or instruct them how they
shall exercise their powers.
The directors passed a resolution for rights issue which was questioned by certain shareholders. The Calcutta HC
held that the question whether the company needed additional capital was a question which should primarily be
decided by the directors of the company and if they were of the view that further capital in the form of rights issue
was required, the Court would not be allowed to disturb the same unless there were extreme circumstances of
mala fides or breach of trust. [Milan Sen v. Guardian Plasticate Ltd. (1998) 2 Comp L J 320]
Exceptions: In the following exceptional cases, the general body of shareholders is competent to act even in
matters delegated to the board:
(1) Directors acting mala fide: The general body of shareholders can intervene when it is proved that the
directors have acted for improper motive or arbitrarily. Ordinarily the directors of a company are persons who can
conduct litigation in the name of company, but when they are themselves the wrong doers the majority of the
shareholders may take steps for redressal of the wrong.
(2) Incompetent Board: The general body of shareholders may exercise the powers vested in the board when
the board is incompetent to act, for instance, where all the directors are interested in the transaction or the board
is unwilling to act, or when there are no validly appointed directors functioning.
A clause in the articles of the company authorized the directors to fill casual vacancies and also to increase the
number of directors within the maximum number fixed in the articles. Some casual vacancies occurred, and they
were promptly filled at a general meeting of the shareholders. This was challenged on the ground that once the
power to appoint was delegated to the Board, it could not have been exercised at a general meeting. The Court
upheld the appointments by the company in the general meeting, as it found that at the time of the general
meeting there was no director in office and, therefore, the members had the right to elect. [Vishwanathan v. Tiffins
B.A. & P. Ltd., AIR 1953 Mad. 520]
(3) Deadlock in the board: If the directors are unable or unwilling to act, on account of deadlock, the
shareholders have the inherent power to act.
There were only 2 directors on the board of the company and one refused to act with the other. There was no
provision in the articles enabling the general meeting of the shareholders to increase or reduce the number of
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directors. Held, that as there was a deadlock in the administration resulting from the fact that the power to take
necessary steps to ensure the working of the company and to appoint additional director for the purpose. [Barron
v. Potter (1914) 1 Ch. 895]
From the above, it is clear that the residuary powers can be pressed into service by the shareholders in general
meeting. -
Que. No. 2] Discuss the powers of the company which can be exercised by the board only by means of resolution
passed at the board meetings and not otherwise.
Can the board of directors of a company delegate any of its powers to others? Discuss.
Ans.: Powers exercisable by passing resolution at a board meeting only [Section 179(3)]: The Board of Directors
of a company shall exercise the following powers on behalf of the company by means of resolutions passed at
meetings of the Board, namely:
(a) To make calls on in respect of money unpaid on shares
(b) To authorize buy-back of securities u/s 68
(c) To issue securities, including debentures, whether in or outside India (d) To borrow monies
(e) To invest the funds of the company
(f) To grant loans or give guarantee or provide security in respect of loans
(g) To approve financial statement and the Board's report
(h) To diversify the business of the company
(i) To approve amalgamation, merger or reconstruction
(j) To take over a company or acquire a controlling or substantial stake in another company
(k) Any other matter which may be prescribed.
The powers specified in clauses (d), (e) and (f) to the extent specified conditions by the board may be delegated
to:
(i) Committee of directors,
(ii) Managing director,
(iii) Manager,
(iv) Principal officer of the company or
(v) Principal officer of the branch office.
Every resolution of the board delegating the powers must specify:
♦ The total amount to be borrowed
♦ The total amount that may be invested and the nature of the investment
♦ The total amount up to which loans may be made.
Rule 8 of the Companies (Meeting of Board and its powers) Rules, 2014 prescribes that the following powers shall
be exercised by the board by passing a resolution at a board meeting only:
(l) Power to make political contributions.
(2) Power to appoint or remove KMP.
(3) Power to appoint internal auditors and secretarial auditor.
Que. No. 3] The Board of directors of Nav Avtar Ltd. passed a resolution for issue of rights shares. However,
certain shareholders of the company raised an objection as to whether the company needed additional capital.
Discuss the validity of the counter-move taken by the shareholders and resolution passed by the Board.
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Ans.: As per Section 179, the Board of Directors of a company shall be entitled to exercise all such powers, and to
do all such acts and things, as the company is authorized to exercise and do. However, in exercising such power or
doing such act or thing, the Board shall be subject to the provisions contained in Companies Act, 2013, or in the
memorandum or articles or in any regulations made by the company in general meeting.
Thus, the Board shall not exercise any power or do any act or thing which is to be exercised or done by the company
in general meeting.
The directors shall exercise their powers bona fide and in interest of the company. The directors while exercising
their powers do not act as agents for the majority or even all the members and so the members cannot by
resolution passed by a majority or even unanimously supercede the director's powers, or instruct them how they
shall exercise their powers.
In Milan Sen v. Guardian Plasticate Ltd. (1998) 2 Comp L J 320, the directors passed a resolution for rights issue
which was questioned by certain shareholders. The Calcutta HC held that the question whether the company
needed additional capital was a question which should primarily be decided by the directors of the company and
if they were of the view that further capital in the form of rights issue was required, the Court would not be allowed
to disturb the same unless there were extreme circumstances of mala fide or breach of trust.
Thus, shareholder of the company will succeed only if they are able show that directors are exercising their power
to mala fidely or in breach of trust.
Que. No. 4] A Board of director desires to buy back its equity share capital up to 10% by passing resolution at
Board meeting. Advise them keeping in view the provisions of the Companies Act, 2013.
CA - Final May 2003 & May 2010 (4 Marks)
Ans.: As per Section 68(2) the board of directors are authorized to buy back up to 10% of the total paid-up equity
capital and free reserves of the company by passing resolution at its meeting.
Under Section 179(3)(b) the Board of Directors of a company has given power to buy-back of securities as per
Section 68 by passing resolution at meetings of the Board.
Therefore, in the present case, the Board of Directors are authorized to buy back the shares of the company up to
10% of the paid up capital, provided the resolution authorizing the buy back is passed at the Board meeting and
not by circular resolution.
Que. No. 5] Ram is the director of M & Co. Ltd. Ram has borrowed ` 50 Lakhs on reasonable terms from Shyam
for Company's benefit and business. Ram has no power to borrow. What will be the legal position? Explain.
Ans.: As per Section 179(3) power to borrow monies shall be exercised by the board at the board meeting.
However, this power may be delegated to:
(i) Committee of directors,
(ii) Managing director,
(iii) Manager,
(iv) Principal officer of the company or
(v) Principal officer of the branch office.
Borrowing of money falls within the implied or ostensible authority of a director and so outsider dealing with the
company are entitled to assume that every director is authorized to borrow money on behalf of company. Thus,
the company shall be liable to repay the amount, if it shown that money has gone into the hands of the company.
Que. No. 6] In a limited company, the Managing Director terminated an employee on the charge of various
misconducts. The aggrieved employee filed a writ petition before the High Court challenging the dismissal
contending that the Managing Director had no power to do so and the proper authority was the Board of
directors. During the pendency of writ, the Board of directors passed a resolution ratifying the action of the
Managing Director. The High Court while setting aside the Managing Director's dismissal order, allowed the writ
petition. Managing Director appealed to the Supreme Court. Decide the case having regard to the judicial
pronouncements in the matter. CS (Executive) - Dec 2014 (8 Marks)
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Ans.: In Maharashtra State Mining Corpn. v. Sunil (2006) 5 SCC 96, the appellant corporation's Managing Director
terminated respondent's services for various misconducts. The respondent filed a writ petition challenging the said
dismissal order on the ground that the Managing Director had no authority to do so since the same was vested in
the appellant's board of directors. While the said petition was pending, the Board of Directors passed a resolution
ratifying the managing director's impugned action.
The High Court, while setting aside the impugned termination order, allowed respondent's writ petition. Appellant
appealed to the Supreme Court. Appeal was allowed. According to the Supreme Court, the High Court was right
when it held that an act by a legally incompetent authority was invalid. But it was entirely wrong in holding that
such an invalid act cannot be subsequently rectified by ratification of the competent authority. Ratification, by
definition, means making valid an act already done.
Therefore, ratification assumed an invalid act, which was retrospectively validated. In the instant case, the
managing director's order dismissing the respondent from the service was admittedly ratified by the board of
directors and the board of directors unquestionably had the power to terminate the services of the respondent.
Since the order of the Managing Director had been ratified by the board of directors, such ratification related back
to the date of the order and validated it. Therefore, the instant appeal was allowed, the impugned judgment and
order of the High Court was quashed, and the dismissal order was upheld.
Que. No. 7] State the powers of director which must be exercised by unanimous vote.
Ans.: The following powers of the board must be exercised by resolutions passed at meeting with the consent of
all the directors present at the meeting:
(1) The power to appoint or employ a person as its managing director or manager u/s 203 if he is managing
director or manager of one and not more than one other company.
(2) The power to invest in shares or debentures of any other body corporate u/s 186.
Que. No. 8] What are the powers of the board which are exercisable with the approval of the company in general
meeting?
Ans.: Restrictions on powers of Board [Section 180(1)]: The board of directors of a public company shall exercise
the following powers only with the consent of company by a special resolution:
(a) Sell, lease or dispose of the whole of the undertaking of the company.
Undertaking shall mean an undertaking in which the investment of the company exceeds 20% of its net worth as
per the audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total
income of the company during the previous financial year.
Substantially the whole of the undertaking in any financial year shall mean 20% or more of the value of the
undertaking as per the audited balance sheet of the preceding financial year.
Net worth means the aggregate value of the paid-up share capital and all reserves created out of the profits and
securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure
and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves
created out of revaluation of assets, write-back of depreciation and amalgamation. [Section 2(57)] .
Nothing contained Section 180(l)(a) shall affect -
(a) the title of a buyer or other person who buys or takes on lease any property, investment or undertaking as
is referred to in that clause, in good faith; or
(b) the sale or lease of. any property of the company where the ordinary business of the company consists of,
Or comprises, such selling or leasing.
Any special resolution passed by the company consenting to the transaction referred to Section 180(1) (c) may
stipulate conditions as may be specified in such resolution, including conditions regarding the use, disposal or
investment of the sale proceeds which may result from the transactions.
(b) Invest the amount of compensation received by it as a result of any merger or amalgamation (if amount
invested in trust securities this clause is not applicable hence members consent by way of special resolution is not
required)
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(c) Borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves and securities premium
(if amount borrowed is temporary loan from the company's bankers in the ordinary course of business then this
clause is not applicable, hence members consent by way of special resolution is not required)
Free Reserves means such reserves which, as per the latest audited balance sheet of a company, are available for
distribution as dividend. However, following shall not be treated as free reserves
(i) Any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a
reserve or otherwise, or
(ii) Any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and
loss account on measurement of the asset or the liability at fair value.
Every special resolution passed by the company in general meeting in relation to the exercise of the powers
referred to in Section 180(l)(c) shall specify the total amount up to which monies may be borrowed by the Board
of Directors.
No debt incurred by the company in excess of the limit imposed by Section 180(l)(c) shall be valid or effectual,
unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by
that clause had been exceeded.
,
(d) Remit, or give time for the repayment of, any debt due from a director.
Department's View: If a company mortgages the whole or substantially the whole of its undertaking for obtaining
loans or other financial assistance, it need not comply with the provisions of Section 180(l)(a), but if it is an
usufructuary mortgage the said section would be attracted.
Usufructuary Mortgage: Where the mortgagor delivers possession, or expressly or by implication binds himself to
deliver possession of the mortgaged property to the mortgagee and authorizes him to retain such possession until
payment of the mortgage money, and to receive the rents and profits accruing from the property or any part of
such rents and profits and to appropriate the same in lieu of interest or partly in payment of the mortgage money,
partly in lieu of interest and partly in payment of the mortgage money, the transaction is called a usufructuary
mortgage and the mortgagee a usufructuary mortgagee.
Hire purchase & leasing transactions: Hire purchase and leasing transactions are not covered by Section 180(1)
(d), as they do not amount to borrowing.
Judicial Views:
♦ A closed unit of a company is not an undertaking within the meaning of this sub-section and the provisions
of Section 180(1) do not apply to a proposed sale of the unit. [Pramod Kumar Mittal v. Andhra Steel Corporation
ltd. (1982) 2 Comp LJ 629]
♦ Leasing of the right to use the facilities of a company, was held to be not a lease or disposal of the Com
pany's undertaking, because undertaking means substantial part of the assets. An agreement of sale etc. means a
complete and exclusive transfer whereby the transferee gets the right to hold, possess and control the undertaking
in question. [Allana Cold Storage Ltd. v. Coa Meat Complex Ltd. (1997) 90 Com. Cases 50 at 64]
Que. No. 9] One of the objects clause of the Memorandum of Association of Info Company Ltd. conferred upon
the company power to sell its undertaking to another company with identical objects. Company's Articles also
conferred upon the directors whereby power was conferred upon them to sell or otherwise deal with the
property of the company. At an EOGM of the company, members passed an ordinary resolution for the sale of
its assets on certain terms and authorized the directors to carry out the sale.
Directors refused to comply with the wishes of the members where upon it was contended on behalf of the
members that they were the principals and directors being their agents, were bound to give effect to their
(members) decisions.
(i) Whether the contention of members against the non-compliance of member's decision by the directors is
tenable?
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(if) Whether it is possible for the members usurp the powers which by the Articles are vested in the directors by
passing a resolution in the general meeting? CA (Final) - Nov 2015 (4 Marks)
Ans.: Except where express provisions are made that the powers of a company in respect of any matter are to be
exercised by the company in general meeting, in all other cases the Board is entitled to exercise all its powers.
The directors acting together are the authority for conducting the affairs of the company. They are authorized to
do what the company is authorized to do, unless barred by restrictions on their powers by the provisions of the
Companies Act, 2013, the MOA or AOA of the company [Section 179],
The directors while exercising their powers do not act as agents for the majority or even all the members and so
the members cannot by resolution passed by a majority or even unanimously supercede the director's powers, or
instruct them how they shall exercise their powers. This sovereignty of the directors within the limits of the powers
conferred on them by the articles, and within limit laid down by the Act.
Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved
for the shareholders in general meeting. The powers of management are vested in the directors. They and they
alone can exercise these powers. The only way in which the general body of the shareholders can control the
exercise of the powers vested by the articles, in the directors, is by altering the articles, or if opportunity arises
under the articles, by refusing to re-elect the directors whose action they disapprove. They cannot themselves
usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers
vested by the articles in the general body of shareholders.
In view of above answer to given problem is as follows:
(i) The contention of members against the non-compliance of member's decision by the directors is not tenable.
(if) It not is possible for the members usurp the powers which by the Articles are vested in the directors by passing
a resolution in the general meeting.
Further as per Section 180, the board of directors of a public company shall exercise certain powers only with the
consent of company by a special resolution. Sell, lease or dispose of the whole of the undertaking of the company
is covered by Section 180.
Thus, correct procedure is to be followed for board is to approve the sale of undertaking clearly specifying the
terms and conditions and then convene general meeting for the approval of shareholder.
Que. No. 10] Power to borrow money includes the power to give security. Comment.
Ans.: The power to borrow includes the power to give security, which may take the form of a mortgage, a charge,
hypothecation, lien, guarantee, pledge etc. The creditor's position becomes safer when security is given.
A company, like a natural person, can give security. Normally, the debentures and other borrowings of the
company are secured by a charge on the assets of the company.
Every company may necessarily possess certain powers which are implied, such as, a power to appoint and act by
agents, and where it is a trading company, a power to borrow and give security for the purposes of its business,
and also a power to sell. Such powers are incidental and can be inferred from the powers expressed in the
memorandum. [Oakbank Oil Co. v. Crum (1882) 8 App Cas 65] The principle underlying the exercise of such powers
is that a company, in carrying on the business for which it is constituted, must be able to pursue those things which
may be regarded as incidental to or consequential upon that business. [Egyptian Salt and Soda Co. v. Port Said Salt
Association]
Que. No. 11] Bright Products Ltd. wishes to sell one of its undertakings for which it decides to call an
extraordinary general meeting (EGM) and to pass a resolution thereat. State the material facts to be set out in
the explanatory statement to be annexed to the notice of the EGM on this special business to be transacted at
the meeting. CS (Executive) - June 2016 (4 Marks)
Ans.: As per Section 180(l)(a), the board of directors of a public company can sell, lease or dispose of the whole of
the undertaking of the company only with the consent of company by a special resolution.
As per Section 102, in case of special business items to be transacted at a general meeting, a statement setting out
the following material facts, shall be annexed to the notice calling the meeting:
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(I) The nature of concern or interest, financial or otherwise in respect of each item of:
- Every director and the manager, if any
- Every other key managerial personnel and
- Relatives of the persons mentioned above.
(II) Any other information and facts that may enable members to understand the meaning, scope and
implications of the items of business and to take decision thereon.
Thus, keeping in view above provisions, for selling one of the undertakings of the company explanatory statement
annexed to the notice must specify the following material facts:
(1) General nature of business of the company.
(2) Role of undertaking in the business of the company.
(3) Nature of assets and liabilities of the undertaking.
(4) Reasons for the sale of undertaking.
(5) Financial effect after sales on the balance sheet and income of the company.
(6) Major terms and conditions relating to sale of undertaking.
(7) The fact that sale of undertaking requires approval of shareholder in terms of Section 180.
(8) The nature of interest, if any of the director, manager and KMP.
Que. No. 12] The last three years Balance Sheet of RBS Ltd., contains the following information and figures:
Particulars As at 31.3.2013 ? As at 31.3.2014 ? As at 31.3.2015 ?
Paid up Capital 50,00,000 50,00,000 75,00,000
General Reserve 45,00,000 50,00,000 60,00,000
Debenture Redemption Reserve 15,00,000 20,00,000 25,00,000
Secured Loans 10,00,000 15,00,000 30,00,000
Net Profit for the year 12,50,000 19,00,000 34,50,000
In the ensuring Board Meeting scheduled to be held on 5th November, 2015, among other items of agenda,
following item is also appearing:
"To decide about borrowing from financial institutions on long-term basis."
Based on above information, you are required to find out as per the provisions of the Companies Act, 2013, the
amount up to which the Board can borrow from financial institutions without seeking the approval in general
meeting.
Ans.: As per Section 180(1) (c), the board of directors of a public company shall not borrow money without the
consent of company by a special resolution, where the money to be borrowed, together with the money already
borrowed by the company exceeds aggregate of its paid-up share capital and free reserves. However, temporary
loan obtained from company's banker in the ordinary course of business shall not be considered as borrowings.
For the purpose of calculation of limit, paid up capital and free reserve of latest audited balance sheet of a company
has to be taken. Debenture Redemption Reserve is not for free distribution of dividend and is therefore not
considered as free reserve.
As per the data given in problem, the paid up capital and free reserve is ` 1,35,00,000. The company has already
borrowed ` 30,00,000. Thus, company can borrow further ` 1,05,00,000 without requiring any consent form
shareholder. However, if fresh borrowing exceeds ` 1,05,00,000 the consent of shareholders of the company by a
special resolution will be required.
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Que. No. 13] State the power of board of director to contribute amounts to charitable and other funds as given
in Section 182 of the Companies Act, 2013?
Ans.: Company to contribute to charitable funds [Section 181]: The Board of Directors of a company may
contribute to bona fide charitable and other funds. However, if contribution to charitable and other funds exceeds
5% of its average net profits for the 3 immediately preceding financial years, prior permission of the company in
general meeting shall be required.
Que. No. 14] The board of directors of public company having made an average profit of ` 1 Crore during las` 3
years proposes to donate during the current year ` 1 lakh to school run exclusively for the benefit of employee.
Advise the board of directors in this regard. CA (Final) - May 1995 (4 Marks)
Ans.: As per Section 181, the Board of Directors of a company may contribute to bona fide charitable and other
funds. However, if contribution to charitable and other funds exceeds 5% of its average net profits for the 3
immediately preceding financial years, prior permission of the company in general meeting shall be required.
Donating the amount to the school run exclusively for the benefit of employee does not amount to charitable
contribution. It will be treated as 'welfare expenses', which will induce the employee to increase their efforts.
As the donation is outside the purview of charitable donation, provisions of the Section 182 are not attracted.
Therefore, donation of ` 1,00,000 to the school run exclusively for the benefit of employee is within the powers of
the board and prior permission of the company in general meeting shall not be required.
Que. No. 15] Advice the management on the prohibitions and restrictions regarding political contributions.
Ans.: Prohibitions and restrictions regarding political contributions [Section 182]: Following companies are
prohibited from making political contribution:
(1) Government companies
(2) Other companies which has been in existence for less than 3 financial years
The aggregate of the political contributions in any financial year shall not exceed 7.5% of its average net profits
during the 3 immediately preceding financial years.
The power to make political contribution shall be exercised only by passing a resolution at the board meeting.
Every company shall disclose in its profit and loss account any amount contributed to any political party during the
financial year, giving particulars of the total amount contributed and the name of the party to which amount has
been contributed.
Penalty: If a company makes any contribution in contravention of the above provisions, the company shall be
punishable with fine which may extend to 5 times the amount so contributed and every officer of the company
who is in default shall be punishable:
- with imprisonment for a term which may extend to 6 months and
- with fine which may extend to 5 times the amount so contributed.
A donation or subscription or payment caused to be given by a company on its behalf or on its account to a person
who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or
payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall
be deemed to be contribution for a political purpose.
The amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication,
being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, shall also be deemed, -
(i) Where such publication is by or on behalf of a political party, to be a contribution of such amount to such political
party, and
(ii) Where such publication is not by or on behalf of, but for the advantage of a political party, to be a contribution
for a political purpose.
Que. No. 16] State with reference to the provisions of the Companies Act, 2013 whether following companies
can make donations (as on 1.6.2016) to the political parties and if so conditions to be complied in this regard:
286
(i) ABC Ltd., a government company registered in 2009 wants to donate a sum of ` 10,00,000.
(ii) EFG Ltd. a public company registered in 2011 wishes to contribute a sum of ` 5,00,000.
(iii) RST Ltd., a company incorporated in year 2014, decides to contribute a sum of ` 3 lakhs.
Ans.: Keeping in view of provisions of the Section 182 of the Companies Act, 2013 answers to given problem is as
follows:
(i) ABC Ltd. is a government company and it is prohibited from making any political contribution.
(ii) EFG Ltd. is a public company registered in 2011 and has been in existence for more than 3 years; hence it can
make political contribution only if the company has made average net profit of ` 66,66,667 or more (5,00,000 x
100/7.5) during las` 3 financial years. EFG Ltd. shall make political contribution only by passing a resolution at the
board meeting. EFG Ltd. shall disclose in its profit and loss account any amount contributed to political party during
the financial year, giving particulars of the total amount contributed and the name of the party to which amount
has been contributed.
(iii) RST Ltd. is incorporated in year 2014 and has not been existence for a period of 3 financial years. Thus, it
cannot make any political contribution.
Que. No. 17] The board of directors of LM Ltd. propose to donate ` 3,00,000 to a school established exclusively
for the benefit of children of employees and also donate ` 50,000 to a political party during the financial year
ending 31st March, 2010. The average net profits determined in accordance with the provisions of Section 198
during the 3 immediately preceding financial years is ` 40,00,000. Examine with reference to the provisions of
the Companies Act, 2013 whether the proposed donations are within the power of the board of directors of
company. CA (Final) - Nov 2009 (4 Marks)
Ans.: As per Section 181, the Board of Directors of a company may contribute to bona fide charitable and other
funds. However, if contribution to charitable and other funds exceeds 5% of its average net profits for the 3
immediately preceding financial years, prior permission of the company in general meeting shall be required.
Donating the amount to the school run exclusively for the benefit of employee does not amount to charitable
contribution. It will be treated as 'welfare expenses', which will induce the employee to increase their efforts.
In the given case, the school is established exclusively for the benefit of the children of the employees of the
company and hence the restriction u/s 181 is not applicable and the board is empowered to make the proposed
donation.
Donation to political parties: It is presumed that LM Ltd. is not a government company and it has been in existence
for more than 3 years. The proposed donation to a political party is only ` 50,000 which is less than 7.5% of the
average net profit for 3 immediately preceding financial years. Hence, the board of directors is empowered to
make a donation by passing a resolution at a board meeting. The company is also required to make proper
disclosure in the profit and loss account. [Section 182]
Que. No. 18] Net profits of PQR Ltd. during the following years as disclosed in the statement of profit and loss
are as under:
Financial year ended Net profits (` in Crore)
31st March, 2013 10
31st March, 2014 12
31st March, 2015 08
The Board of directors of the company at its meeting decides to contribute to a charitable organization, for
charitable purposes, a sum of ` 3 Crore out of the net profits of the financial year ended 31st March,
2015. This contribution has been made by the Board without seeking approval of shareholders in general
meeting.
In the light of the provisions of the Companies Act, 2013, examine the validity of the contribution made by the
company. What shall be your answer in case the Board decides to contribute ` 1 Crore only?
287
Ans.: Company to contribute to charitable funds [Section 181]: The Board of Directors of a company may
contribute to bona fide charitable and other funds. However, if contribution to charitable and other funds exceeds
5% of its average net profits for the 3 immediately preceding financial years, prior permission of the company in
general meeting shall be required.
As per the facts given in case, the board of directors of PQR Ltd. desires to contribute ` 3 Crore to a charitable
organization, which is more than 5% of its average net profits for the 3 immediately preceding financial years,
hence prior permission of the company in general meeting shall be required.
If the board of directors of PQR Ltd. desires to contribute ` 1 Crore to a charitable organization, answer will be still
same that is to say prior permission of the company in general meeting shall be required as ` 1 Crore is more than
5% of its average net profits of the 3 immediately preceding financial years.
Working Note:
Average net profit = 10 Crore + 12 Crore + 8 Crore /3 = 10 Crore
5% of Average net profit = 10 Crore x 5% = 6.5 Crore
Que. No. 19] Can company contribute ` 5 lakhs to Prime Minister's relief fund?
Charjee Biotech Private Ltd. is a two year old company. The Board of Directors of the company wants to
contribute 2.8% of its average net profits of the last years to the Prime Minister's National Relief Fund. Referring
to the provisions of the Companies Act, 2013, advise the board.
Ans.: Power of Board and other persons to make contributions to national defence fund, etc. [Section 183]: The
Board of Directors of any company or any person or authority exercising the powers of the Board of Directors of a
company, or of the company in general meeting, may, contribute such amount as it thinks fit to the National
Defence Fund or any other Fund approved by the Central Government for the purpose of national defence.
Board can contribute amount under this section by passing resolution at board meeting or passing circular
resolution.
No limit on contribution: There is a limit on the amount that a company may contribute under this section.
Disclosure of contribution: Every company shall disclose in its profits and loss account the total amount
contributed by it to National Defence Fund or any other Fund approved by the Central Government.
Approved funds u/s 293B of the Companies Act, 1956: [corresponding to Section 183 of the Companies Act, 2013]
1. The Chief Secretary to the Government of Andhra Pradesh, Hyderabad, National Defence Fund, Andhra
Pradesh
2. The National Defence Fund, Andhra Pradesh State People's Committee, Andhra Pradesh
3. The Bihar State National Defence And Jawans Welfare Fund, Bihar
4. The Chief Minister's Defence Fund, Kerala State Kerala
5. The National Defence Fund, Madras, Tamil Nadu
6. The Chief Minister's Defence Services Welfare Fund, Rajasthan, Rajasthan
7. The Chief Minister's Defence Forces Welfare Fund, Lucknow, Uttar Pradesh
8. The Chief Minister's Defence Purposes Fund of Uttar Pradesh, Lucknow, Uttar Pradesh
9. The Chief Minister's West Bengal Account National Defence Fund, West Bengal
10. Gujarat Chief Minister's Sainik Fund, Gujarat
11. Prime Minister's National Relief Fund
Keeping in view of above provisions, the board of directors of Biotech Private Limited can contribute 2.8% of
its average net profits of last years to the Prime Minister's National Relief Fund.
Que. No. 20] State the provisions of the Companies Act, 2013 relating to loans to directors
288
Ans.: Loan to directors, etc. [Section 185]:
(1) A company shall not directly or indirectly, advance any loan, including any loan represented by a book debt
to, or give any guarantee or provide any security in connection with any loan taken by -
(a) any director of company, or of a company which is its holding company or any partner or relative of any such
director; or
(b) any firm in which any such director or relative is a partner.
(2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or
provide any security in connection with any loan taken by any person in whom any of the director of the company
is interested, subject to the condition that -
(a) A special resolution is passed by the company in general meeting. However, the explanatory statement to
the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given
or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the
recipient of the loan or guarantee or security and any other relevant fact and
(b) The loans are utilized by the borrowing company for its principal business activities.
The expression "any person in whom any of the director of the company is interested" means —
(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than 25% of the total voting power may be
exercised or controlled by any such director, or by two or more such directors, together; or
(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in
accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
No prohibition in certain cases: The prohibition of Section 185 shall not apply to -
(a) The giving of any loan to a managing or whole-time director as a part of the conditions of service extended
by the company to all its employees or pursuant to any scheme approved by the members by a special resolution
or
(b) A company which in the ordinary course of its business provides loans or gives guarantees or securities for
the due repayment of any loan and in respect of such loans and interest is charged at a rate not less than the rate
of prevailing yield of 1 year, 3 year, 5 year or 10 year Government security closest to the tenor of the loan; or
(c) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or
security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) Any guarantee given or security provided by a holding company in respect of loan made by any bank or
financial institution to its subsidiary company. However, the loans made under clauses (c) and (d) are utilized by
the subsidiary company for its principal business activities.
Effects of contravention of Section 185: If any loan is advanced or a guarantee or security is given or provided in
contravention of the provisions Section 185, the company shall be punishable with fine which shall not be less than
` 5,00,000 but which may extend to ` 25,00,000.
The director or the other person to whom any loan is advanced or guarantee or security is given or provided in
connection with any loan taken by him or the other person, shall be punishable:
- with imprisonment which may extend to 6 months or
- with fine which shall not be less than ` 5,00,000 but which may extend to ` 25,00,000 or
- with both.
As per Rule 10 of the Companies (Meeting of Board and its Powers) Rule, 2014, Section 185 do not apply to
following transactions.
(1) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or
security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is
exempted from the requirements under this section.
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(2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or
financial institution to its subsidiary company.
However, such are utilized by the subsidiary company for its principle business activities.
Judicial Views:
♦ If the company sells one of its flats to one of its directors on receiving half the price in cash and agreeing to accept
the balance in instalments does not amount to giving of loan to the director, it simply amounts to credit sale.
[Fredie Ardeshir Mehta v. Union of India, (1991) 1 Comp LJ 437 (Bom.)]
♦ The company had given an advance of ` 5,000 to the wife of Managing Directors who was employed by the Com
pany on monthly salary. The Madras High Court held that salary advance do not amount to loan and it cannot be
said that an offence has been committed. [M.R. Electronics Components Ltd. & Others v. Assistant ROC, (1986) 3
Comp. L.J. 28 (Mad.)]
Que. No. 21] A loan given to the wife of the managing director who is a bona fide employee of the company
need not necessarily be treated as loans given to relatives of directors of the company. Comment.
Ans.: As per Section 185, the company cannot give any direct or indirect loan to director or to any other person in
whom the director is interested.
In the case of M.R. Electronics Components Ltd. & Others v. Assistant ROC (1986) 3 Comp. L.J. 28 (Mad.), it was held
that if the company gives advance salary to its employee, it does not amount to loan and there is no contravention
of Section 185. Thus, a loan given as advance salary to the wife of the managing director who is a bona fide
employee of the company need not necessarily be treated as loans given to relatives of directors of the company.
Que. No. 22] The Managing Director of a public limited company applied for purchasing a company's flat. The
price of the flat is ` 40 lakh. The Managing Director suggested that he may be allowed to pay ` 20 lakh and the
balance of ` 20 lakh may be recovered from his salary in 40 instalments. Accounts Department observed that it
will tantamount to providing house building advance to the Managing Director which is not covered by the rules
of the company. Being the Company Secretary of the company, you have been asked by the board of directors
to examine and submit a note stating the rules in this regard and action to be taken for considering the request.
Ans.: In Fredie Ardeshir Mehta v. Union of India, (1991) 1 Comp LJ 437 (Bom.) it was held that if the company sells
one of its flats to one of its directors on receiving half the price in cash and agreeing to accept the balance in
instalments does not amount to giving of loan to the director.
In view of above, the observation made by Accounts Department that purchasing flat by MD will tantamount to
providing house building advance is not correct.
Que. No. 23] Gold Ltd. is a listed company with paid-up capital of ` 125 Crores and free reserves of ` 250 Crores.
Silver Pvt. Ltd. has approached Gold Ltd. for a loan of ` 300 Crore to set up a manufacturing plant. Comment
whether Gold Ltd. can give aforesaid loan to Silver Pvt. Ltd. keeping in view that Raman is a director in both the
companies. CS (Inter) - June 2006 (4 Marks)
Ans.: As per Section 185, a company cannot directly or indirectly advance any loan, including any loan represented
by a book debt to its directors or to any other person in whom the director is interested.
The expression "to any other person in whom director is interested" included a private company of which any
director is a director or member.
Thus, Gold Ltd. cannot give loan to Silver Pvt. Ltd.
■ ■■ BOARD'S SANCTION FOR CONTRACTS IN WHICH DIRECTORS ARE INTERESTED
Que. No. 24] It is mandatory for every director to disclose his interest or nature of his concern in other companies
in which he is a director. CS (Executive) - June 2016 (5 Marks)
A director failed to disclose interest in a contract in which he was interested and the same was approved at the
board meeting. Comment. CS (Inter) - June 2003 (4 Marks)
290
Explain the position of an interested director in the light of the provisions of Section 184.
Ans.: Disclosure of interest by director [Section 184(1)]: Every director shall at the first Board meeting in which he
participates as a director disclose his concern or interest in any company or bodies corporate, firms, or other
association which shall include the disclosure of shareholding held by him in Form MBP -1.
Whenever there is any change in the disclosures already made, then fresh disclourse should be made at the first
Board meeting held after such change.
Disclosure of interest in a contract or arrangement by director [Section 184(2)]: Every director shall disclose the
nature of his concern or interest at the meeting of the Board and shall not participate in meeting in which is directly
or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement.
The contract or arrangement may be -
(a) with a body corporate in which
(i) director or director in association with any other director, holds more than 2% shareholding of that body
corporate, or
(ii) director is a promoter, manager, Chief Executive Officer of that body corporate or
(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be.
If director become interested at a later stage: If at the time when the contract or arrangement was entered into,
the director was not interested director, but afterwards he becomes interested director, he shall disclose his
interest at the first board meeting held after he becomes an interested director.
Effect of contract entered without disclosure [Section 184(3)]: A contract or arrangement entered into by the
company without disclosure or with participation by a director who is concerned or interested in any way, directly
or indirectly, in the contract or arrangement, shall be voidable at the option of the company.
Punishment for director for contravention [Section 184(4)]: If a director of the company contravenes the
provisions of Section 184(1) or (2), such director shall be punishable -
- with fine which may extend to f 1,00,000 or
- with both.
Non applicability of Section 184 [Section 184(5)]: Nothing in Section 184 shall apply to any contract or
arrangement entered into or to be entered into between two companies or between one or more companies and
one or more bodies corporate where any of the directors of the one company or body corporate or two or more
of them together holds or hold not more than 2% of the paid-up share capital in the other company or the body
corporate.
Some Important Points:
♦ Section 184 applies to all companies, whether it is public company or private company.
♦ As per Section 184(2), an interested director shall not participate in the discussion and voting on the contract
or arrangement in which he is interested. Thus, the presence of the interested director shall not be counted for
determining quorum with respect to such contract.
♦ As per Section 167, the office of a director shall become vacant, in case -
(a) He fails to disclose his concern or interest in the contract or arrangement in which he is interested.
(b) He participates in the discussion and voting on the contract or arrangement in which he is interested
Que. No. 25] Barkha Ltd. has 4 directors on its Board. A Board meeting was convened which was attended by
only 2 directors, where Rekha was appointed as an additional director. Rekha is related to both the directors.
Referring to the provisions of the Companies Act, 2013, examine the validity of the appointment.
Ans.: The appointment as an additional director of a person who is related to a director has been held not to violate
the requirement of Section 184 because such appointment does not constitute any "contract or arrangement" of
291
the company with the sitting director [Shailesh Harilal Shah v. Matushree Textiles Ltd., (1994) 2 Comp LJ 291 at
301: AIR 1994 Bom 20],
The director in question was not accordingly disentitled from participation and voting at a meeting of the Board.
Que. No. 26] Director of ABC Ltd. are not holding any shares in MDJ Ltd. Similarly directors of MDJ Ltd. are not
holding any shares in ABC Ltd. But, wife of director 'A' of ABC Ltd. holds 40% paid up capital of MDJ Ltd. Board
of directors of ABC Ltd. entered into a contract with MDJ Ltd for purchase of goods and director 'A' did not
disclose his indirect interest in MDJ Ltd. Examine whether 'A' has violated any provisions of the Companies Act,
2013 and also the validity of the contract.
Ans.: As per Section 184 (2), every director shall disclose the nature of his concern or interest at the meeting of
the Board and shall not participate in meeting in which is directly or indirectly, concerned or interested in a contract
or arrangement or proposed contract or arrangement.
As per fact's given in case, ‘A’ is required to disclose his interest since he is indirectly interested in a contract, as his
wife hold 40% paid up capital of MDJ Ltd.
Consequences of failure to disclose his interest are as follows:
(1) ‘A’ shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of ABC Ltd. [Section 184(3)]
(3) He shall be punishable -
- with both. [Section 184(4)]
Que. No. 27] X Ltd. entered into contract with M Ltd. for purchase of raw material of ` 2,50,000 at the prevailing
market price. The director of X Ltd., Mr. B, was holding shares of the value of 1% of the paid up capital of M Ltd.
Another director of X Ltd., Mr. C was holding 1.5% paid up capital of M Ltd. Mr. B has already given general
notice to X Ltd. that he was interested in M Ltd. Comment.
Ans.: As per Section 184(2), every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be
entered into with a body corporate in which director or director with any other director, holds more than 2%
shareholding of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board
in which the contract or arrangement is discussed and shall not participate in such meeting.
In the present case, the aggregate shareholding of Mr. B and Mr. C is more than 2% of the paid up share capital of
M Ltd. and thus Section 184(2) is attracted. Hence, Mr. B and Mr. C both are required to disclose the nature of
their interest i.e. their shareholding in M Ltd. in the Board meeting of X Ltd. in which the contract or arrangement
between X Ltd. and M Ltd. is first discussed.
The general notice given by Mr. B in terms of Section 184(1) is sufficient as requirement of Section 184(2) are
independent of Section 184(1). Thus by non disclosure both Mr. B and Mr. C has contravened Section 184(2).
(1) Both Mr. B and Mr. C shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of X Ltd. [Section 184(3)]
(3) Both Mr. B and Mr. C shall be punishable -
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Que. No. 28] Mr. G, a Director of Sam Ltd. was interested in a contract to be entered into by the company. The
Articles of Association of Sam Ltd. contained a clause, which prohibited the directors from voting on the
resolution in respect of any contract in which he is interested. The matter in respect of the said contract was put
up for approval of the shareholders in a general meeting. The general meeting was attended by Mr. G and he
also voted on the resolution. Mr. G, claims that he has a right to vote on the resolution in the general meeting.
Ans.: When a director exercises his voting right as a shareholder, he is free to vote in his own best interests like
any other shareholder. An article in the articles of association prohibiting a director from voting on a resolution in
respect of a contract in which he is interested does not debar him from voting thereon as a shareholder in a general
meeting. [East Pant Du United Lead Mining Co. Ltd. v. Merry Weather (13 WR 216)]
A shareholder may vote as he pleases even when his interests are different from or opposed to those of the
company. Shareholders are not trustees for the company or for one another. The restriction in the article pertaining
to voting applies only to the board meetings and not to the general meetings.
In view of the above legal pronouncements, there cannot be any restriction on the voting right of a director in a
general meeting where he is voting as a shareholder. Hence, the contention of Mr. G is correct.
Que. No. 29] PQR Ltd. having paid-up capital of ` 50 lakh, entered into a contract with the company XYZ Ltd. in
which director D was holding 20% shares. The director did not disclose interest at the time of approval of the
contract by the board. Comment. CS (Inter) - Dec 2000 (4 Marks)
Ans.: As per Section 184(2), every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be
entered into with a body corporate in which director or director with any other director, holds more than 2%
shareholding of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board
in which the contract or arrangement is discussed and shall not participate in such meeting.
In the present case, the aggregate shareholding of 'D' is 20% which is more than 2% of the paid up share capital of
XYZ Ltd. and thus Section 184(2) is attracted. Hence, 'D' is required to disclose the nature of his interest i.e. their
shareholding in XYZ Ltd. in the Board meeting of PQR Ltd. in which the contract or arrangement between XYZ Ltd.
and PQR Ltd. is first discussed. Thus, by non disclosure 'D' has contravened Section 184(2).
(1) 'D' shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of PQR Ltd. [Section 184(3)]
(3) 'D' shall be punishable -
Que. No. 30] Rana is a director of Urmi Exports Ltd. Urmi Exports Ltd. wishes to enter into a contract with
Srilakshmi Creations Pvt. Ltd., a company registered in Mauritius in which Mrs. Rana is a director. What
compliances, if any, are required under the Companies Act, 2013? CS (Inter) - June 2005 (5 Marks)
Ans.: As per Section 184(2), every director shall disclose the nature of his concern or interest at the meeting of the
Board and shall not participate in meeting in which is directly or indirectly, concerned or interested in a contract
or arrangement or proposed contract or arrangement.
As per facts given in case, Rana is required to disclose his interest since he is indirectly interested in a contract, as
his wife is Director of Srilakshmi Creations Pvt. Ltd.
(1) Rana shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of Urmi Exports Ltd. [Section 184(3)]
(3) Rana shall be punishable -
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Further as per Section 189 the particulars of the contract must be entered in "register of contract in which directors
are interested" with prescribed period and it should be signed by all the directors present in the next board
meeting.
Que. No. 31] Write a short note on: Register of contracts or arrangements in which directors are interested
Ans.: Register of contracts or arrangements in which directors are interested [Section 189]: Every company shall
keep one or more registers giving separately the particulars of all contracts or arrangements to Section 184(2) or
Section 188 applies, in prescribed manner and containing prescribed particulars.
Rule 16 of the Companies (Meeting of Board and its Powers) Rule, 2014
Placing and signing of register: After entering the particulars, register shall be placed before the next meeting of
the Board and signed by all the directors present at the meeting.
Disclosure: Every director or KMP shall, within a period of 30 days of his appointment, or relinquishment of his
office, disclose to the company the particulars specified in Section 184(1) relating to his concern or interest in the
other associations which are required to be included in the register or other information relating to himself as may
be prescribed.
Place of keeping and inspection: The register shall be kept at the registered office and it shall be open for
inspection at such office during business hours and extracts may be taken and copies may be required by any
member of the company shall be furnished by the company in prescribed manner on payment of prescribed fees.
Placing the register at the AGM: The register kept under this section shall also be produced at the commencement
of every AGM of the company and shall remain open and accessible during the continuance of the meeting to any
person having the right to attend the meeting.
Non-applicability: Following contract or arrangement shall not be required to be included in the register, if
(a) it relates to the sale, purchase or supply of any goods, materials or services if the value of goods and materials
or the cost of services does not exceed ` 5,00,000 in the aggregate in any year; or
(b) it relates to a banking company for the collection of bills in the ordinary course of its business.
Penalty: Every director who fails to comply with the provisions of this section and the rules made there under shall
be liable to a penalty of ` 25,000.
Rule 16 of the Companies (Meeting of Board and its Powers) Rule, 2014 makes the following provisions regarding
the "register of contracts or arrangements in which directors are interested"
(1) Every company shall maintain one or more registers in Form MBP-4, and shall enter therein the particulars
of -
(a) company or companies or bodies corporate, firms or other association of individuals, in which any director
has any concern or interest, as mentioned under Section 184(1).
However, the particulars of the company or companies or bodies corporate in which a director himself together
with any other director holds 2% or less of the paid-up share capital would not be required to be entered in the
register
(b) contracts or arrangements with a body corporate or firm or other entity as mentioned u/s 184(2), in which
any director is, directly or indirectly, concerned or interested and
(c) contracts or arrangements with a related party with respect to transactions to which Section 188 applies.
(2) The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological
order and shall be authenticated by the Company Secretary of the company or by any other person authorized by
the Board for the purpose.
(3) The register shall be kept at the registered office of the company and the register shall be preserved
permanently and shall be kept in the custody of the Company Secretary of the company or any other person
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(4) The company shall provide extracts from such register to a member of the company on his request, within 7
days from the date on which such request is made upon the payment of fee specified in the articles of the company
but not exceeding ` 10 per page.
Que. No. 32] In what way does the Companies Act, 2013 restricts the non-cash transactions involving directors
of a public limited company? Explain. CA (Final) - Nov 2014 (8 Marks)
Ans.: Non-cash transaction means acquiring or selling assets for consideration other than cash.
Restriction on non-cash transactions involving directors [Section 192(1)]: No company shall enter into following
non-cash transactions -
(a) A director of the company or its holding, subsidiary or associate company or a person connected with him
acquires assets for consideration other than cash from the company or
(b) The company acquires assets from director or person connected with directors.
Non-cash transactions can be entered into by the company only with the approval of shareholder in general
meeting.
If the director or connected person is a director of its holding company, approval shall also be obtained by passing
a resolution in general meeting of the holding company.
Notice of general meeting approving non-cash transaction [Section 192(2)]: The notice for approval of the
resolution by the company or holding company in general meeting shall include the particulars of the arrangement
along with the value of the assets duly calculated by a registered valuer.
Contract to be voidable [Section 192(3)]: Any arrangement entered into by a company or its holding company in
contravention of the provisions of Section 195 shall be voidable at the option of the company.
However, in following cases the contract is not voidable at the option of company:
(a) If the company has been indemnified by any other person for any loss or damage caused to it or
(b) Third party acquires rights bona fide for value and without notice of the contravention.
Que. No. 33] Board of directors of Divine Ltd. decides to enter into a contract whereby Manish, a director of the
company shall acquire certain assets from the company for consideration other than cash, without seeking
approval of the company in its general meeting. Certain shareholders of the company object to the said decision
of the Board. Referring to the provisions of the Companies Act, 2013, examine the validity of the Board's decision
and state whether the contention of the shareholders shall be tenable.
CS (Executive) - Dec 2015 (4 marks)
Ans.: Restriction on non-cash transactions involving directors [Section 192]: No company shall enter into
following non-cash transactions-
(a) A director of the company or its holding, subsidiary or associate company or a person connected with him
acquires assets for consideration other than cash from the company or
(b) The company acquires assets from director or person connected with directors.
Non-cash transactions can be entered into by the company only with the approval of shareholder in general
meeting.
As per the facts given in case, the board of directors of Divine Ltd. decides to enter into a contract whereby Manish,
a director of the company shall acquire certain assets form the company for consideration other than cash, without
seeking approval of the company in general meeting, which is not valid as per Section 192 of the Companies Act,
2013. The company should have taken approval of shareholder in general meeting by way of passing special
resolution. * 4 * 4
Que. No. 34] Which companies are required to constitute a 'Nomination & Remuneration Committee'? What is
the composition of the above committee? CS (Executive) - June 2016 (4 Marks)
4 . 1 Ans.: Constitution of Nomination & Remuneration Committee [Section 178(1)]: The Board of Directors
of every listed public company and other prescribed classes of companies, shall constitute the Nomination &
Remuneration Committee consisting of 3 or more non-executive directors out of which not less than one-half shall
be independent directors.
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The Chairperson of the company may be appointed as a member of the Nomination & Remuneration Committee
but shall not Chair such Committee.
Duties of Nomination & Remuneration Committee [Section 178(2) to (5)]: The Nomination & Remuneration
Committee shall identify persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, recommend to the Board their appointment and removal
and shall specify the manner for effective evaluation of performance of Board, its committees and individual
directors to be carried out either by the Board, by the Nomination & Remuneration Committee or by an
independent external agency and review its implementation and compliance.
The Nomination & Remuneration Committee shall formulate the criteria for determining qualifications, positive
attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for
the directors, KMP and other employees.
The Nomination & Remuneration Committee shall, while formulating the policy ensure that -
(a) The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully;
(b) Relationship of remuneration to performance is clear and meets appropriate performance benchmarks;
and
(c) Remuneration to directors,. KMP and senior management involves a balance between fixed and incentive
pay reflecting short and long-term performance objectives appropriate to the working of the company and its
goals. Such policy shall be disclosed in the Board's report.
However, such policy shall be placed on the website of the company, if any, and the salient features of the policy
and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board's report.
Constitution of Stakeholders Relationship Committee [Section 178(5)]: The Board of Directors of a company
which consists of more than 1,000 shareholders, debenture-holders, deposit-holders and any other security
holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a
chairperson who shall be a non-executive director and such other members as may be decided by the Board.
Duties of Stakeholders Relationship Committee [Section 178(6)]: The Stakeholders Relationship Committee shall
consider and resolve the grievances of security holders of the company.
Attendance at general meetings [Section 178(7)]: The Chairperson of Nomination & Remuneration Committee &
Stakeholders Relationship Committee, in his absence, any other member of the committee authorized by him in
this behalf shall attend the general meetings of the company.
It is to be noted that inability to resolve or consider any grievance by the Stakeholders Relationship Committee in
good faith shall not constitute a contravention of this section.
Que. No. 35] Examining the provisions of the Companies Act, 2013, relating to the constitution of a 'Nomination
and Remuneration Committee' and 'Stakeholders Relationship Committee', answer the following:
(i) Is it mandatory for a listed company to constitute such committees? Also state whether it is mandatory
for a non-listed public company having paid-up share capital of ` 5 Crore to constitute such committees?
(ii) What shall be the composition of the committees in case the company is required to constitute such
committees? CS (Executive) - Dec 2015 (4 Marks)
Ans.: Keeping in view above provisions of Section 178 of the Companies Act, 2013, answer to given problem is as
follows:
(i) It is mandatory for a listed company to constitute such committees. In case of a non-listed public company
having paid-up share capital of X 5 Crore it is not necessary to constitute such committees.
(ii) Nomination & Remuneration Committee shall consist of 3 or more non-executive directors out of which not
less than one-half shall be independent directors.
Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director and such
other members as may be decided by the Board.
Que. No. 36] Discuss briefly the duties of directors under Section 166 of the Companies Act, 2013?
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Ans.: Duties of directors [Section 166]:
(1) A director of a company shall act in accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he
shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable with
fine which shall not be less than X 1,00,000 but which may extend to X 5,00,000.
Que. No. 37] Mr. Sunil Goyal, a director of XYZ Limited wants to go on foreign trip. He wants to assign his office
to the Vice President of the company. Mr. Sunil Goyal seeks your advice whether he can do so. Referring to the
provisions of the Companies Act, 2013 advise him in the matter.
Ans.: As per Section 166(6), a director of a company shall not assign his office and any assignment so made shall
be void. Thus, Mr. Sunil Goyal, a director of XYZ Ltd. cannot assign his office to Vice President of the company.
Que. No. 38] A whole-time director of a company made an invention during the course of his employment with
the company. He patented the invention in his own name and appropriated the benefits to himself. Can he do
so? Cite case law, if any. CS (Executive) - June 2009 (5 Marks)
Ans.: The directors are liable to the company for all personal profits or gain made by them taking advantage of
their position as directors.
A director was held liable when a director patented and exploited in his own name an invention made during the
course of his employment with the company. [Cranleigh Precision Engineering Ltd. v. Bryan, (1964) All ER 289]
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CHAPTER
17
MEETINGS OF BOARD AND ITS COMMITTEES
BOARD MEETING
Que. No. 1] State the number of board meeting that a company must hold each year as per the Companies Act,
2013.
Ans.: Meetings of Board [Section 173(1)]:
First Board Meeting: Every company shall hold the first meeting of the Board of Directors within 30 days of the
date of its incorporation.
Subsequent Board Meetings: Every company shall hold a minimum 4 meetings of its Board of Directors every year.
The gap between two board meetings should not be more than 120 days.
In case of OPC, small company and dormant company:
- At least one meeting of the Board of Directors has been conducted in each half of a calendar year and
- The gap between the two meetings is not less than 90 days.
No board meeting is required to be held by OPC in which there is only one director on its Board. [Section 173(5)]
Que. No. 2] During the year 2019, A Ltd. held four meetings of Board on 2nd January, 2019,10th May 2019, 16th
October, 2019, and 31st December, 2019. Examine whether he was in accordance with the provisions of the
Companies Act, 2013. CS (Final) - June 1995 (5 Marks)
Ans.: As per Section 173(1), every company shall hold a minimum 4 meetings of its Board of Directors every year.
As per facts given in case, gap between various meetings are shown below:
2nd January, 2019 to 10th May 2019 127 days
10th May 2019 to 16th October, 2019 158 days
16th October, 2019, to 31st December, 2019 75 days
Thus, from the above calculation, it is clear that company has contravened provisions of Section 173(1) for the
meetings held on 10th May 2019 & 16th October, 2019'
Que. No. 3] Following are the dates of Board Meetings held by the Jolly Ltd. during the year 2019:
First Meeting - 15.1.2019
Second Meeting - 25.4.2019
Third Meeting - 31.7.2019
Fourth Meeting - 21.10.2019
However, in fourth meeting was adjourned due to want of quorum and held on 10.11.2019. Do you think that
company has contravened provisions of Section 173(1) of the Companies Act, 2013?
As per facts given in case, gap between various meetings are shown below:
15.1.2019 to 25.4.2019 100 days
25.4.2019 to 31.7.2019 97 days
31.7.2019 to 21.10.2019 92 days
In case of fourth meeting date of original meeting will be taken and not the date of adjourned meeting. This is so
because adjourned meeting is mere continuance of original meeting.
Since Jolly Ltd. has held all the four Board Meeting during the calendar year 2019 and the gap between any two
meetings is not more than 120 days, it has not complied with Section 173(1).
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Que. No. 4] Anubhav Ltd. held four board meeting in a calendar year with an interval of more than 3 months in
between two board meeting. Comment. CS (Inter) - Dec 2003 (4 Marks)
As per facts given in case gap of two meetings is more than 3 months (average 90 days) but if it has held the
meetings keeping gap of not be more than 120 days, the Anubhav Ltd. has complied the Section 173(1) of the Act.
Que. No. 5] The Board of directors of a company met thrice in the year 2015 and the fourth meeting was not
held for want of quorum. As a Company Secretary, examine the provisions of the Companies Act, 2013 and
decide with reasons whether the company has complied with the requirements of meetings to be held in a
calendar year or violated the requirements thereof? CS (Executive) - Dec 2013 (4 Marks)
If the gap between 1st & 2nd, 2nd & 3rd meeting is not more than 120 days then there is no default of Section
173(1).
In case of 4th meeting, it is stated in problem that, meeting was not held at all due to want of quorum and hence
there is default of Section 173(1).
Que. No. 6] State the provisions relating to holding of Board Meeting through video conferencing under the
The board of directors of Vedic Ltd. desirous of transacting certain matters through video conferencing, seek
your advice on the matters which cannot be dealt with through video conferencing. Advice the Board.
Ans.: Manner of participation in Board Meetings [Section 173(2)]: The participation of directors in a meeting of
the Board may be either in person (personally present) or through video conferencing or other audio visual means.
The system of video conferencing or other audio visual means must be capable of recording and recognizing the
participation of the directors and of recording and storing the proceedings of such meetings along with date and
time.
As per Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 following matters shall not be
dealt with in a meeting through video conferencing or other audio visual means:
(i) The approval of the annual financial statements
(ii) The approval of the Board's report
(iii) The approval of the prospectus
(iv) The Audit Committee Meetings for consideration of accounts and
(v) The approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
Que. No. 7] XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they reside
in America. The company wants to convene its Board meeting in Mumbai but all the 5 directors are pre-occupied
and are not in a position to travel to India. Advice the company regarding conduct of such a Board meeting as
per provisions of the Companies Act, 2013 and relevant Rules. Will the same Rules or provisions be applicable in
case the company wants to approve annual financial statements in the Board meeting?
Ans.: As per Section 173(2), the participation of directors in a meeting of the Board may be either in person
(personally present) or through video conferencing or other audio visual means.
time.
299
The company should also comply with the Rule 3 of the Companies (Meetings of Board and its Powers) Rules,
2014.
Thus, XYZ Ltd. can hold the meeting of its directors through video conferencing or other audio visual means.
However, it cannot pass motion relating to approval of the annual financial statements in such meeting.
Que. No. 8] State the provisions of the Companies Act, 2013 in respect of notice of Board Meeting.
Ans.: Notice of Board Meeting [Section 173(3)]: A meeting of the Board shall be called by giving not less than 7
days notice in writing to every director at his address registered with the company. Such notice shall be sent by
hand delivery or by post or by electronic means.
Shorter Notice: A meeting of the Board may be called at shorter notice to transact urgent business subject to the
condition that at least one independent director, if any, shall be present at the meeting.
However, in case of absence of independent directors from such a meeting of the Board, decisions taken at such a
meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one
independent director, if any.
Penalty [Section 173(4)]: Every officer of the company who fails to give notice shall be liable to a penalty of `
25,000.
Que. No. 9] Advise the company with reference to the relevant provisions of the Companies Act about sending
notice of board meetings to the following directors:
(i) Mr. Rohit, a director, who intimates his inability to attend the next board meeting.
(ii) Mr. Bipin Ram, who has gone abroad for four months and an alternate director, has been appointed in his
place.
(iii) Mr. James is a director residing abroad representing the foreign collaborator and the Articles of
Association of the company provide for sending notice to such directors by e-mail.
Ans.: As per Section 173(3), a meeting of the Board shall be called by giving not less than 7 days notice in writing
to every director at his address registered with the company. Such notice shall be sent by hand delivery or by post
or by electronic means. Keeping in view the provisions of the Section 173(3), answer to given problem is as follows:
(i) Notice is to be sent to every director even if he waives the right to receive the notice. Waiver of right to
receive the notice by a director does not exempt the company from its duty to serve notice to every director. Thus,
the notice of Board Meeting must be sent to Mr. Rohit.
(ii) As per facts given in case, a director has gone abroad for a period of more than 3 months and in his absence
an alternate director appointed under Section 161(2) will attend and participate the meetings of the board of
directors. Thus, notice of board meeting should be sent to alternate director. (As alternate director is also director)
(iii) Section 173(1) specifically authorizes to send notice by electronic means, hence notice sent to director
residing abroad representing the foreign collaborator is valid.
Que. No. 10] Discuss the requirements of issuing notice for the adjourned board meetings.
Ans.: An adjourned meeting is merely continuation of original meeting. Notice need not be given of an adjourned
meeting other than meeting that has been adjourned sine die.
Que. No. 11] Mr. P and Mr. Q who are the directors of the Company informed the Company their inability to
attend the meeting because the notice of the meeting was not served on them. Discuss whether there is any
default on the part of the Company and the consequences thereof.
300
Ans.: As per Section 173(3), a meeting of the Board shall be called by giving not less than 7 days notice in writing
to every director at his address registered with the company. Such notice shall be sent by hand delivery or by post
or by electronic means.
In Parmeshwari Prasad Gupta v. Union of India (1974) 44 Comp Cas 1, it was held that even accidental omission to
give notice to single director would render the resolutions passed at that meeting void. Thus, by not sending the
notice to the directors Mr. P and Mr. Q, the company has defaulted in compliance of Section 173(3).
Further every officer of the company who fails to give notice shall be liable to a penalty of ` 25,000 as per Section
173(4).
Que. No. 12] Write a short note on: Quorum for board meetings
The quorum for board meeting should be present throughout the meeting.
Ans.: Quorum for meetings of Board [Section 174(1)]: The quorum for a meeting of the Board of Directors of a
company shall be higher of the following two:
- l/3rd of its total strength or (fraction rounded up to next)
- Two directors
The article of the company may provide for higher quorum.
"Total strength" shall not include directors whose places are vacant.
The participation of the directors by video conferencing or by other audio visual means shall also be counted for
the purposes of quorum.
Example on quorum for meetings of Board (when none of director is interested):
Total Directors 2 3 4 5 6 7 8 9 10 11 12 13
[A] Total Director x 1/3 (rounded up to next) 1 1 2 2 2 3 3 3 4 4 4 5
[B] Minimum directors required 2 2 2 2 2 2 2 2 2 2 2 2
Quorum for a meeting of the Board [A] or [B] whichever is 2 2 2 2 2 3 3 3 4 4 4 5.

higher
Quorum in case of interested director present at the board meeting [Section 174(3)]: Where at any time the
number of interested directors exceeds or is equal to 2/3rd (fraction rounded up to next) of the total strength of
Directors, the number of directors who are not interested directors and present at the meeting, being not less than
two, shall be the quorum during such time.
Example: XYZ Ltd. has total 11 directors. In the meeting of board of directors all the 11 directors are present and
out of them 8 directors are interested in particulars item of transaction.
Since number of director exceeds 2/3rd of the total strength of directors, the number of directors who are not
interested and present at the meeting, being not less than two, shall be the quorum. Thus, quorum for board
meeting will be 3 directors.
When meeting can be held without quorum [Section 174(2)]: If number falls below minimum required to form
quorum, the continuing directors may act for following the purpose only -
(a) Increasing the number of directors to that fixed for the quorum or
(b) Summoning a general meeting of the company.
They cannot act for any other purpose.
Que. No. 13] The quorum for board meeting should be present throughout the meeting.
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Ans.: Presence of quorum throughout the meeting: In the case of a board meeting, the meeting cannot transact
any business, unless a quorum is present at the time of transacting the business. It is not enough that a quorum
was present at the commencement of the business.
The quorum of the board is required at every stage of the meeting and unless a quorum is present at every such
stage, the business transacted is void. [Balakrishna v. Balu Subudhi, AIR 1949 Pat 184]
Que. No. 14] Star Gen Ltd. held a meeting of its Board of directors on 31st October, 2019 at its registered office.
Though the company has 12 directors on its board, only 5 directors were present at the commencement of
meeting. Thereafter, even while the meeting was in progress, 2 more directors left the meeting and remaining
directors carried on the proceedings of the meeting. Discuss the validity of decisions, if any, taken by the
remaining 3 directors. CS (Executive) - Dec 2012 (4 Marks)
Ans.: Quorum for meetings of Board [Section 174(1)]: The quorum for a meeting of the Board of Directors of a
company shall be higher of the following two:
- Two directors .
Presence of quorum throughout the meeting: In the case of a board meeting, the meeting cannot transact any
business, unless a quorum is present at the time of transacting the business. It is not enough that a quorum was
present at the commencement of the business.
The quorum of the board is required at every stage of the meeting and unless a quorum is present at every such
stage, the business transacted is void. [Balakrishna v. Balu Subudhi, AIR 1949 Pat 184]
As per facts given in case required quorum is present at the commencement of meeting bu` 2 directors left during
the meeting hence quorum is below required number and hence for subsequent business transacted without
required quorum are void.
Que. No. 15] In a meeting of the Board, only 3 directors were present out of the total of 11 directors. None of
the 3 directors was interested in any of the items of the agenda. Examine the validity of the meeting.
Ans.: As per Section 174(1), the quorum for a meeting of the Board of Directors of a company shall be higher of
the following two:
- Two directors
As there are total 11 directors, l/3rd of the 11 comes to 4 (3.67 rounded up to next). Thus, at leas` 4 directors must
be present at the board meeting. However, only 3 directors are present and hence meeting cannot be held due
want of quorum.
Que. No. 16] In a meeting of the Board, only 7 directors were present out of the total of 11 directors and only 2
directors was not interested in one of the transaction. How should meeting deal with the matter?
the following two:
- 1/3rd of its total strength or (fraction rounded up to next)
- Two directors
As per Section 174(3), where at any time the number of interested directors exceeds or is equal to 2/3rd of the
total strength of Directors, the number of directors who are not interested directors and present at the meeting,
being not less than two, shall be the quorum during such time.
As per facts given in case, 2/3rd of 11 comes to 8 (11 x 2/3 = 7.33, rounded up to next). In meeting 7 directors are
present out of which only 2 directors are not interested, that mean only 5 directors are interested. Since condition
specified in Section 174(3) is not satisfied relaxation that directors present or two directors will form quorum is not
available. For this transaction quorum will be governed by Section 174(1).
302
As per Section 174(1), quorum comes to 4 (11 * 1/3 = 3.66, rounded up to next). As only two non interested
directors are present there is no valid quorum for the transaction and thus it cannot be discussed and voted upon.
Que. No. 17] Out of 9 directors in Rooftop Ltd., 5 are Indian nationals, 3 are foreign residents and one is a person
of Indian origin. The articles of the company stipulate that quorum for a Board meeting shall be 5 directors of
which at least one director shall be a foreign resident. Referring to the provisions of the Companies Act, 2013,
examine the validity of the above provision in the articles.
the following two:
- 1/3rd of its total strength or (fraction rounded up to next)
- Two directors
Stricter provisions should be followed: The Articles may provide for a higher quorum than what is prescribed under
the law. Where the Quorum requirement provided in the Articles is higher than one-third of the total strength, the
company shall conform to such higher requirement.
The company may provide by its Articles higher number but not a lower number or proportion to constitute a valid
quorum. [Amrit Kaur Puri v. Kapurthala Flour Oil & General Mills Co. P. Ltd., (1984) 56 Com Cases 194 (P&H)].
Further, the Articles may provide for the presence of the Foreign Director at all Meetings. Such provision should
be adhered to.
Thus, provisions contained in article of Rooftop Ltd. is valid and as per the provisions of the Companies Act, 2013.
Que. No. 18] What are the provisions of the Companies Act, 2013, if at the board meeting required quorum is
not present?
Ans.: If at the board meeting required quorum is not present [Section 174(4)]: Where a meeting of the Board
could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting
shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is
a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.
Even at such adjourned meeting, 'quorum' is essential. As per Guidance Note on Board Meeting, issued by ICSI,
if there is no quorum at the adjourned meeting also, the meeting stands dissolved as meeting cannot be
adjourned for quorum again.
Que. No. 19] A meeting of the Board of directors was scheduled to take place at the factory premises of a
company and not at the registered office. At the scheduled date and time, the required quorum was not present.
The Chairman of the meeting announced that the meeting is dissolved.
Ans.: As per Section 96(2), an annual general meeting can be called during business hours, that is, between 9 a.m.
and 6 p.m. on any day that is not a National Holiday.
There is no similar provision for holding board meeting. Thus, the meetings of the board of directors may be held
at any place convenient to the directors even outside the business hours and even on a national holiday unless the
articles provide otherwise.
Thus, meeting of board of director can be held at factory premises and it is not necessary that it should be held at
registered office of the company.
As per Section 174(4), where a meeting of the Board could not be held for want of quorum, then, unless the articles
of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same
time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place.
Thus, contention of Chairman that meeting is dissolved due to want of quorum is not correct. If quorum is not
present the meeting shall automatically stand adjourned to the same day at the same time and place in the next
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week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same
time and place.
Que. No. 20] In a private limited company, there are only two directors on the board. A Board meeting convened
was adjourned for want of quorum. At the adjourned meeting, inspite of quorum not being present, the
resolutions were passed as per the agenda. Discuss the validity of resolutions so passed.
the following two:
- Two directors
In case of board meeting quorum must be present even at adjourned meeting and any business transacted for
want of quorum is not valid.
Que. No. 21] A meeting of the board of directors of a company was convened on 31st December, 2015 to discuss
some important matters. 5 Directors out of 7 directors write to the chairman that they would like to attend the
meeting but could not do so due to other pre-occupations. The last meeting was held on 29th September, 2015.
Advise the chairman. CS (Inter) - June 2003, Dec 2007 (4 Marks)
As per Section 174(1), the quorum for a meeting of the Board of Directors of a company shall be higher of the
following two:
- l/3rd of its total strength (fraction rounded up to next) or
- Two directors
l/3rd of 7 comes to 3 (2.33 rounded up to 3). Thus, meeting cannot be held with two directors on 31.12.2015.
national holiday, at the same time and place. Even at such adjourned meeting, 'quorum' is essential.
However, if at adjourned meeting required quorum is present then such adjourned meeting will be deemed to be
held on 31.12.2015 as adjourned meeting is nothing but the mere continuance of original meeting and it cannot
be said that company has contravened Section 173(1).
Que. No. 22] As the Company Secretary of Joy Ltd., what steps would you take in case the scheduled Board
meeting could not complete the agenda stated thereat. The items of business left un-transacted are of extreme
importance for the company's growth and the same cannot be deferred until the next Board meeting because
of urgency. Advise the Board about the steps to be taken to get the un-transacted items passed.
Ans.: If items of business left un-transacted in board meeting are extreme importance for the company, then as
Company Secretary following actions can be taken:
- Meeting can be adjourned by the Chairman and such adjourned meeting can be held on next day or some
other day to complete the items left un-transacted.
- Company can also pass the resolution by circulation for the items left un-transacted if passing by circular
resolution on a subject is not specifically prohibited under the Companies Act, 2013.
- The company can also avail the option of holding of Board Meeting through video conferencing as provided
u/s 173(2) of the Companies Act, 2013.
Que. No. 23] Explain the provisions relating to passing of resolution by circulation.
CS (Inter) - Dec 1999 (4 Marks), June 2003 (5 Marks) CS (Inter) - Dec 2011 (5 Marks)
State the matters which cannot be decided through resolution by circulation.
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Ans.: Passing of resolution by circulation [Section 175]: Resolution shall be deemed to have been duly passed by
the Board or by a committee by circulation if -
- The resolution has been circulated in draft, together with the necessary papers, if any
- The resolution should be circulated to all the directors, or members of the committee, as the case may be
- It shall be circulated at their addresses registered with the company in India by hand delivery or by post or
by courier, or through electronic means
- Such circular resolution shall be approved by a majority of the directors or members, who are entitled to
vote on the resolution.
Noting and inclusion in minutes: A resolution passed by circulation shall be noted at a subsequent meeting of the
Board or the committee thereof, and made part of the minutes of meeting.
Demand for decision at board meeting: If not less than 1 /3rd of the total number of directors of the company
require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution
to be decided at a meeting of the Board.
Matters which cannot be decided by circular resolution:
(a) To fill a casual vacancy occurred in the Board. [Section 161(4)]
(b) Power to make calls on shareholders in respect of money unpaid on shares. [Section 179(3)]
(c) To authorize buy-back of securities up to 10% of the total paid-up equity capital and free reserves. [Section
68]
(d) Power to issue debentures. [Section 179(l)(c)]
(e) Power to borrow moneys otherwise than on debentures. [Section 179(l)(d)]
(f) Power to invest the funds of the company. [Section 179(l)(e)]
(g) Power to make loans. [Section 179(l)(f)]
(h) Power to delegate to any committee of directors, managing director, manager or any other principal
officer of the company or in the case of branch office of the company, a principal officer of the branch office, the
powers specified in clauses (d) to (f). [Proviso to Section 179(3)]
(i) Decision to make any political contribution. [Section 182]
(j) To give general notice of interest specifying firms or bodies corporate in which the director may be deemed
to be concerned or interested. [Section 184(1)]
(k) To accord consent to a contract in which a director or other specified persons are interested. [Section 188]
(0 In the case of a public company or a private company, if it is a subsidiary of a public company, to appoint a
person as a managing director, if he is already a managing director or manager of any other company, by an
unanimous resolution. [Section 203]
(m) In the case of a public company or a private company, if it is a subsidiary of a public company, to appoint
a person as a manager, if he is already a manager or managing director of any other company, by an unanimous
resolution. [Section 203]
(n) To make a declaration of solvency where it is proposed to wind up the company voluntarily. [Section 305]
Que. No. 24] Write a short note on: Time and place of board meetings CS (Inter) - Dec 2011 (5 Marks)
at any place convenient to the directors even outside the business hours and even on a national holiday unless the
articles provide otherwise.
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national holiday, at the same time and place. Thus, it evident that adjourned meeting cannot be held on national
holiday. However in following two cases adjourned meeting can be held on national holiday:
(l) Where board voluntarily adjourns a duly convened board meeting for a day which is a national holiday
(2) If it is so provided in article of the company.
Que. No. 25] The Board of Directors of Infotech Consultant Ltd., registered in Kolkata, proposes to hold next
board meeting in the month of December, 2019. They seek your advise in respect of the following matters:
(1) Can the board meeting be held in Chennai, where all the directors of the company reside?
(2) Whether the board meeting can be called on a national holiday and that too after business hours as the
majority of directors have gone on vacation.
(3) Is it necessary to that the notice of the board meeting should specify the nature of business to be
transacted? CA (Final) - May 2000 (6 Marks)
Ans.: The answers to given problem is as follows:
(1) The meetings of the board of directors may be held at any place convenient to the directors even outside
the business hours and even on a national holiday unless the articles provide otherwise. Thus, board meeting can
be held in Chennai.
(2) The board meeting can be on a national holiday.
(3) There is no provision under the Companies Act, 2013 which requires to specify the nature of business to be
transacted. Therefore, the notices of board meeting need not to specify the nature of business to be transacted.
Que. No. 26] Board of directors of Ash Ltd. having its registered office at New Delhi decides to hold its next
meeting at New York, USA since all the directors of the company are going to attend a sales exhibition to be held
at New York. Examining the provisions of the Companies Act, 2013, advise the Board about the validity of its
decision to hold the Board meeting at New York. CS (Executive) - June 2016 ( Marks)
at any place even at aboard convenient to the directors; outside the business hours and even on a national holiday
unless the articles provide otherwise.
Thus, board of directors of Ash Ltd. can held board meeting outside India.
Que. No. 27] Write a short note on: Agenda of Board Meeting
Ans.: The Companies Act, 2013 do not have any provision relating to agenda of board meeting. However, good
governance envisages such requirement.
The SS-1 issued by ICSI requires circulating agenda, setting out the business to be transacted at the meeting and
notes on agenda to directors at leas` 7 days before the date of meeting unless article provides longer period.
Que. No. 28] Whether secretarial standard relating to general and board meeting is required to be complied by
the companies under the Companies Act, 2013.
Ans.: Compliance with Secretarial Standard relating to general and board meeting [Section 118(10)]: Every
company shall observe secretarial standards with respect to general and Board meetings specified by the ICSI
constituted u/s 3 of the Company Secretaries Act, 1980, and approved as such by the Central Government.
In the context of this provision, observance of Secretarial Standard issued by the ICSI assumes special relevance
and companies will have to ensure that there is compliance with these standards on their part.
The ICSI has already issued the Secretarial Standards relating to Board and General Meeting.
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CHAPTER
18
VIRTUAL MEETINGS
Que. No. 1] Write a short note on: Virtual Meeting
Ans.: A meeting held totally by means of either Video conferencing or other audio-visual means is known as Virtual
Meeting. A virtual meeting is when people around the world, regardless of their location, use video, audio, and
text to link up online. Virtual meetings allow people to share information and data in real-time without being
physically located together. In virtual meeting there is no physical presence of participants and there is no
designated venue for the purpose of meetings. Participants located at different places participate in the meeting
either by teleconference or video conference or combination of them at predetermined time.
Virtual meetings are becoming an increasingly common aspect at corporate world when it comes to professional
communication and the way business are done, for most company's Virtual meetings is the fact of life. Companies
today operate across multiple time zones from different countries and continents.
Employees, Board Members, stakeholders and investors are not from any particular region, city or country. In fact
they are spread wide and far. By using virtual technology, it is possible to replace physical meetings which require
the presence of people at the designated place and time.
With rapid change in technology and wide spread of internet and audio and video combination, which is readily
available, affordable and reliable, many companies and organizations are adopting and favouring virtual meetings.
The use of audio and video conferences, webinars and web meetings via computers, telephones or other devices
is more frequent. The potential gains are in terms of reduced travel costs, time saving, efficiency improvements,
and less environmental impact in terms of savings on fuel and transport.
Virtual Meetings are held at a distance in real time basis with the help of digital technology. The meetings are
mainly (1) audio and/or video based, such as audio conferencing, video conferencing, and online meetings or
webinars, often they are supported by other forms like chat, white boards, document sharing, etc. (2) Audio
conferencing means conference calls with three or more participants, either by connecting the different
participants by using a conference phone, or both. (3) Video conferencing, a technology now a day commonly used
in board meetings.
Que. No. 2] Success of virtual meetings depends on technical equipment, the software used and trained
manpower which should work well and be operated with ease. Comment.
Ans.: Success of virtual meetings depends on technical equipment, the software used and trained manpower which
should work well and be operated with ease. Virtual Equipment should be simple and easy to use and understand
by the users with little instruction or training. The Commonly used software for Virtual meetings are Microsoft's
Skype for Business, Adobe's Connect, Google's Hangouts, or WebEx to name a few. The development of new
technologies such as VOIP telephony (voice over internet protocol, an example of which is Skype) and shared
computer screens. All the major providers provide for a website address where participants can click to join the
meeting. Hence a virtual meeting is a "room" set up online through a website host that allows people from
anywhere to "meet" with each other to share information and network in real-time.
As understood a meeting can take the form of audio, video, instant-message chat, and apps that can be shared
among attendees, such as for taking notes or polls. Virtual meetings can also be recorded so that attendees or
those who missed the meeting can review the meeting and its chat transcripts at a later date. A virtual meeting
space works through a Web browser plug-in and by a host's local or remote server.
Participants usually must log in, and they can see a list of other participants. Webcams are used for those
participating in video, and "Voice over Internet protocol," or VoIP, allows the audio to work.
Que. No. 3] Write a short note on: Brief Requirements for Virtual Meeting
Ans.:
♦ Meeting rooms
♦ Software, which can be either purchased or can be provided by vendor for a fee on yearly rental basis.
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♦ Hardware equipment like Monitor or LED screen, Webcams.
♦ High quality mike system.
♦ Projectors
♦ Document scanners.
♦ Leased Lines.
♦ High speed wireless internet.
♦ Recording & storage equipment for recording the proceeding and proper storage for future reference as may
be required under law.
♦ Trial runs before the meeting to ensure all the systems are working properly.
♦ Proper arrangements are made in the Meeting room.
A virtual meeting room is a unique identifier that allows a meeting organizer to invite attendees from disparate
geographical locations to collaborate in real time over the Internet. A virtual meeting room is also known as a
virtual meeting space.
Que. No. 4] State the provisions relating to holding of Board Meeting through video conferencing under the
The board of directors of Vedic Ltd. desirous of transacting certain matters through video conferencing, seek
your advice on the matters which cannot be dealt with through video conferencing. Advice the Board.
Ans.: Manner of participation in Board Meetings [Section 173(2)]: The participation of directors in a meeting of
the Board may be either in person (personally present) or through video conferencing or other audio visual means.
time.
Que. No. 5] XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they reside
in America. The company wants to convene its Board meeting in Mumbai but all the 5 directors are pre-occupied
and are not in a position to travel to India. Advice the company regarding conduct of such a Board meeting as
per provisions of the Companies Act, 2013 and relevant Rules. Will the same Rules or provisions be applicable in
case the company wants to approve annual financial statements in the Board meeting?
Ans.: As per Section 173(2), the participation of directors in a meeting of the Board may be either in person
(personally present) or through video conferencing or other audio visual means.
time.
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The company should also comply with the Rule 3 of the Companies (Meetings of Board and its Powers) Rules,
2014.
Thus, XYZ Ltd. can hold the meeting of its directors through video conferencing or other audio visual means.
However, if cannot pass motion relating to approval of the annual financial statements in such meeting.
Que. No. 6] You are the Company Secretary of Hi-Fi Ltd. Explain in detail to your company's Chairman the
procedure for conducting meetings of Board through video conferencing or other audio visual means.
Ans.: Procedure for conducting meetings of Board through video conferencing or other audio visual means [Rule
3 of the Companies (Meetings of Board and its Powers) Rules, 2014]: A company shall comply with the following
procedure, for convening and conducting the Board meetings through video conferencing or other audio visual
means.
(1) Every Company shall make necessary arrangements to avoid failure of video or audio visual connection.
(2) The Chairperson of the meeting and the Company Secretary, if any, shall take due and reasonable care -
(a) To safeguard the integrity of the meeting by ensuring sufficient security and identification procedures;
(b) To ensure availability of proper video conferencing or other audio visual equipment or facilities for providing
transmission of the communications for effective participation of the directors and other authorized participants
at the Board meeting;
(c) To record proceedings and prepare the minutes of the meeting;
(d) To store for safekeeping and marking the tape recordings or other electronic recording mechanism as part
of the records of the company at least before the time of completion of audit of that particular year.
(e) To ensure that no person other than the concerned director are attending or have access to the proceedings
of the meeting through video conferencing mode or other audio visual means; and
(f) To ensure that participants attending the meeting through audio visual means are able to hear and see the other
participants clearly during the course of the meeting: Provided that the persons, who are differently abled, may
make request to the Board to allow a person to accompany him,
(3) (a) The notice of the meeting shall be sent to all the directors in accordance with the provisions of
Section 173(3).
(b) The notice of the meeting shall inform the directors regarding the option available to them to participate
through video conferencing mode or other audio visual means, and shall provide all the necessary information to
enable the directors to participate through video conferencing mode or other audio visual means.
(c) A director intending to participate through video conferencing or audio visual means shall communicate his
intention to the Chairperson or the company secretary of the company.
(d) If the director intends to participate through video conferencing or other audio visual means, he shall give prior
intimation to that effect sufficiently in advance so that company is able to make suitable arrangements in this
behalf.
(e) Any director who intends to participate in the meeting through electronic mode may intimate about such
participation at the beginning of the calendar year and such declaration shall be valid for 1 year. However, such
declaration shall not debar him from participation in the meeting in person in which case he shall intimate the
company sufficiently in advance of his intention to participate in person.
(f) In the absence of any intimation, it shall be assumed that the director shall attend the meeting in person.
(4) At the commencement of the meeting, a roll call shall be taken by the Chairperson when every director
participating through video conferencing or other audio visual means shall state, for the record, the following:
(a) Name
(b) The location from where he is participating
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(c) That he has received the agenda and all the relevant material for the meeting
(d) That no one other than the concerned director is attending or having access to the proceedings of the
meeting at the location from where he is participating.
(5) After the roll call, the Chairperson or the Company Secretary shall inform the Board about the names of
persons other than the directors who are present for the said meeting at the request or with the permission of the
Chairperson and confirm that the required quorum is complete.
Explanation: A director participating in a meeting through video conferencing or other audio visual means shall be
counted for the purpose of quorum, unless he is to be excluded for any items of business under any provisions of
the Act or the rules.
The Chairperson shall ensure that the required quorum is present throughout the meeting.
(6) With respect to every meeting conducted through video conferencing or other audio visual means
authorized under these rules, the scheduled venue of the meeting as set forth in the notice convening the meeting,
shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting shall be
deemed to be made at such place.
(7) The statutory registers which are required to be placed in the Board meeting shall be placed at the scheduled
venue of the meeting and where such registers are required to be signed by the directors, the same shall be
deemed to'have been signed by the directors participating through electronic mode, if they have given their
consent to this effect and it is so recorded in the minutes of the meeting.
(8) Every participant shall identify himself for the record before speaking on any item of business on the agenda.
If a statement of a director in the meeting through video conferencing or other audio visual means is interrupted
or garbled, the Chairperson or Company Secretary shall request for a repeat or reiteration by the Director.
(9) If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the roll and note the
vote of each director who shall identify himself while casting his vote.
(10) From the commencement of the meeting and until the conclusion of such meeting, no person other than the
Chairperson, Directors, Company Secretary and any other person whose presence is required by the Board shall
be allowed access to the place where any director is attending the meeting either physically or through video
conferencing without the permission of the Board.
(11) At the end of discussion on each agenda item, the Chairperson of the meeting shall announce the summary
of the decision taken on such item along with names of the directors, if any, who dissented from the decision taken
by majority and the draft minutes so recorded shall be preserved by the company till the confirmation of the draft
minutes in accordance with clause (12).
The minutes shall disclose the particulars of the directors who attended the meeting through video conferencing
or other audio visual means.
(12) The draft minutes of the meeting shall be circulated among all the directors within 15 days of the meeting
either in writing or in electronic mode as may be decided by the Board.
Every director who attended the meeting, whether personally or through video conferencing or other audio visual
means, shall confirm or give his comments in writing, about the accuracy of recording of the proceedings of that
particular meeting in the draft minutes, within seven days or some reasonable time as decided by the Board, after
receipt of the draft minutes failing which his approval shall be presumed.
After completion of the meeting, the minutes shall be entered in the minute book as specified u/s 118 and signed
by the Chairperson.
Explanation: "Video conferencing or other audio visual means" means audio-visual electronic communication
facility employed which enables all the persons participating in a meeting to communicate concurrently with each
other without an intermediary and to participate effectively in the meeting.
Que. No. 7] Explain the provisions of the Secretarial Standard 1 - 'Meetings of the Board of Directors' relating to
notice and holding virtual meeting of board of directors.
Ans.: Various provisions of the SS-1 relating to 'Meetings of the Board of Directors' are as follows:
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♦ Notice shall be issued by the Company Secretary or where there is no Company Secretary, any Director or
any other person authorized by the Board for the purpose.
♦ The Notice shall specify the serial number, day, date, time and full address of the venue of the Meeting.
♦ Notice of the Meeting shall clearly mentio'n a venue, whether registered office or otherwise, to be the venue
of the Meeting and all the recordings of the proceedings of the Meeting, if conducted through Electronic Mode,
shall be deemed to be made at such place.
♦ The Notice shall inform the Directors about the option available to them to participate through Electronic
Mode and provide them all the necessary information.
♦ If a Director intends to participate through Electronic Mode, he shall give sufficient prior intimation to the
Chairman or the Company Secretary to enable them to make suitable arrangements in this behalf.
♦ The Director may intimate his intention of participation through Electronic Mode at the beginning of the
Calendar Year also, which shall be valid for such Calendar Year.
♦ The Notice shall also contain the contact number or e-mail address of the Chairman or the Company
Secretary or any other person authorized by the Board, to whom the Director shall confirm in this regard. In the
absence of an advance communication or confirmation from the Director as above, it shall be assumed that he will
attend the Meeting physically.
♦ Any Director may participate through Electronic Mode in a Meeting unless the Act or any other law
specifically prohibits such participation through Electronic Mode in respect of any item of business.
♦ Directors shall not participate through Electronic Mode in the discussion on certain restricted items. Such
restricted items of business include approval of the annual financial statement, Board's report, prospectus and
matters relating to amalgamation, merger, demerger, acquisition and takeover. Similarly, participation in the
discussion through Electronic Mode shall not be allowed in Meetings of the Audit Committee for consideration of
annual financial statement including consolidated financial statement, if any, to be approved by the Board.
♦ If the item of business is a related party transaction, then director shall not be present at the meeting,
whether physically or through Electronic Mode, during discussions and voting on such item.
♦ Directors participating through Electronic Mode in a Meeting shall be counted for the purpose of Quorum,
unless they are to be excluded for any items of business under the provisions of the Act or any other law.
♦ The attendance register of board meeting shall contain the following particulars:
Serial number and date of the Meeting; in case of a Committee Meeting name of the Committee; place of the
Meeting; time of the Meeting; names and signatures of the Directors, the Company Secretary and also of persons
attending the Meeting by invitation and their mode of presence, if participating through Electronic Mode.
♦ The attendance register shall be deemed to have been signed by the Directors participating through
Electronic Mode, if their attendance is recorded in the attendance register and authenticated by the Company
Secretary or where there is no Company Secretary, by the Chairman or by any other Director present at the
Meeting, if so authorized by the Chairman and the fact of such participation is also recorded in the Minutes.
♦ In case of Directors participating through Electronic Mode, the Chairman shall confirm the attendance of
such Directors. For this purpose, at the commencement of the Meeting, the Chairman shall take a roll call. The
Chairman or Company Secretary shall request the Director participating through Electronic Mode to state his full
name and location from where he is participating and shall record the same in the Minutes. The proceedings of
such Meetings shall be recorded through any electronic recording mechanism and the details of the venue, date
and time shall be mentioned.
♦ If the item of business is a related party transaction, the Chairman shall not be present at the Meeting,
whether physically or through Electronic Mode, during discussions and voting on such item.
♦ In case some of the Directors participate through Electronic Mode, the Chairman and the Company Secretary
shall take due and reasonable care to safeguard the integrity of the Meeting by ensuring sufficient security and
identification procedures to record proceedings and safe keeping of the recordings. No person other than the
Director concerned shall be allowed access to the proceedings of the Meeting where Director(s) participate
through Electronic Mode, except a Director who is differently abled, provided such Director requests the Board to
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allow a person to accompany him and ensures that such person maintains confidentiality of the matters discussed
at the Meeting.
♦ Minutes shall record the names of the Directors present physically or through Electronic Mode, the Company
Secretary who is in attendance at the Meeting and Invitees, if any, including Invitees for specific items.
♦ Minutes shall inter alia contain the following:
(a) The names of Directors present and their mode of attendance, if through Electronic Mode.
(b) In case of a Director participating through Electronic Mode, his particulars, the location from . where he
participated and wherever required, his consent to sign the statutory registers placed at the Meeting.
(c) The name of Company Secretary who is in attendance and Invitees, if any, for specific items and mode of
their attendance if through Electronic Mode.
Que. No. 8] Write a short note on: Virtual AGM/EGM
Ans.: Section 108 of the Companies Act, 2013 provides for Voting through electronic means. The Central
Government may prescribe the class or classes of companies and manner in which a member may exercise his right
to vote by the electronic means general meetings, particularly when large numbers of shareholders are involved,
can be very expensive and are not considered to be a cost-effective.
Virtual meetings of members have advantages for companies and their shareholders. When compared to couple
of decade back present-day shareholders are spread across the country and also in different countries and as the
AGMs can only conducted in the city or place in which the registered office of the company is located, it makes it
more difficult for the shareholders located in faraway locations and cities to attend the meetings as it involves lot
of travel time and cost. With less participation, the agenda items are often passed without any discussion with
fewer members. Virtual meetings will help in increasing shareholder participation as compared to physical
meetings because of improved access, shareholders who cannot attend in person due to location or other reasons
can attend virtually and do not have to incur the time and costs of travel to a physical meeting.
Similarly, companies may find virtual meetings help to achieve wider shareholders participation. Virtual annual
meetings offer benefits to both companies and shareholders. With companies and investors becoming increasingly
global, virtual meetings can save travel time and costs for shareholders, avoid traffic and other logistical delays and
be easier to schedule. It will also eliminate the costs of an in-person meeting, including
travel for shareholders and a company's directors and management, thereby allowing shareholders more time to
attend more meetings in which they hold shares, as well as minimizing the amount of time that directors and
management must spend at meetings. This in turn will increase the participation of shareholders who would
otherwise not attend the meetings.
Que. No. 9] Write a short note on: Advantages of Virtual AGM/EGM
Ans.: Advantages of Virtual AGM/EGM are as follows:
♦ Increased shareholder participation in meetings.
♦ Saving in travel time and cost of conducting meeting.
♦ Encourages more participation by investors across the world.
♦ Provides greater accessibility to shareholders who cannot be physically present due to distance.
♦ Enables institutional investors to attend more than one meeting in a day and protect shareholders interest.
♦ Reduce the cost of holding and conducting shareholder meeting, including the costs of the venue, stationary,
transport and refreshments.
♦ Saves time of the Company's personnel.
Que. No. 10] Write a short note on: Difficulties in holding Virtual Meetings of Members Ans.:
♦ Security of the systems used.
♦ Streaming with quality without interruption.
♦ Providing with secure login and shareholder authentication for attendance, with ease of access for
shareholders, and remote voting.
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♦ Combined registration, voting and reporting software.
♦ Customized instant results screen and detailed audit reporting.
♦ Data Security of Logins and Passwords.
♦ Allowing the shareholders, the choice of device.
♦ The technology used must give all shareholders a reasonable opportunity to participate.
♦ The technology must be secure and must provide reasonable measures for verifying/ validating those
allowed to attend and vote at the meeting.
♦ The company must provide a digital record of the meeting.
Que. No. 11] State the provisions relating to "voting through electronic means" of the Companies Act, 2013?
Ans.: Voting through electronic means [Section 108]: The Central Government may prescribe the class or classes
of companies and manner in which a member may exercise his right to vote by the electronic means.
Rule 20 of the Companies (Management & Administration) Rule, 2014 makes the following provisions in relation
to voting through electronic means:
Every listed company or a company having not less than 1,000 members, shall provide to its members facility to
vote on resolutions by electronic means.
A company which provides the facility to its members to exercise voting by electronic means shall comply with the
following procedure:
♦ The notice of the meeting shall be sent to all the members, directors and auditors of the company either:
- By registered post or speed post or
- Through electronic means, namely, registered E-mail ID of the recipient or
- By courier service
♦ The notice shall also be placed on the website of the company.
♦ The notice of the meeting shall clearly state —
- That the company is providing facility for voting by electronic means and the business may be transacted
through such voting.
- That the facility for voting, either through electronic voting system or ballot or polling paper shall also be
made available at the meeting and members attending the meeting who have not already cast their vote by remote
e-voting shall be able to exercise their right at the meeting
- That the members who have cast their vote by remote e-voting prior to the meeting may also attend the
meeting but shall not be entitled to cast their vote again
♦ The notice shall —
- Indicate the process and manner for voting by electronic means
- Indicate the time schedule including the time period during which the votes may be cast by remote e-voting
- Provide the details about the login ID
- Specify the process and manner for generating or receiving the password and for casting of vote in a secure
manner.
♦ The company shall cause a public notice by way of an advertisement to be published, immediately on
completion of dispatch of notices for the meeting at least 21 days before the date of general meeting, at least once
in a vernacular language newspaper and at least once in English language newspaper. Such newspaper
advertisement should contain the following matters:
- Statement that the business may be transacted through voting by electronic means
- The date and time of commencement of remote e-voting
- The date and time of end of remote e-voting
- Cut-off date
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- The manner in which persons who have acquired shares and become members of the company after the
dispatch of notice may obtain the login ID and password
- The statement that—
• Remote e-voting shall not be allowed beyond the said date and time
• The manner in which the company shall provide for voting by members present at the meeting and
• A member may participate in the general meeting even after exercising his right to vote through remote e-
voting but shall not be allowed to vote again in the meeting and
• A person whose name is recorded in the register of members or in the register of beneficial owners
maintained by the depositories as on the cut-off date only shall be entitled to avail the facility of remote e-voting
as well as voting in the general meeting
• Website address of the company, if any, and of the agency where notice of the meeting is displayed and
• Name, designation, address, email id and phone number of the person responsible to address the grievances
connected with facility for voting by electronic means:
♦ The facility for remote e-voting shall remain open for not less than three days and shall close a` 5.00 p.m. on
the date preceding the date of the general meeting.
♦ During the period when facility for remote e-voting is provided, the members of the company, holding shares
either in physical form or in dematerialized form, as on the cut-off date, may opt for remote e- voting. However,
once the vote on a resolution is cast by the member, he shall not be allowed to change it subsequently or cast the
vote again. A member may participate in the general meeting even after exercising his right to vote through remote
e-voting but shall not be allowed to vote again.
♦ At the end of the remote e-voting period, the facility shall forthwith be blocked. If a company opts to provide
the same electronic voting system as used during remote e-voting during the general meeting,
the said facility shall be in operation till all the resolutions are considered and voted upon in the meeting and may
be used for voting only by the members attending the meeting and who have not exercised theinright to vote
through remote e-voting.
♦ The Board of Directors shall appoint one or more scrutinizer, who may be practicing CA, CWA, or CS or an
Advocate, or any other person who is not in employment of the company and is a person of repute who, in the
opinion of the Board can scrutinize the voting and remote e-voting process in a fair and transparent manner. The
scrutinizer so appointed may take assistance of a person who is not in employment of the company and who is
well-versed with the electronic voting system.
♦ The scrutinizer shall be willing to be appointed and be available for the purpose of ascertaining the requisite
majority.
♦ The Chairman shall, at the general meeting, at the end of discussion on the resolutions on which voting is to
be held, allow voting, with the assistance of scrutinizer, by use of ballot or polling paper or by using an electronic
voting system for all those members who are present at the general meeting but have not cast their votes by
availing the remote e-voting facility.
♦ The scrutinizer shall, immediately after the conclusion of voting at the general meeting, first count the votes
cast at the meeting, thereafter unblock the votes cast through remote e-voting in the presence of at leas` 2
witnesses not in the employment of the company and make, not later than 3 days of conclusion of the meeting, a
consolidated scrutinizer's report of the total votes cast in favour or against, to the Chairman or a person authorized
by him in writing who shall countersign the same. The Chairman or a person authorized by him in writing shall
declare the result of the voting forthwith. The manner in which members have cast their votes, that is, affirming
or negating the resolution, shall remain secret and not available to the Chairman, Scrutinizer or any other person
till the votes are cast in the meeting.
♦ For the purpose of ensuring that members who have cast their votes through remote e-voting do not vote
again at the general meeting, the scrutinizer shall have access, after the closure of period for remote e-voting and
before the start of general meeting, to details relating to members, such as their names, folios, number of shares
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held and such other information that the scrutinizer may require, who have cast votes through remote e-voting
but not the manner in which they have cast their votes.
♦ The scrutinizer shall maintain a register either manually or electronically to record the assent or dissent
received, mentioning the particulars of name, address, folio number or client ID of the members, number of shares
held by them, nominal value of such shares and whether the shares have differential voting rights.
♦ The register and all other papers relating to voting by electronic means shall remain in the safe custody of
the scrutinizer until the Chairman considers, approves and signs the minutes and thereafter, the scrutinizer shall
hand over the register and other related papers to the company.
♦ The results declared along with the report of the scrutinizer shall be placed on the website of the company,
and on the website of the agency immediately after the result is declared by the Chairman. In case of companies
whose equity shares are listed on a recognized stock exchange, the company shall, simultaneously, forward the
results to the concerned stock exchange or exchanges where its equity shares are listed and such stock exchange
or exchanges shall place the results on its or their website.
♦ Subject to receipt of requisite number of votes, the resolution shall be deemed to be passed on the date of
the relevant general meeting.
♦ A resolution proposed to be considered through voting by electronic means shall not be withdrawn.
Que. No. 12] PQR Ltd. is an unlisted company and has 400 shareholders in all. The shareholders of the company
propose voting by electronic mode. Chairman of the company rej ected the shareholders' proposal. Explaining
the provisions of the Companies Act, 2013, examine the validity of rejection of the shareholders' proposal by
the Chairman. CS (Executive) - June 2015 (4 Marks)
Ans.: As per Rule 20 of the Companies (Management & Administration) Rule, 2014, every listed company or a
company having not less than 1,000 members, shall provide to its members facility to vote on resolutions by
electronic means. In given case PQR Ltd. (an unlisted company) has only 400 shareholders. Thus, it not mandatory
for the PQR Ltd. to conduct voting by electronic voting system.
Que. No. 13] Distinguish between: 'E-voting' & 'Voting by show of hands'
Ans.: Following are the main points of difference between 'E-voting' & 'voting by show of hands':
Meaning Electronic voting is a form of machine based Vote given by members personally presenting
voting in which voters make their selections at the meeting by raising their hands is known
with the aid of machine or computer. as voting by show of hands.
Applicability The Central Government may prescribe the At any general meeting, a resolution put to the
class or classes of companies and manner in vote of the meeting shall in the first instance be
which a member may exercise his right to vote decided on a show of hands.
by the electronic means.
Section Section 108 of the Companies Act, 2013 makes Section 107 of the Companies Act, 2013 makes
provisions relating to e-voting. provisions relating to show of hands.
Mandatory Every listed company or a company having not Voting by show of hands can be adopted by any
less than 1,000 members shall provide to its company and it is optional.
members facility to vote on resolutions by
electronic means.
Physical Physical presence of members at meeting is Physical presence of members at meeting is

presence not necessary in case of e-voting. necessary in case of voting by show of hands:
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316
CHAPTER
19
APPOINTMENT S REMUNERATION OF KEY MANAGERIAL PERSONNEL
KEY MANAGERIAL PERSONNEL
Que. No. 1] Explain the meaning of the term 'Key Managerial Personnel' in relation to company as introduced
by the Companies Act, 2013. CS (Executive) - June 2015 (2 Marks)
Ans.: Key Managerial Personnel [Section 2(51)]: Key managerial personnel means -
(i) The Chief Executive Officer or the Managing Director or the Manager
(ii) The Company Secretary
(iii) The Whole-time director
(iv) The Chief Financial Officer
(v) Such other officer, not more than one level below the directors who is in whole-time employment,
designated as key managerial personnel by the Board
(vi) Other prescribed officers.
Que. No. 2] Define the following terms as defined in Companies Act, 2013.
(1) Manager
(2) Managing Director
(3) Whole-time director
(4) Chief Executive Officer
(5) Chief Financial Officer
Ans.:
(1) Manager [Section 2(53)]: Manager means an individual who, subject to the superintendence, control and
direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of
a company, and includes a director or any other person occupying the position of a manager, by whatever name
called, whether under a contract of service or not.
(2) Managing Director [Section 2(54)]: Managing director means a director who, by virtue of the articles of a
company or an agreement with the company or a resolution passed in its general meeting, or by its Board of
Directors, is entrusted with substantial powers of management of the affairs of the company and includes a
director occupying the position of managing director, by whatever name called.
Explanation: The power to do administrative acts of a routine nature when so authorized by the Board such as the
power to affix the common seal of the company to any document or to draw and endorse any cheque on the
account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate
of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial
powers of management
(3) Whole-time director [Section 2(94)]: Whole-time director includes a director in the whole-time employment
of the company.
(4) Chief Executive Officer [Section 2(18)]: Chief Executive Officer means an officer of a company, who has been
designated as such by it.
(5) Chief Financial Officer [Section 2(19)]: Chief Financial Officer means a person appointed as the Chief
Financial Officer of a company.
A company, instead of appointing MD orWTD, can appoint CEO or Manager. The distinction is that MD or WTD
should be on board of directors, while the CEO or Manager need not be director on the board.
Que. No. 3] Distinguish between: Managing Director and Whole Time Director
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Ans.: Following are the main points of distinction between managing director & whole time director:
Points Managing Director Whole Time Director
Meaning Managing Director means a director who is Whole-time director includes a director in the
entrusted with substantial powers of whole-time employment of the company.
management. [Section 2(54)] [Section 2(94)]
No. of A person can be managing director in one, and A person cannot be whole time director in
companies of not more than one, other company. [Section more than one company.
202(3)]
Appointment A managing director and manager cannot be A whole time director and manager can be
with Manager appointed simultaneously. appointed simultaneously.
Que. No. 4] Distinguish between: Whole time chairman and Part time chairman
Ans.: In India, we have Boards, which are chaired by managing directors, who are known as chairman-cum-
managing director (CMD). We have also Boards, which are chaired by directors, who are not whole-time directors.
A chairman-cum-managing director (CMD) is sometimes called a whole-time chairman whereas a director, who is
not a whole-time director of the company, is called a part-time chairman. Even if a managing director is chairman-
cum-managing director of the company, he acts as chairman of the meetings of the Board of directors only when
they are held. During the intervals, he occupies the chair of the managing director. Strictly speaking therefore, a
chairman is never a whole-time chairman. He is always a part-time chairman. The term whole-time chairman thus
seems to be a misnomer.
Que. No. 5] Distinguish between: 'Key-managerial personnel' and 'Managing Director'
Ans.: Following are the main points of difference between 'key managerial personnel' and 'managing director':
Points Key Managerial Personnel Managing Director
Meaning Key managerial personnel means - Managing director means a director who, by
(i) The Chief Executive Officer or the Managing virtue of the articles of a company or an
Director or the Manager agreement with the company or a resolution
passed in its general meeting, or by its Board of
(ii) The Company Secretary
Directors, is entrusted with substantial powers
(iii) The whole-time director of management of the affairs of the company
(iv) The Chief Financial Officer and includes a director occupying the position
(v) Such other officer, not more than one of managing director, by whatever name
level below the directors who is in whole-time called.
employment, designated as key managerial
personnel by the Board
(vi) Other prescribed officers.
Power Many powers as delegated by management/ Managing director has substantial powers of
board of directors can be exercised by the key management of the affairs of the company.
managerial personnel.
Points Key Managerial Personnel Managing Director
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Director Every key managerial personnel did not to be Managing director is essentially a director. If
director. person appointed as 'managing director' cease
to be 'director' he also ceases to be managing
director.
Position Every key managerial personnel are not a Every managing director is key managerial
managing director. personnel.
Appointment A company can appoint or re-appoint any A company shall not appoint or re-appoint any
person as its KMP except MD for a term person as its Managing Director for a term
exceeding 5 years at a time. exceeding 5 years at a time. [Section 196(2)]
Procedure for Every whole-time key managerial personnel of In case of appointment of MD in addition to
appointment a company shall be appointed by means of a approval of board at its meeting, approval of
resolution of the Board containing the terms shareholders at general meeting is also
and conditions of the appointment including necessary.
the remuneration.
Que. No. 6] Whether a person initially appointed as additional director could continue as managing/ whole-time
director? CS (Inter) - Dec 2000 (8 Marks)
Ans.: The terms "director" and "managing director" are defined in the Act. On the face of it, a managing director
has first to be a director. So long as he is a director and is also appointed as managing director, he continues as
managing director.
An additional director can be appointed by the board of directors of a company u/s 161(1). Such a person continues
to be the additional director till the next AGM. As soon as the AGM is held, he ceases to be the additional director.
If such a person while he was the additional director of a company had been appointed as managing director ceases
to be a director, he also ceases to be the managing director, the latter appointment also ceases simultaneously
with his ceaser of directorship at the commencement of the AGM. However, if such a person is re-elected as a full-
fledged director at the AGM and thereby he continues as a director of the company, he shall continue as a
managing director also for the period for which he is so elected by the AGM.
Que. No. 7] Mr. Atul Rastogi, the Managing Director of ABC Limited has resigned from the Managing Directorship
of the company. He, however, wants to continue as a director in the company. Referring to the provisions of the
Companies Act, 2013, state whether Mr. Atul can continue as a director in the company.
Ans.: The terms "director" and "managing director" are defined under the Companies Act, 2013. On the face of it,
a managing director has first to be a director. So long as he is a director and is also appointed as managing director,
he continues as managing director.
If such person resigns from his appointment as 'managing director' he continues to be 'director'.
Thus, Mr. Atul Rastogi, the Managing Director of ABC Ltd. can continue as director even he resigns from his
Managing Directorship.
Que. No. 8] Can company appoint at the same time a Managing Director and a Manager?
Ans.: As per Section 196(1), a company shall not appoint or employ at the same time a Managing Director and a
Manager.
Que. No. 9] For what period a company can appoint the Managing Director and the Manager?
Ans.: As per Section 196(2), a company shall not appoint or re-appoint any person as its Managing Director, Whole-
time Director or Manager for a term exceeding 5 years at a time.
Reappointment: Re-appointment of the Managing Director, Whole-time Director and a Manager shall not be made
earlier than 1 year before the expiry of his term.
319
Que. No. 10] The Managing Director of a company filed a suit on behalf of the company against the tenants and
the trial court granted decree directing the tenants to vacate and deliver possession of the tenanted premises.
The tenants filed an application and contended that in the instant case, the managing director, who had filed
suit, had no proper authorization from the board of directors. Discuss with reference to decided case whether
contention of tenant is correct?
Ans.: The facts of the given case are similar to Wasava Tyres v. Printers (Mysore) Ltd. (2008) 86 SCL171 (Kar). In
this case the managing director of a company filed a suit on behalf of the company against the tenants and the
trial court granted decree directing the tenants to vacate and deliver possession of the tenanted premises. The
court also directed payment of damages and, in default, to pay interest. The tenants filed an application and
contended that in the instant case, the managing director, who had filed suit, had no proper authorization from
the board of directors. The Court dismissed the application of the tenants and held that the words 'substantial
powers of management' specifically excludes certain acts from its purview.
Therefore, except the excluded acts, the managing director has power and privilege of conducting the business of
the company in accordance with the memorandum and articles of association of the company. The institution of
the suit on behalf of the company by the managing director is deemed to be within the meaning of "substantial
powers of management", since such a power is necessary and incidental to manage the day-to day affairs and
business of the company. Therefore, the suit instituted by the managing director is deemed to be within his power
and authority. The suit was obviously filed for the benefit of the company. In that view of the matter, the
contention that the managing director had no authority to file a suit is untenable.
Negligible
Que. No. 11] Write a short note on: Disqualification of Managing Director, Whole-time Director & Manager
Ans.: Disqualification of Managing Director and Manager [Section 196(3)]: A company shall not appoint or
continue the employment of following person as Managing Director, Whole-time Director or Manager -
(a) A person who is below the age of 21 years or has attained the age of 75 years. However, the appointment
of a person who has attained the age of 70 years may be made by passing a special resolution in which case the
explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such
person.
(b) A person who is an un-discharged insolvent or has at any time been adjudged as an insolvent.
(c) A person who has at any time suspended payment to his creditors or makes, or has at any time made a
composition with them.
(d) A person who has at any time been convicted by a Court of an offence and sentenced for a period of more
than 6 months.
Que. No. 12] State the provisions of the Section 197 of the Companies Act, 2013 relating to "Overall maximum
managerial remuneration and managerial remuneration in case of absence or inadequacy of profits".
Write short notes on: Remuneration to directors CS (Inter) - Dec 2000 (5 Marks)
Ans.: Section 197 is amended by the Companies (Amendment) Act, 2017 and the requirement as to previous
approval of Cen tral Government for payment of managerial remuneration has been done away. Thus, companies
can pay remuneration to managerial personnel as per limit laid down in section and in case above limit,
remuneration is payable by complying with the conditions laid down in this Section and Schedule V. For paying
excess remuneration henceforth no prior approval of Central Government is necessary.
Overall maximum managerial remuneration [Section 197(1)]: Total managerial remuneration payable by a public
company, to its directors in respect of any financial year shall not exceed 11% of the net profits. Net profit for this
purpose will be calculated as per Section 198.
However, the company in general meeting may authorize the payment of remuneration exceeding 11% of the net
profits, subject to the provisions of Schedule V.
Limit of 11% of net -profit for remuneration is applicable for public companies only. Thus, private company and OPC
can pay any remuneration without any limit.
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Maximum remuneration to managing director or whole-time director or manager: Except with the approval of
the company in general meeting by a special resolution the remuneration payable to any one managing director;
or whole-time director or manager shall not exceed 5% of the net profits and if there is more than one such director
remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.
However, where any term loan of any bank or public financial institution is subsisting or the company has defaulted
in payment of dues to non-convertible debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor,
as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.
Maximum remuneration to part-time director (non-executive director): Except with the approval of the company
in general meeting the remuneration payable to part-time director (non-executive director) shall not exceed -
(a) 1% of the net profits, if there is a managing or whole-time director or manager
(b) 3% of the net profits in any other case.
Summary of different limits based on net profits of the company is given below:
Managerial personnel % of net profits
Overall (excluding fees for attending meetings) 11%
If there is one managerial personnel 5%
If there are more than one managerial personnel 10%
Remuneration to part-time directors:
(a) If there is no managing director, whole-time director or manager 3%
(b) If there is a managing director or whole-time director_ 1%
Sitting fee not to be included in remuneration [Section 197(2)]: The percentages aforesaid shall be exclusive of
any sitting fees payable to directors for attending the board meetings.
Remuneration in case the company has no profits or its profits are inadequate [Section 197(3)]: If in any
financial year, a company has no profits or its profits are inadequate, the company can pay remuneration to
managing or whole-time director or manager in accordance with the provisions of Schedule V only.
Remuneration for other services not be included in remuneration of directors [Section 197 (4)]: The
remuneration payable to the directors of a company in any other capacity shall also be included in 'remuneration
payable to directors' under the provisions of Section 197(1).
However, any remuneration for services rendered by director in other capacity shall not be so included if -
(a) The services rendered are of a professional nature
(b) If company is required to form the Nomination & Remuneration Committee, then such committee is of the
opinion that the director possesses the requisite qualification for the practice of the profession for which additional
remuneration is payable.
Judicial View:
Guarantee Commission received by the director is for personal liability which the director undertakes. Therefore,
guarantee commission is not remuneration within the meaning of Section 309. [Suessen Textile Bearings Ltd v.
Union of India, [1984] 55 Com Cases 492 (Delhi)]
Mode of payment of remuneration [Section 197(6)]: A director or manager may be paid remuneration either by
way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and
partly by the other.
Remuneration to an independent director [Section 197(7)]: An independent director may receive remuneration
by way of -
(a) Sitting fees
(b) Reimbursement of expenses for participation in the board and other meetings
(c) Profit related commission atm`ved bv the members.
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However, an independent director shall not be entitled to any stock option.
Computation of net profit for the purpose of managerial remuneration [Section 197(8)]: The net profits for the
purposes of managerial remuneration shall be computed as per Section 198.
Refund of excess remuneration [Section 197(9)]: If any director draws or receives, directly or indirectly, by way of
remuneration any such sums in excess of the limit prescribed by this section or without approval required under
this section, he shall refund such sums to the company, within 2 years or such lesser period as may be allowed by
the company, and until such sum is refunded, hold it in trust for the company.
Company cannot waive the excess remuneration paid to managerial person [Section 197(10)]: The company shall
not waive the recovery of any sum refundable by managerial person to unless approved by the company by special
resolution within 2 years from the date the sum becomes refundable.
However, where any term loan of any bank or public financial institution is subsisting or the company has defaulted
in payment of dues to non-convertible debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor,
as the case may be, shall be obtained by the company before obtaining approval of such waiyer
Increase in remuneration to be in accordance with Schedule V: If company pays remuneration to managerial
personnel as per Schedule V due to no profits or inadequate profits, then subsequent increase in remuneration
should also comply provisions of Schedule V and such remuneration should be within the limits laid down by the
Schedule V.
Disclosure in board's report [Section 197(12)]: Every listed company shall disclose in the Board's report, the ratio
of the remuneration of each director to the median employee's remuneration and such other details as may be
prescribed.
Insurance premium not be part of managerial remuneration [Section 197(13)]: A company may take insurance
on behalf of its MD, WTD, Manager, CEO, CFO or CS for indemnifying any of them against any liability in respect of
any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty. The premium
paid on such insurance shall not be treated as part of the managerial remuneration.
However, if such person is proved to be guilty, the premium paid on insurance shall be treated as part of the
remuneration.
Receipt of remuneration from holding or subsidiary company [Section 197(14)]: A Managing Director or Whole-
time director of the company can receive any remuneration or commission from any holding company or subsidiary
company. However, company should make disclosure of such remuneration or commission in Board's Report.
Penalty [Section 197(15)]: If any person contravenes the provisions of Section 197, he shall be punishable with
fine which shall not be less than ` 1,00,000 but which may extend to ` 5,00,000.
Reporting by Auditor [Section 197(16)]: The auditor of the company shall make a statement in his report as to
whether the remuneration paid by the company to its directors is in accordance with the provisions of this section,
whether remuneration paid to any director is in excess of the limit laid down under this section and give such other
details as may be prescribed.
"Net Profit" for the purpose of managerial remuneration has to be calculated as per Section 198 of the Companies
Act, 2013.
Que. No. 13] In the context of managerial remuneration, explain what does the expression 'inadequate profit'
mean. CS (Inter) - Dec 2006 (5 Marks)
Ans.: As per the Companies Act, 2013 remuneration payable to managing director or whole time director or shall
not exceed 5% of net profit and if there is more than one such person remuneration shall not exceed 10% of the
net profits to all such directors and manager taken together. In case remuneration to be given director is greater
than 5% of the net profits then it is said that profit is inadequate.
Example:
Remuneration as per agreement with MD = ` 2,00,000 p.m. i.e. ` 24,00,000 annually.
Profit as per Section 198 of the Companies Act, 2013 = ` 4,50,00,000.
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Maximum remuneration payable to MD as per Section 197(1) = 4,50,00,000 x 5% = ` 22,50,000.
As maximum remuneration payable to MD as per Section 197(1) is less than remuneration payable to him as per
agreement, profit is said to be inadequate.
Remuneration in case the company has no profits or its profits are inadequate [Section 197(3)]: If in any
financial year, a company has no profits or its profits are inadequate, the company can pay remuneration to
managing or whole-time director or manager in accordance with the provisions of Schedule V.
Que. No. 14] Prudent Ltd. is paying remuneration to its non-executive directors in the form of commission at the
rate of 1% of the net profits of the company distributed equally among all the non-executive directors. The
company is providing depreciation as per Schedule II to the Companies Act, 2013. The company seeks your advice
in respect of following:
(i) Whether is it necessary to make adjustment in respect of depreciation for the purpose of arriving at the net
profit of the company to determine the quantum of remuneration payable to its nonexecutive directors?
(ii) Is it possible to pay remuneration to non-executive director besides sitting fees in the event of loss in a
financial year? CS (Inter) - Dec 2004 (5 Marks)
Ans.: Keeping in view the provisions of the Companies Act, 2013 answers to given problem is as follows:
(l) "Net Profit" for the purpose of managerial remuneration has to be calculated as per Section 198 of the
Companies Act, 2013. As per said Section 198, depreciation is required to be deducted for calculation of net profit
for the purpose of managerial remuneration.
Thus, it is necessary for the Prudent Ltd. to make adjustment in respect of depreciation for the purpose of arriving
at the net profit of the company to determine the quantum of remuneration payable to its non-executive directors
(ii) As per Section 197(1), except with the approval of the company in general meeting the remuneration payable
to part-time director (non-executive director) shall not exceed -
(a) 1% of the net profits, if there is a managing or whole-time director or manager
(b) 3% of the net profits in any other case.
Thus, in the event of loss, remuneration to non-executive directors can be paid only after obtaining approval of
shareholder in general meeting.
Que. No. 15] A Managing Director of a company stood as surety for the repayment of loan taken by it for which
he was paid guarantee commission. Does this commission amount to managerial remuneration? Support your
answer with decided case law, if any. CS (Inter) - June 2009 (5 Marks)
Ans.: Guarantee commission received by the director is for personal liability which the director undertakes.
Therefore, guarantee commission is not remuneration within the meaning of Section 197 of the Companies Act,
2013. [Suessen Textile Bearings Ltd v. Union of India, [1984] 55 Com Cases 492 (Delhi)]
Que. No. 16] What are the provisions relating to payment of sitting fee to the director for attending board
meetings? CS (Inter) - Dec 2000 (4 Marks) * 1
Ans.: Sitting Fees [Section 197(5)]: A director may receive remuneration by way of fee for attending meetings of
the Board or Committee or for any other purpose whatsoever as may be decided by the Board. However, the
amount of such fees shall not exceed the amount as may be prescribed.
Rule 4 of the Companies (Appointment & Remuneration of Managerial personnel) Rules, 2014 makes following
provisions in relation to payment of sitting fees:
(1) A company may pay a sitting fee to a director for attending meetings of the Board or committees thereof.
(2) Amount of sitting fee shall be such sum as may be decided by the Board of directors.
(3) Amount of sitting fee shall not exceed ` 1,00,000 per meeting.
(4) Amount of sitting fee payable to Independent Directors and Women Directors shall not be less than the
sitting fee payable to other directors.
Important Points:
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♦ The Companies Act, 1956 did not make any provision for any sitting fees for attending general meeting. Now
Companies Act, 2013 makes specific provision for payment of sitting fees for attending meeting for any other
purpose.
♦ Sitting fees can be paid to directors even if company is making losses.
♦ A managing director or manager is not entitled to sitting fees. If sitting fee is paid to them it is subject limit
of managerial remuneration as per Section 197 read with Schedule V.
♦ Where the articles contain a provision identical with Article 61(ii) of Table F, the directors may be paid
travelling, hotel or other expenses incurred by them in attending meetings of the board or any committee thereof
or general meetings of the company or in connection with the business of the company.
♦ Whether a director attending the Board meetings of two or three companies on the same day and in the
same building was entitled to draw travelling allowance from one of them only or from all the companies provided
amount does not exceed the expenses actually incurred.
Que. No. 17] Abhay is director in two companies - Goodluck India Ltd. and Lucky Winners India Ltd. Abhay
attended Board meetings of these two companies on 22nd August, 2015 in the same building 'Welcome House'
a` 2 p.m. and 4 p.m. respectively.
(i) Can Abhay draw travelling allowance from both the companies?
(ii) Is he entitled to receive sitting fees fully from both the companies?
Ans.: As per Section 197(5), a director may receive remuneration by way of fee for attending meetings of the Board
or Committee or for any other purpose whatsoever as may be decided by the Board.
Where the article contain a provision identical with Article 61 (ii) of Table F, the directors may be paid travelling,
hotel or other expenses incurred by them in attending meetings of the board or any committee thereof or general
meetings of the company or in connection with the business of the company.
In view of above:
- Abhay can draw travelling allowance from one of the company only or from both the companies provided
amount does not exceed the expenses actually incurred.
- Abhay is entitled to sitting fee fully from both the companies.
Que. No. 18] An article of association of a company has put a cap of ` 30,000 on sitting fee. There is a proposal
to increase the sitting fee from present amount of ` 30,000 to ` 75,000. Advise the company.
Ans.: As per Section 197(5), a director may receive remuneration by way of fee for attending meetings of the Board
or Committee or for any other purpose whatsoever as may be decided by the Board.
Companies will have discretion to pay such amount by way of sitting fee as may be considered appropriate within
ceiling of Rule 4 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014.
As per Rule 4, amount of sitting fee shall not exceed ` 1,00,000 per meeting.
In given case since the article of the company has put a cap of ` 30,000, so article will be required to be altered by
passing special resolution.
Que. No. 19] Richie, the Managing Director of Prosperous Ltd. wants to get sitting fees for attending board
meeting over and above his salary. Is this legally permissible? CS (Inter) - Dec 2001 (3 Marks)
Ans.: A managing director is expected to devote his whole time to the affairs of the company. Attending the board
meeting is part of his duties. As such question of payment of sitting fees to a managing director would not arise.
But, if company chooses to pay him sitting fees it can do so provided the remuneration and sitting fees together
do not exceed 5% of net profit.
Que. No. 20] Suresh, a solicitor, is appointed as director on the Board of Sam Organic Ltd. The company has
obtained legal opinion from Suresh and paid a fee of ` 5 lakh during the financial year 2014 - 2015. Auditor has
raised an objection that fee payable to Suresh exceeds the limit prescribed and hence payment made to him is
illegal. Therefore, the company should take steps to recover the same from Suresh. Keeping in view the
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provisions of the Companies Act, 2013, give your opinion on the objection raised by the auditor.
Ans.: As per Section 197(4), the remuneration payable to the directors of a company any other capacity shall also
be included in 'remuneration payable to directors' under the provisions of Section 197(1).
However, any remuneration for services rendered by any such director in other capacity shall not be so included if
-
In view of above, objection raised by auditor that fee payable to Suresh exceeds the prescribed limit and hence
payment made .to him is illegal is incorrect. Therefore, the company should not take steps to recover the same
from Suresh.
Que. No. 21] Heal Ltd. owns a chain of hospitals in Mumbai. Dr. Aman, a practicing surgeon, has been appointed
by the company as its non-executive ordinary director and wants to pay him fees on case-to-case basis for
surgeries performed by him on patients at hospital. Advise the company, whether payment of such fees to him
would amount to payment of managerial remuneration to a director under the Companies Act, 2013.
Ans.: As per Section 197(4), the remuneration payable to the directors of a company any other capacity shall also
be included in 'remuneration payable to directors' under the provisions of Section 197(1).
However, any remuneration for services rendered by director in other capacity shall not be so included if -
In view of above if, Heal Ltd. can pay fees to Dr. Aman for his professional service for surgeries performed by him
on patients at hospital if Nomination & Remuneration Committee is of the opinion that the director possesses the
requisite qualification for the practice of the profession for which additional remuneration is payable.
Que. No. 22] It has been found that Mrs. Shweta, director of a company, has drawn remuneration in excess of
the prescribed limits. The Chief Financial Officer of the company has sought your advice in the matter.
Ans.: Refund of excess remuneration [Section 197(9)]: If any director draws or receives, directly or indirectly, by
way of remuneration in excess of the limit prescribed or without the prior sanction of the Central Government, he
shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.
Company cannot waive the excess remuneration paid to managerial person [Section 197(10)]: The company shall
not waive the recovery of any sum refundable by managerial person to unless permitted by the Central
Government.
Penalty [Section 197(15)]: If any person contravenes the provisions of Section 197, he shall be punishable with
fine which shall not be less than ` 1,00,000 but which may extend to ` 5,00,000.
Thus, Mrs. Shweta cannot keep the excess remuneration. She shall refund such excess remuneration to company.
Until such refund is made, she shall hold it in trust for the company. Further, company cannot waive the recovery
of excess remuneration unless the Central Government permits the waiver of recovery of excess remuneration.
Que. No. 23] State the provisions of the Part I of the Schedule V of the Companies Act, 2013 relating to
appointment of the Managing Director, Whole-time Director or Manager.
Ans.: Appointment of the Managing Director, Whole-time Director or Manager [Section 196(4)]: Subject to the
provisions of Section 197 and Schedule V, Managing Director, Whole-time Director or Manager shall be appointed
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and the terms and conditions of such appointment and remuneration payable be approved at board meeting. Such
appointment shall be subject to approval by a resolution at the next general meeting of the company.
Such appointment also requires prior approval of the Central Government in case appointment is at variance to
the conditions specified in Part-I of Schedule V.
Notice of meeting to contain certain disclosure: A notice convening Board or general meeting for considering
appointment of the Managing Director, Whole-time Director or Manager shall include the terms and conditions of
such appointment, remuneration payable and such other matters including interest, of a director or directors in
such appointments, if any.
Filling of Return with ROC: A return in Form MR-2 shall be filed within 60 days of such appointment with the
Registrar. [Rule 7 of the Companies (Appointment & Remuneration of Managerial Personnel) Rule, 2014]
Validity of acts where appointment is not approved at general meeting: Where an appointment of a managing
director, whole-time director or manager is not approved by the company at a general meeting, any act done by
him before such approval shall not be deemed to be invalid.
Que. No. 24] State the various eligibility criteria prescribed under the Schedule V of the Companies Act, 2013 for
the appointment of Managing Director, Whole-time Director or Manager?
Ans.: Conditions to be fulfilled for the appointment of a managing or whole-time director or a manager without
the approval of the central government appointments [Part I of the Schedule V]: A person shall be eligible for
appointment as a managing or whole-time director or a manager (hereinafter referred to as 'managerial person')
of a company only if satisfies the following conditions, namely:
(a) He had not been sentenced to imprisonment for any period, or to a fine exceeding ` 1,000, for the conviction
of an offence under any of the following Acts, namely -
- The Indian Stamp Act, 1899
- The Central Excise Act, 1944
- The Industries (Development & Regulation) Act, 1951
- The Prevention of Food Adulteration Act, 1954
- The Essential Commodities Act, 1955
- The Companies Act, 2013 or any previous company law
- The Securities Contracts (Regulation) Act, 1956
- The Wealth-tax Act, 1957
- The Income-tax Act, 1961
- The Customs Act, 1962
- The Competition Act, 2002
- The Foreign Exchange Management Act, 1999
- The Sick Industrial Companies (Special Provisions) Act, 1985
- The Securities and Exchange Board of India Act, 1992
- The Foreign Trade (Development and Regulation) Act, 1922
- The Prevention of Money-Laundering Act, 2002 (15 of 2003);
(b) He had not been detained for any period under the Conservation of Foreign Exchange & Prevention of
Smuggling Activities Act, 1974.
However, where the Central Government has given its approval to the appointment of a person convicted or
detained under clauses (a) & (b) no further approval of the Central Government shall be necessary for the
subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.
(c) He has completed the age of 21 years and has not attained the age of 70 years.
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However, where he has attained the age of 70 years and where his appointment is approved by a special resolution
passed by the company in general meeting, no further approval of the Central Government shall be necessary for
such appointment.
(d) Where he is a managerial person in more than one company, he draws remuneration from one or more
companies subject to the ceiling provided in Section V of Part II of Schedule V.
(e) He is resident of India.
Explanation I: Resident in India includes a person who has been staying in India for a continuous period of not less
than 12 months immediately preceding the date of his appointment as a managerial person and who has come to
stay in India, -
(i) for taking up employment in India or
(ii) for carrying on a business or vacation in India.
Explanation II: This condition shall not apply to the companies in SEZ as notified by Department of Commerce from
time to time. Provided that a person, being a non-resident in India shall enter India only after obtaining a proper
Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to
furnish, along with the visa application form, profile of the company, the principal employer and terms and
conditions of such person's appointment.
Que. No. 25] State the provisions of the Part II of the Schedule V of the Companies Act, 2013 relating to
remuneration payable to the Managing Director, Whole-time Director or Manager.
Ans.: Remuneration of managerial personnel [Part II of the Schedule V]:
Section I - Remuneration payable by companies having profits: A company having profits in a financial year may
pay remuneration to a managerial person or persons not exceeding the limits specified in Section 197.
Section II - Remuneration payable by companies having no profit or inadequate profit without Central
Government approval: Where in any financial year during the currency of tenure of a managerial person, a
company has no profits or its profits are inadequate, it may, without Central Government approval, pay
remuneration to the managerial person not exceeding the higher of the limits under (A) and (B) given below:
(A) Remuneration based on effective capital:
Where the effective capital is Limit of yearly remuneration payable shall not exceed
(?)
Negative or less than 5 Crores 60 Lakhs
5 crores and above but less than 100 Crores 84 Lakhs
100 crores and above but less than 250 Crores 120 Lakhs
250 crores and above 120 lakhs plus 0.01% of the effective capital in excess of
` 250 crores
The above limits shall be doubled if the resolution passed by the shareholders is a special resolution.
If a period less than one year, the limits shall be pro-rated.
Explanation I: "Effective Capital" means the aggregate of the paid-up share capital (excluding share application
money or advances against shares); amount, if any, for the time being standing to the credit of share premium
account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one
year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and
other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by
an investment company whose principal business is acquisition of shares, stock, debentures or other securities),
accumulated losses and preliminary expenses not written off.
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Explanation II:
(a) Where the appointment of the managerial person is made in the year in which company has been incorporated,
the effective capital shall be calculated as on the date of such appointment;
(b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding
the financial year in which the appointment of the managerial person is made.
Explanation: "Negative Effective Capital" means the effective capital which is calculated in accordance with the
provisions contained in Explanation I of this Part is less than zero.
(B) In case of a managerial person who is functioning in a professional capacity, no approval of Central
Government is required, if such managerial person is not having any interest in the capital of the company or its
holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not
having any, direct or indirect interest or related to the directors or promoters of the company or its holding
company or any of its subsidiaries at any time during the last two years before or on or after the date of
appointment and possesses graduate level qualification with expertise and specialized knowledge in the field in
which the company operates.
However, any employee of a company holding shares of the company not exceeding 0.5% of its paid up share
capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option
Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company
- The managerial person was not a security holder holding securities of the company of nominal value of `
5,00,000 or more.
- The managerial person was not an employee or a director of the company or not related to any director or
promoter at any time during the 2 years prior to his appointment as a managerial person.
Other conditions to be complied by company to pay remuneration as per Section II of the Part II of the Schedule
V:
(i) Payment of remuneration is approved by a resolution passed by the Board and Nomination & Remuneration
Committee where the company is required to constitute such committee.
(ii) The company has not made any default in repayment of any of its debts (including public deposits) or
debentures or interest payable thereon for a continuous period of 30 days in the preceding financial year before
the date of appointment of such managerial person.
(iii) A special resolution has been passed at the general meeting of the company for payment of remuneration
for a period not exceeding 3 years.
(iv) A statement along with a notice calling the general meeting is given to the shareholders containing the
following information, namely:
I. General Information:
- Nature of industry
- Date or expected date of commencement of commercial production
- In case of new companies, expected date of commencement of activities as per project approved by financial
institutions appearing in the prospectus
- Financial performance based on given indicators
- Foreign investments or collaborations, if any.
II. Information about the appointee:
- Background details
- Past remuneration
- Recognition or awards
- Job profile and his suitability
- Remuneration proposed
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- Comparative remuneration profile with respect to industry, size of the company, profile of the position and
person (in case of expatriates the relevant details would be with respect to the country of his origin)
- Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel,
if any.
III. Other information:
- Reasons of loss or inadequate profits
- Steps taken or proposed to be taken for improvement
- Expected increase in productivity and profits in measurable terms.
IV. Disclosures: The following disclosures shall be mentioned in the Board of Director's report under the heading
"Corporate Governance", if any, attached to the financial statement: —
(i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the
directors;
(ii) details of fixed component and performance linked incentives along with the performance criteria;
(iii) service contracts, notice period, severance fees;
(iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over
which accrued and over which exercisable.
Explanation: The Nomination and Remuneration Committee while approving the remuneration under Section II or
Section III, shall -
(a) take into account, financial position of the company, trend in the industry, appointee's qualification,
experience, past performance, past remuneration, etc.;
(b) be in a position to bring about objectivity in determining the remuneration package while striking a balance
between the interest of the company and the shareholders.
Section III: Remuneration payable by companies having no profit or inadequate profit without Central
Government approval in certain special circumstances:
In the following circumstances a company may, without the Central Government approval, pay remuneration to a
managerial person in excess of the amounts provided in Section II above:
(a) Where the remuneration in excess of the limits specified in Section I or II is paid by any other company
[usually holding or parent company]
That other company is either a foreign company or has got the approval of its shareholders in general meeting to
make such payment
Such other company treats this amount as managerial remuneration for the purpose of Section 197 of that
company
The total managerial remuneration payable by such other company to its managerial persons including such
amount or amounts is within permissible limits under Section 197.
(b) Where the company -
(i) is a newly incorporated company, for a period of 7 years from the date of its incorporation, or
(ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the BIFR or NCLT, for a
period of 5 years from the date of sanction of scheme of revival, it may pay remuneration up to two times the
amount permissible under Section II.
(iii) is a company in relation to which a resolution plan has been approved by the National Company Law Tribunal
under the Insolvency and Bankruptcy Code, 2016 for a period of 5 years from the date of such approval, it may pay
remuneration up to 2 times the amount permissible under Section II.
(c) Where remuneration of a managerial person exceeds the limits in Section II but the remuneration has been
fixed by the BIFR or the NCLT.
The limits under Section III shall be applicable subject to meeting all the conditions specified under Section II and
the following additional conditions:
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(i) Except as provided in para (a) of Section III, the managerial person is not receiving remuneration from any other
company;
(ii) The auditor or CS of the company or where the company has not appointed CA, PCS certifies that all secured
creditors and term lenders have stated in writing that they have no objection
for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed
along with the return as prescribed under Section 196(4).
(iii) The auditor or CS or where the company has not appointed a secretary, a PCS certifies that there is no default
on payments to any creditors, and all dues to deposit holders are being settled on time.
(d) A company in a SEZ as notified by Department of Commerce from time to time which has not raised any
money by public issue of shares or debentures in India, and has not made any default in India in repayment of any
of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty
days in any financial year, may pay remuneration up to ` 2,40,00,000 p.a.
Section IV: Perquisites not included in managerial remuneration:
1. A managerial person shall be eligible for the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II and Section III:
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put
together are not taxable under the Income Tax Act, 1961;
(b) Gratuity payable at a rate not exceeding half a month's salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.
2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person
(including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II or Section III.
3. (a) Children's Education Allowance: In case of children studying in or outside India, an allowance
limited to a maximum of ` 12,000 p.m. per child or actual expenses incurred, whichever is less. Such allowance is
admissible up to a maximum of 2 children.
(b) Holiday package for children studying outside India or family staying abroad: Return holiday package once in
a year by economy class or once in 2 years by first class to children and to the members of the family from the
place of their study or stay abroad to India if they are not residing in India, with the managerial person.
(c) Leave travel concession: Return package for self and family in accordance with the rules specified by the
company where it is proposed that the leave be spent in home country instead of anywhere in India.
Explanation: "Family" means the spouse, dependent children and dependent parents of the managerial person.
Section V: Remuneration payable to a managerial person in two companies: A managerial person shall draw
remuneration from one or both companies, provided that the total remuneration drawn from the companies does
not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial
person.
Que. No. 26] Ms. Jyoti is the Managing Director of Wise (India) Ltd., incorporated under the Companies Act,
2013. Board of directors of the company presents the following financial data extracted from the company's
financial statements as at 31st March, 2015:
Particulars (` in Crores)
Authorized equity share capital 60
Paid-up equity share capital 10
Debenture redemption reserve 10
Securities premium account 20
Profit and loss (loss) (10)
Revaluation reserve 20
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Due to losses in the financial year 2014-2015, the company is not in a position to pay any remuneration to Ms.
Jyoti, Managing Director of the company. As per the agreement of service between Ms. Jyoti and the company,
in case of losses or inadequacy of profits in any financial year, she is to be paid remuneration on the basis of
'effective capital' of the company.
Based on the provisions of the Companies Act, 2013, decide the maximum remuneration payable to Ms. Jyoti
for the financial year 2014-2015 without the approval of the Central Government.
Ans.: Effective Capital means the aggregate of the paid-up share capital (excluding share application money or
advances against shares); amount, if any, for the time being standing to the credit of share premium account;
reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year
(excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other
short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an
investment company whose principal business is acquisition of shares, stock, debentures or other securities),
accumulated losses and preliminary expenses not written off.
Computation of effective capital for managerial remuneration:
Particulars ` in Crores
Paid-up capital 10
Debenture redemption reserve (not specifically excluded by definition of'effective capital) 10
Securities premium account 20
Profit & loss account (10)
Revaluation reserve (specifically excluded by definition of'effective capital') -
Effective Capital 30
Remuneration payable by companies having no profit or inadequate profit without Central Government
approval [Section II of the Part II of the Schedule V]: Where in any financial year during the currency of tenure of
a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government
approval, pay remuneration to the managerial person not exceeding the limits given below:
Remuneration based on effective capital:
Where the effective capital is Limit of yearly remuneration payable shall not exceed
Negative or less than ` 5 Crores ` 60 Lakhs
` 5 Crores and above but less than ` 100 Crores ` 84 Lakhs
` 100 Crores and above but less than ` 250 Crores ` 120 Lakhs
` 250 Crores and above ` 120 lakhs plus 0.01% of the effective capital in excess
of ` 250 Crores
The above limits shall be doubled if the resolution passed by the shareholders is a special resolution.
If a period less than one year, the limits shall be pro-rated.
Considering the above provisions, Ms. Jyoti, Managing Director of Wise (India) Ltd. can be remunerated in following
ways without approval of Central Government:
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- As company's 'effective capital' is between "` 5 Crores to 100 Crores"; Ms. Jyoti can be paid annual
remuneration of ` 84 Lakhs i.e. monthly ` 7 Lakhs.
- If company pass special resolution, remuneration can be doubled i.e. ` 168 Lakhs per annum i.e. ` 14 Lakhs
per month can be paid.
Que. No. 27] Mrs. Beautiful, aged 40 years, is the Managing Director of Beauty Care Products Ltd. She has
received contribution to superannuation fund and leave encashment during her tenure with the company during
the financial year ending 31st March, 2017. The Manager (Accounts) of the company is not very confident, if
these perquisites are to be included in the computation of ceiling on remuneration specified in the Companies
Act, 2013. Referring to the provisions of the Act, advice the Manager (Accounts).
Ans.: As per Section IV of the Schedule V to the Companies Act, 2013, a managerial person shall be eligible for the
following perquisites which shall not be included in the computation of the ceiling on remuneration specified in
Section II and Section III:
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put
together are not taxable under the Income Tax Act, 1961;
(b) Gratuity payable at a rate not exceeding half a month's salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.
Keeping in view of above provisions, 'contribution to superannuation fund' and 'leave encashment' received by
Mrs. Beautiful should not be included in the computation of ceiling on remuneration specified in the Companies
Act, 2013
Que. No. 28] State the provisions of the Companies Act, 2013 relating to recovery of remuneration from
managerial personnel?
Ans.: Recovery of remuneration in certain cases [Section 199]: If a company is required to re-state its financial
statements due to fraud or non-compliance with any requirement under the Act and the rules made thereunder,
the company shall recover remuneration (including stock option) in excess of what would have been payable as
per restatement of financial statements from following past or present managerial personnel:
- Managing Director
- Whole-time director
- Manager
- CEO.
Que. No. 29] State the powers of Central Government or a company to fix remuneration under the Companies
Act, 2013?
Ans.: Company to fix limit with regard to remuneration [Section 200]: The company may, while according its
approval u/s 196, to any appointment or to any remuneration under Section 197 in respect of cases where the
company has inadequate or no profits, fix the remuneration within the limits specified, at such amount or
percentage of profits of the company, as it may deem fit and while fixing the remuneration. While fixing or limiting
the remuneration the company shall take into consideration following factors:
(a) The financial position of the company.
(b) The remuneration or commission drawn by the individual concerned in any other capacity.
(c) The remuneration or commission drawn by him from any other company.
(d) Professional qualifications and experience of the individual concerned.
(e) Such other matters as may be prescribed.
Que. No. 30] State the procedure for making application to the Central Government under Chapter XIII of the
Ans.: Forms of, and procedure in relation to, certain applications [Section 201]: Every application made to the
Central Government under Section 196 shall be in prescribed form.
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Before any application is made by a company to the Central Government, there shall be issued by or on behalf of
the company a general notice to the members, indicating the nature of the application proposed to be made.
Such notice shall be published at least once in a newspaper in the principal language of the district in which the
registered office of the company is situate and circulating in that district, and at least once in English in an English
newspaper circulating in that district.
The copies of the notices, together with a certificate by the company as to the due publication thereof, shall be
attached to the application.
Que. No. 31] Advise Super Specialties Ltd. in respect of the following proposals under consideration of its Board
of Directors:
(i) Appointment of Managing Director who is more than 70 years of age.
(ii) Payment of commission of 4% of the net profits p.a. to the ordinary directors
(iii) Payment of remuneration to an ordinary director of rendering professional services.
(iv) Payment of remuneration of 40,000 p.m. to the whole time director of the company
- If company is in profit
- If company is running in loss and having an effective capital of ` 95.00 lakhs.
Ans.: Keeping in view the provisions of the Sections 196 and 197 of the Companies Act, 2013, answers to given
problem is as follows:
(i) As per Section 196(3), a company shall not appoint or continue the employment of person as Managing
Director, Whole-time Director or Manager if such a person is below the age of 21 years or has attained the age of
75 years. However, the appointment of a person who has attained the age of 70 years may be made by passing a
special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate
the justification for appointing such person.
Thus, Super Specialties Ltd. can appointment a person who is more than 70 years of age as its Managing Director
by passing a special resolution in general meeting. However, age of such person should be below 75 years. The
company should also comply with the other conditions prescribed in Schedule V of the Companies Act, 2013.
(ii) As per Section 197(1), except with the approval of the company in general meeting the remuneration
payable to part-time director (non-executive director) shall not exceed -
- 1% of the net profits, if there is a managing or whole-time director or manager
- 3% of the net profits in any other case.
Thus, Super Specialties Ltd. can pay commission of 4% to the ordinary directors only with the approval of the
members in general meeting.
(iii) As per Section 197(4), The remuneration payable to the directors of a company any other capacity shall also
be included in 'remuneration payable to directors' under the provisions of Section 197(1). However, any
remuneration for services rendered by any director in other capacity shall not be so included in managerial
remuneration if -
Thus, Super Specialties Ltd. can pay remuneration to an ordinary director for rendering professional services and
such remuneration will not be treated as part of managerial remuneration.
(iv) As per Section 197(1), the company can be pay remuneration up to 5% of its net profit. Thus, if profit of the
Super Specialties Ltd. is ` 96,00,000 or more (40,000 x 12 x 100/5) it can pay monthly remuneration of ` 40,000 to
its whole time director.
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As per Section 197(3), if in any financial year, a company has no profits or its profits are inadequate, the company
can pay remuneration to managing or whole-time director or manager in accordance with the provisions of
Schedule V.
As per Schedule V, company having effective capital less than ` 5 Crore can pay yearly remuneration up to `
60,00,000 (monthly ` 5,00,000). Thus, Super Specialties Ltd. can pay remuneration of ` 5,00,000 p.m. to its whole
time director. However, the company has to comply with other provisions of Schedule V of the Companies Act,
2013.
"Each director shall be entitled to be paid out of the funds of the company for attending meetings of the Board
or a Committee thereof including adjourned meeting such sum as sitting fees as shall be determined from time
to time by the Directors but not exceeding a sum of ` 1,25,000 for each such meeting to be attended by the
Director."
You are required to advise the company as to the validity of such a clause and the correct legal position under
the provisions of the Companies Act, 2013. CA (Final) - May 2009 (5 Marks)
Ans.: Validity of inclusion of proposed clause in Articles of Association is discussed below:
(1) As per Rule 4 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014,
amount of sitting fee shall not exceed ` 1,00,000 per meeting. Since, proposed purports to payment of sitting fee
of ` 1,25,000 which is more than prescribed sum of ` 1,00,000, hence it is not valid.
(2) Company can pay the sitting fee for adjourned board meeting for want of quorum, but where a adjourned
board meeting is held at later date then sitting fee cannot be paid again, as adjourned meeting is mere continuance
of original meeting and adjourned meeting along with original meeting constitute only one meeting and two
meetings.
Que. No. 33] Mr. Weldon was appointed as a director of Esquire Engineering Ltd. w.e.f. from 1st October, 2014.
Since the Company wanted to take full advantage of the wisdom and experience of Mr. Weldon, it offered him
attractive remuneration payable on monthly basis and made an application to the Central Government for
approval to pay such remuneration. Anticipating the approval of the Central Government. Esquire Engineering
Ltd. started paying such remuneration from the date of appointment and continued to do so till 31st March,
2015. The Central Government did not fully approve the remuneration proposed by the Company and restricted
the same to a lower amount. On scrutiny of accounts, the Company noticed that till 31st March, 2015 it has paid
to Mr. Weldon a total sum of ` 5.50 lakhs in excess of the remuneration sanctioned by the Central Government.
Explain the relevant provisions of the Companies Act, 2013, in respect of recovery and waiver of recovery of the
excess remuneration so paid.
Ans.: As per Section 197(9), if any director draws or receives, directly or indirectly, by way of remuneration any
such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government,
where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for
the company.
Thus, Mr. Weldon cannot keep the excess remuneration of ` 5,50,000. He shall refund such excess remuneration
to company. Until such refund is made, he shall hold it in trust for the company. Further, company cannot waive
the recovery of excess remuneration unless the Central Government permits the waiver of recovery of excess
remuneration.
Que. No. 34] Can a company pay compensation for loss of office to a managing or whole-time director or
manager? Also state the cases in such managerial personnel are not allowed to receive compensation? What is
the limitation on amount of compensation?
Ans.: Compensation for loss of office of managing or whole-time director or manager [Section 202(1)]: A
company may pay compensation for loss of office to a managing or whole-time director or manager only.
Compensation for loss of office cannot be paid to part-time director.
Compensation when not allowed [Section 202(2)]: Even compensation for loss of office to a managing or whole-
time director or manager shall not be made in the following cases, namely:
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(a) Where the director resigns from his office as a result of the reconstruction of the company, or of its
amalgamation with any other body corporate and is appointed as the managing or whole-time director, manager
or other officer of the reconstructed company or of the body corporate resulting from the amalgamation.
(b) Where the director resigns from his office otherwise than on the reconstruction of the company or its
amalgamation.
(c) Where the office of the director is vacated u/s 167(1).
(d) Where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the
winding up was due to the negligence or default of the director.
(e) Where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross
mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company.
(f) Where the director has instigated, or has taken part directly or indirectly in bringing about, the termination
of his office.
Limit on amount of compensation [Section 202(3)]: Any compensation to a managing or whole-time director or
manager shall be lower of the following:
- Remuneration for unexpired residue of his term or
- Remuneration for 3 years.
Que. No. 35] Mr. Doubtful was appointed as Managing Director of Carefree Industries Ltd. for a period of 5 years
w.e.f. 1.4.2014 on a salary of ` 12 lakhs p.a. with other perquisites. The Board of Directors of the company on
coming to know of certain questionable transactions, terminated the services of the Managing Director from
1.3.2017. Mr. Doubtful termed his removal as illegal and claimed compensation from the company. Meanwhile
the company paid a sum of ` 5 lakhs on ad hoc basis to Mr. Doubtful pending settlement of his dues.
Discuss whether:
(i) The company is bound to pay compensation to Mr. Doubtful and, if so, how much.
(ii) The company can recover the amount of ` 5 lakhs paid on the ground that Mr. Doubtful is not entitled to
any compensation, because he is guilty of corrupt practices.
CA (Final) - Nov 2004 (4 + 4 = 8 Marks)
Ans.: Keeping in view of the provisions of the Companies Act, 2013 answer to given problem is as follows:
(i) As per Section 202(3), any compensation to a managing or whole-time director or manager shall be lower of the
following:
- Remuneration for unexpired residue of his term [25 months x 1,00,000 = ` 25,00,000]
- Remuneration for 3 years [36 months x 1,00,000 = ` 36,00,000]
Thus, compensation payable to Mr. Doubtful cannot exceed ` 25,00,000. If company has already paid ` 5,00,000
then remaining ` 20,00,000 is payable form the company.
(ii) As per Section 202(2) (e), where the director has been guilty of fraud or breach of trust in relation to, or of
gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary
company or holding company, he shall not be paid any compensation.
However, it was held by the House of Lords that after paying compensation if the company comes to know that
managerial personnel to whom the compensation has been paid was guilty of serious breaches of duty and corrupt
practices, the company cannot recover the same. [Bell v. Lever Bros 1932 AC 161]
Thus, if compensation has already been paid to Mr. Doubtful, the compensation cannot be recovered back as per
decision in Bell v. Lever Bros.
However, if breach of duty and corrupt practices of Mr. Doubtful comes to light at the time when his service is
terminated, the company is not liable to pay any compensation to him.
Que. No. 36] State the provisions of the Companies Act, 2013 relating to appointment of key managerial
personnel (KMP)? CS (Executive) - June 2015 (2 Marks), Dec 2015 (3 Marks)
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Ans.: Appointment of key managerial personnel [Section 203(1)]: Every prescribed classes of companies shall have
the following whole-time key managerial personnel -
(i) Managing Director, or Chief Executive Officer (CEO) or Manager and in their absence, a whole-time director
(ii) Company Secretary (CS)
(iii) Chief Financial Officer (CFO)
Rule 8 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014 prescribes the
following types of companies:
- Every listed company
- Every other company having paid up share capital of ` 10 Crore or more.
As Rule 8A, a company other than company covered under Rule 8 which has paid up capital of 5 Crore or more
shall have a whole time Company Secretary.
Chairperson not to be CEO or MD [Proviso Section 203(1)]: An individual shall not be appointed or reappointed as
the Chairperson as well as the MD or CEO of the company at the same time unless -
(a) The articles of such a company provide otherwise or (b) The company does not carry multiple businesses.
However, this provision shall not apply to:
- Class of companies engaged in multiple businesses and
- Which has appointed one or more Chief Executive Officers for each such business
KMP to appointed at board meetings [Section 203(2)]: Every whole-time key managerial personnel of a company
shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment
including the remuneration.
Number of companies in which a person can be appointed as KMP [Section 203(3)]: A whole-time KMP shall not
hold office in more than one company except in its subsidiary company at the same time. However, key managerial
personnel can be director of any company with the permission of the Board.
Managing Director in two companies [Proviso to Section 203(3)]: A company may appoint or employ a person
who is already Managing Director or manager of other company if following conditions are fulfilled:
(1) If he is Managing Director or Manager of one, and of not more than one, other company.
(2) Appointment is made by a resolution passed at Board meeting with unanimous consent.
(3) Specific notice of board meeting is given to all the directors then in India.
Vacancy in the office of whole time KMP [Section 203(4)]: If the office of any whole-time KMP is vacated, the
resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6 months from the
date of such vacancy.
Que. No. 37] Kapil is branch head of a limited company. The Company proposes to elevate Kapil to the board.
Enumerate the steps involved in such proposal. CS (Executive) - June 2013 (4 Marks)
Ans.: To elevate Kapil to the board following steps/provisions are required to be observed:
- To see that Kapil is not disqualified for appointment of director. [Section 164]
- Kapil shall inform to the company about his disqualification under Section 164(2) in Form DIR-8 before he is
appointed.
- Kapil shall furnish his Director Identification Number to the company before appointment.
- After taking into board to the Kapil number of directors should not exceed 15. [Section 149]
- Kapil will be appointed as additional director. [Section 161(1)] In next AGM he can be appointed as regular
director.
- Kapil can be appointed for a term not exceeding 5 years at a time, if he is appointed as whole time director.
[Section 196(2)]
- Kapil shall furnish to the company a consent in writing to act as such in Form DIR-2.
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- The company shall, within 30 days of the appointment of Kapil as a director, file such consent with the
Registrar in Form DIR-12 along with prescribed fee.
- After appointment of Kapil as a director, an entry has to be made in "Register of directors and key managerial
personnel and their shareholding". [Section 170]
Que. No. 38] Can director or KMP enter into forward dealing contract of securities of the company?
Ans.: Prohibition on forward dealings in securities of company by director or KMP [Section 194]: Section 194 has
been deleted by the Companies (Amendment) Act, 2017. Hence, question is not relevant for Dec 2018 and onward
exams.
COMPANY SECRETARY
Que. No. 39] Define the term: Company Secretary
Ans.: Company Secretary [Section 2(24)]: "Company Secretary" or "Secretary" means a company secretary as
defined in Section 2(1) (c) of the Company Secretaries Act, 1980 who is appointed by a company to perform the
functions of a Company Secretary under the Act.
As per Section 2(l)(c) of the Company Secretaries Act, 1980, Company Secretary means a person who is a member
of the ICSI.
Company Secretary in Practice [Section 2(25)]: "Company Secretary in practice" means a Company Secretary who
is deemed to be in Section 2(2) of the Company Secretaries Act, 1980.
As per Section 2(2) of the Company Secretaries Act, 1980, a member of the ICSI shall be deemed "to be in practice"
when, individually, or in partnership with one or more members of the Institute in practice or in partnership with
members of such other recognized professions as may be prescribed, he, in consideration of remuneration
received or to be received, -
(a) engages himself in the practice of the profession of Company Secretaries to, or in relation to, any company;
or
(b) offers to perform or performs services in relation to the promotion, forming, incorporation, amalgamation,
reconstruction, reorganization or winding up of companies; or
(c) offers to perform or performs such services as may be performed by -
(i) an authorized representative of a company with respect to filing, registering, presenting, attesting or verifying
any documents (including forms, applications and returns) by or on behalf of the company,
(ii) a share transfer agent,
(iii) an issue house,
(iv) a share and stock broker,
(v) a secretarial auditor or consultant,
(vi) an adviser to a company on management, including any legal or procedural matter falling under the
Industries (Development and Regulation) Act, 1951, the Companies Act, 2013, the Securities Contracts (Regulation)
Act, 1956, any of the rules or bye-laws made by a recognized stock exchange, the Competition Act, 2002, the
Foreign Exchange Management Act, 1999, or under any other law for the time being in force,
(vii) issuing certificates on behalf of, or for the purposes of a company; or
(d) holds himself out to the public as a Company Secretary in practice; or
(e) renders professional services or assistance with respect to matters of principle or detail relating to the
practice of the profession of Company Secretaries; or
(f) renders such other services as, in the opinion of the Council, are or may be rendered by a Company Secretary
in practice.
What are the statutory duties of the Company Secretary under the Companies Act, 2013.
Ans.: Functions of the Company Secretary [Section 205]: The functions of the Company Secretary includes the
following -
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(a) To report to the Board about compliance with the provisions of the Companies Act, 2013 and the rules made
thereunder and other laws applicable to the company.
(b) To ensure that company complies with Secretarial Standards.
(c) To discharge other prescribed duties.
Explanation: The expression "Secretarial Standards" means secretarial standards'issued by the ICSI and approved
by the Central Government.
Duties of Company Secretary [Rule 10 of the Companies (Appointment & Remuneration of Managerial
Personnel) Rules, 2014]: The duties of Company Secretary shall discharge the following duties:
(1) To provide guidance to the directors with regard to their duties, responsibilities and powers.
(2) To facilitate the convening of meetings and attend Board, committee and general meetings and maintain the
minutes of these meetings.
(3) To obtain approvals from the Board, general meeting, the government and other authorities as required
under the provisions of the Act.
(4) To represent before various Regulators, and other authorities in connection with discharge of various duties.
(5) To assist the Board in the conduct of the affairs of the company.
(6) To assist and advise the Board in ensuring and in complying good corporate governance and best practices.
(7) To discharge other specified duties under the Act or Rules.
(8) To discharge other duties as may be assigned by the Board from time to time.
Que. No. 41] State the provisions and procedure relating to appointment of Company Secretary.
Ans.: As per Section 2(51), Company Secretary is Key Managerial Personnel (KMP). Section 203 deals with the
mandatory appointment of KMP in certain classes of companies.
Thus, as per Section 203 read with Rules 8 & 8A of the Companies (Appointment & Remuneration of Managerial
Personnel) Rules, 2014, appointment of Company Secretary in mandatory in following types of companies:
- Every other public company paid-up capital of which is ` 5 Crore or more
Section 8 company's i.e. non-profit making companies need to appoint Company Secretary. [MCA Notification dated
5.6.2015]
Appointment of Company Secretary: A Company Secretary shall be appointed by resolution of board of directors,
containing the terms and conditions of appointment including remuneration.
Filing of Return: Return of appointment of Company Secretary as well as cessation has to be filed with ROC in Form
DIR-12. In addition to this, From MR-1 is also required to filed as Company Secretary is KMP.
Details to be entered in Register of KMP: The Company Secretary is KMP and his details have to be included in
"Register of Directors & KMP" maintained u/s 170.
A whole time Company Secretary can be Company Secretary of subsidiary company: A whole time KMP (which
includes Company Secretary) shall not hold office in more than one company except in its subsidiary company at
the same time. [Section 203(3)]
Company Secretary can be director of any company: A Company Secretary can be appointed as director of the
company or of any other company with the permission of Board. [Section 203(3)]
Vacancy to be filed in 6 months: Any vacancy in the post of Company Secretary should be filled within 6 months.
[Section 203(4)]
Company Secretary as Compliance Officer: As per Regulation 6 of the SEBI (Listing Obligation & Disclosure
Requirement) Regulations, 2015, a listed company shall appoint qualified Company Secretary as Compliance
Officer.
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Officer in default: The Company Secretary is included in definition of 'Officer in default'. Thus, he may be penalized
for non compliance of the provisions of the Companies Act, 2013 and Rules and Regulations made thereunder.
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CHAPTER
20
INTER-CORPORATE LOANS, INUESTMENTS, GUARANTEES & SECURITY & RELATED
PARTY TRANSACTIONS
■ ■■■ KEY MANAGERIAL PERSONNEL
Que. No. 1] Outline the provisions of the Companies Act, 2013 regarding:
(i) Inter-corporate investments
(ii) Inter-corporate loans CS (Inter) - June 2000 (12 Marks), Dec 2003 (12 Marks)
The power to invest funds of the company is the prerogative of the Board of directors under Section 179. Discuss
the limitations on such powers of the Board, if any, relating to inter-corporate loans and investments under
Section 186. CS (Executive) - Dec 2004 (8 Marks), Dec 2009 (6 Marks)
What are the circumstances under which approval of members is not required in respect of inter-corporate loans
and investments? CS (Inter) - June 2001 (6 Marks), June 2003 (6 Marks)
Ans.: Loan and investment by company [Section 186(2)]: A company can directly or indirectly give loan, guarantee
or provide security or make investment other body corporate or person up to higher of the following two limits:
- [Paid-up Capital + Free Reserves + Securities Premium Account] * 60% or
- [Free Reserves + Securities Premium Account] x 100%
Explanation: The word "person" does not include any individual who is in the employment of the company.
Due to explanation, loan made by the company to any individual who is in employment of the company will be
excluded for the purpose of monetary limit. At the same time, any guarantee provided or security provided in
connection with loan will also be excluded.
Higher loan, guarantee or investment by passing special resolution [Section 186(3)]: Where the aggregate of the
loans and investment so far made, the amount for which guarantee or security so far provided to or in all other
bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the
Board, exceed the specified limits, no investment or loan shall be made or guarantee shall be given or security shall
be provided unless previously authorized by a special resolution passed in a general meeting.
As per Rule 22 (j) of the Companies (Management & Administration) Rules, 2014, in case of companies having more
than 200 members, the special resolution for giving loan or extending guarantee or providing security in excess of
limit laid down is required to be passed by postal ballot.
Exemption in case of Wholly Owned Subsidiary (WOS): The requirement of passing special resolution is not
necessary:
(a) Where a loan or guarantee is given or where a security has been provided by a company to its Wholly Owned
Subsidiary (WOS) or a joint venture company, or
(b) Where acquisition is made by a holding company, by way of subscription, purchase of the securities of its
WOS.
However, the company shall disclose the details of such loans or guarantee or security or acquisition in the financial
statement.
Disclosure [Section 186(4)]: The company shall disclose to the members in the financial statement the full
particulars of the loans given, investment made or guarantee given or security provided and the purpose for which
the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.
Consent of board and prior approval of public financial institution [Section 186(5)]: No investment shall be made
or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting
of the Board with the consent of all the directors present at the meeting and the prior approval of the public
financial institution concerned where any term loan is subsisting, is obtained.
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However, prior approval of a public financial institution shall not be required where the aggregate of the loans and
investments so far made, the amount for which guarantee or security so far provided to or in all other bodies
corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed
the specified limit and there is no default in repayment of loan instalments or payment of interest thereon as per
the terms and conditions of such loan to the public financial institution.
Special provision for companies registered u/s 12 of the SEBI Act, 1992 [Section 186(6)]: No company, which is
registered u/s 12 of the SEBI Act, 1992 and covered under such class or classes of companies as may be prescribed,
shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its
financial statement the details of the loan or deposits.
Minimum rate of interest [Section 186(7)]: No loan shall be given under this section at a rate of interest lower
than the prevailing yield of 1 year, 3 years, 5 years or 10 years Government Security closest to the tenor of the
loan.
No subsisting defaults in deposits or interest on it [Section 186(8)]: No company which is in default in the
repayment of any deposits accepted or in payment of interest thereon, shall give any loan or give any guarantee
or provide any security or make an acquisition till such default is subsisting.
Register [Section 186(9)]: Every company giving loan or giving a guarantee or providing security or making an
acquisition shall keep a register which shall contain such particulars and shall be maintained in Form MBP-3.
Place where Register has to be kept and its inspection [Section 186(10)]: The Register of loan, guarantee &
investment shall be kept at the registered office of the company.
Such Register shall be open to inspection at registered office and extracts may be taken by any member. If any
member of the company demands its copy, it should be furnished on payment of prescribe fees.
Power to make Rules [Section 186(12)]: The Central Government may make rules for the purposes of this section.
Penalty [Section 186(13)]: If a company contravenes the provisions of this section, the company shall be punishable
-
- With fine which shall not be less than ` 25,000 but which may extend to ` 5,00,000 and
- Every officer of the company who is in default shall be punishable with imprisonment for a term which may
extend to 2 years and with fine which shall not be less than ` 25,000 but which may extend to ` 1,00,000.
Que. No. 2] RR Limited has decided to make investment in other companies for ` 50 lakhs, which is in excess of
60% of the company's paid-up share capital, free reserves and securities premium account. Company has 5
directors. Four directors were present in the Board meeting, three directors have given their consent but one
director abstained from voting.
The decision of the Board was noted in the minutes of Board meeting and decided to make such investment by
passing of Board resolution with majority. Referring to the provisions of Companies Act, 2013, examine the
validity of the Board's decision. CS (Executive) - June 2017 (4 Marks)
Ans.: As per Section 186(5), no investment shall be made or loan or guarantee or security given by the company
unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present
at the meeting and the prior approval of the public financial institution concerned where any term loan is
subsisting, is obtained.
In board meeting of RR Limited resolution for investment in excess of 60% of paid-up capital and free reserves is
approved by four directors out of five directors present in the board meeting.
As consent of all the directors present at the meeting is not obtained, the company has failed to comply with
Section 186(5) and hence resolution is not valid.
Ans.: Non applicability of Section 186 [Section 186(11)]: Nothing contained in Section 186(2) to (13), shall apply:
(a) To any loan made, any guarantee given or any security provided or any investment made by a banking
company, or an insurance company, or a housing finance company in the ordinary course of its business, or a
company established with the object of and engaged in the business of financing industrial enterprises, or of
providing infrastructural facilities;
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(b) To any investment -
(i) made by an investment company;
(ii) made in shares allotted in pursuance of Section 62(1) (a) or in shares allotted in pursuance of rights issues
made by a body corporate;
(iii) made, in respect of investment or lending activities, by a non-banking financial company registered under the
RBI Act, 1934 and whose principal business is acquisition of securities.
A company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other
securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than
50% of its total assets, or if its income derived from investment business constitutes not less than 50% as a
proportion of its gross income.
Que. No. 4] The Board of directors of an Indian company passed a resolution for incorporation of a company in
Singapore with the initial paid-up capital of $10,000. Comment whether investment to be made in the Singapore
company is exempt from the provisions of Section 186. CS (Inter) - June 2006 (4 Marks)
Ans.: Provisions contained in Section 186(2) & (3) will be applicable for incorporation of a company in Singapore
with the initial paid-up capital of $10,000 because company incorporated in foreign country will be body corporate.
Hence, all the limits and condition prescribed in Section 186(2) & (3) has to be complied with.
However, after incorporation if it becomes Wholly Owned Subsidiary then for making further investment they can
take the benefit of Rule 11 of the Companies (Meetings of Board & its Powers) Rules, 2014.
As per Rule 11 of the Companies (Meetings of Board & its Powers) Rules, 2014, the requirement of passing special
resolution is not necessary:
(a) Where a loan or guarantee is given or where a security has been provided by a company to its Wholly Owned
Subsidiary (WOS) or a joint venture company, or
(b) Where acquisition is made by a holding company, by way of subscription, purchase of the securities of its
WOS.
Que. No. 5] State the procedure for granting loan by one company to another company.
Ans.: A company which directly or indirectly give loan, guarantee or provide security or make investment other
body corporate or person must follow the procedure detailed below:
(1) Issue notice for board meeting as per the provisions of Section 173 (3).
(2) Hold board meeting to consider the proposal to give loan, guarantee or provide security or make investment
other body corporate or person.
a. If the aggregate amount of proposed loan/ guarantee/security/investment is within the limits then pass the
resolution with all the directors present at the meeting consenting specifying the limit for such
loan/guarantee/security/investment.
b. If the aggregate amount of proposed loan/ guarantee/ security/ investment exceeds the specified limits then
fix time, date and venue for holding general meeting to pass the special resolution.
(3) Draft the notice of the special resolution which must contain the prescribed details.
(4) Issue notice in writing at least 21 clear days before the date of the general meeting.
(5) In case of listed companies, send 3 copies of the notice to each Stock exchange, where shares of the company
are listed.
(6) Hold the general meeting and pass the special resolution. (In case of companies having more than 200
members, the special resolution for giving loan or extending guarantee or providing security in excess of limit laid
down is required to be passed by postal ballot.)
(7) File the special resolution in Form MGT-14 with ROC within 30 days.
(8) Ensure that approval of the Public Financial Institution(s) has been obtained before implementing the
proposal if the company has taken any term loan from any one of the financial institutions.
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(9) Ensure that company has not defaulted in complying with the provisions of Section 73 of the Companies Act,
2013 relating to "acceptance or repayment of deposits".
(10) Also ensure that loan to any body corporate is not made at a rate of interest lower than the prevailing yield
of 1 years, 3 years, 5 years or 10 year Government Security closest to the tenor of the loan.
(11) Enter the prescribed particulars in Register of inter corporate loans & investments within 7 days.
Que. No. 6] Balance sheet of DEF Ltd. as at 31st March, 2015 shows among others the following information:
Paid-up Share Capital 20 Crores
Reserves & Surplus 35 Crores
Reserve for redemption of debentures 5 Crores
Capital Reserves 5 Crores
The company has already given following loans/stood guarantees for loans to other companies :
- Loan to GHI Ltd. : ` 12 Crores
- Guarantee given on behalf of JKL Ltd. : ` 11 Crores
MNO Ltd. has approached DEF Ltd. for loan of ` 15 Crore Advise the management whether DEF Ltd. can give the
loan of ` 15 Crore to MNO Ltd. and if yes, set out the procedure therefore.
Ans.:
Paid-up capital : ` 20 Crores
Free Reserves : ` 35 Crores
Securities Premium : Nil
Calculation of overall limit: Higher of the following two.
- [20 + 35] x 60% = ` 33 Crores
- 35 x 100% = ` 35 Crores Loan & Investments already made:
Loan to GHI Ltd. 12 Crores
Guarantee given on behalf of JKL Ltd. 11 Crores 23 Crores
Proposed loan to MNO Ltd. : ` 15 Crores

Since, investment/loan/ guarantee already made or given (` 23 Crore) along with proposed investment/loan/
guarantee (` 15 Crore) exceed prescribed limit, proposed investment/loan can be made by ,taking prior approval
by means of a special resolution passed at a general meeting. [Section 186 (3)]
However, if DEF Ltd. has more than 200 members, the special resolution for giving loan or extending guarantee or
providing security in excess of limit laid down is required to be passed by postal ballot. [Rule 22 of the Companies
(Management & Administration) Rules, 2014]
Que. No. 7] Following information has been extracted from the balance sheet of Richy Rich Ltd.:
(t) Paid-up Share Capital ` 20 Crores (ii) Reserves & Surplus ` 80 Crores
(ill) Capital Reserve ` 5 Crores
(iv) Investment in securities ` 10 Crores
(n) Loan to companies ` 30 Crores
DEF Ltd. has requested Richy Rich Ltd. for a loan of ` 50 Crore which the Board of directors will consider at its
ensuing meeting. Explain the legal position and advise the Board.
Ans.:
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- [20 + 80] x 60% = ` 60 Crores
- 80 x 100% =` 80 Crores
Loan & Investments already made:
Investment in securities 10 Crores
Loan to companies 30 Crores
40 Crores
Proposed loan to DEF Ltd.: ` 50 Crores
Since, investment/loan/ guarantee already made or given (` 40 Crore) along with proposed loan (` 50 Crore) exceed
prescribed limit, proposed loan can be given by taking prior approval by means of a special resolution passed at a
general meeting. [Section 186 (3)]
However, if Richy Rich Ltd. has more than 200 members, the special resolution for giving loan or extending
guarantee or providing security in excess of limit laid down is required to be passed by postal ballot. [Rule 22
of the Companies (Management' & Administration) Rules, 2014]
Que. No. 8] As on 31st March, 2015, the balance sheet of ABC Ltd. shows the following:
` in Crores
Paid-up share capital 30
Reserves & Surplus 40
Reserve for redemption of debenture 20
Capital Reserve 10
The company made loan/stood guarantee for loans to other companies as below:
Loan to DEF Ltd. ` 15 Crore
Guarantee given on behalf of GHK Ltd. ` 15 Crore
LKP Ltd. approached ABC Ltd. for loan of an amount of ` 20 Crore. Advise the management of ABC Ltd. as to
whether the company can give loan of ` 20 Crore to LKP Ltd.
Ans.:
- [30 + 40] x 60% = ` 42 Crores
- 40x 100% =` 40 Crores
Loan & Investments already made:
Loan to DEF Ltd. 15 Crores
Guarantee given on behalf of GHK Ltd. 15 Crores
30 Crores
Proposed loan to LKP Ltd. : ` 2D Crores
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Since, investment/loan/ guarantee already made or given (` 30 Crore) along with proposed loan (f 20 Crore)
exceeds prescribed limit, proposed loan can be given by taking prior approval by means of a special resolution
passed at a general meeting.
However, if ABC Ltd. has more than 200 members, the special resolution for giving loan or extending guarantee or
providing security in excess of limit laid down is required to be passed by postal ballot.
Que. No. 9] Board of directors of Joy Ltd., by a resolution passed at its meeting, decide to provide a loan of ` 50
Crore to Happy Ltd. The paid-up share capital of Joy Ltd. on the date of resolution was ` 100 Crore and the
aggregate balancein the Free Reserves and Securities Premium Account stood at ` 40 Crore. Examining the
provisions of the Companies Act, 2013, decide whether the Board's resolution to provide a loan of ` 50 Crore to
Happy Ltd. is valid? CS (Executive) - June 2015 (4 Marks)
Ans.:
Free Reserves & Securities Premium : ` 40 Crores
- [100 + 40] x 60% = ` 84 Crores
- 40x 100% = ` 40 Crores
Proposed loan to Happy Ltd. : ` 50 Crores
Since, the proposed loan (` 50 Crore) does not exceeds prescribed limit, proposed loan can be given by passing a
unanimous resolution in a Board Meeting and prior approval by means of a special resolution passed at a general
meeting shall not be necessary.
Que. No. 10] XYZ Ltd., a company, has a paid up share capital of ` 60 Crores and free reserves of ` 25 Crores. It
desires to make a loan of ` 20 Crores to M Ltd. The company XYZ Ltd. has already made investments in many
other companies including loans to the extent of ` 35 Crores. Can the company go ahead with loan to M Ltd.?
Please advise the company about the procedure to be followed by it.
Ans.: Loan and investment by company [Section 186 (2)]: A company can directly or indirectly give loan, guarantee
or provide security or make investment other body corporate or person up to higher of the following two limits:
- [Paid-up Capital + Free Reserves + Securities Premium Account] x 60% or
- [Free Reserves + Securities Premium Account] x 100%
Higher loan, guarantee or investment by passing special resolution [Section 186 (3)]: Where the giving of any
loan or guarantee or providing any security or the acquisition exceeds the limits specified Section 186 (2), prior
approval by means of a special resolution passed at a general meeting shall be necessary.
Paid-up capital : ` 60 Crore
Free Reserves : ` 25 Crore
- [60 + 25] x 60% = ` 51 Crore
- 25x100% = ` 25 Crore
Existing investment and loan by XYZ Ltd. ` 35 Crore
Proposed loan by XYZ Ltd. to M Ltd. ` 20 Crore
Total ` 55 Crore
Since, proposed investment exceed prescribed limit, proposed investment can be made by taking prior approval
by means of a special resolution passed at a general meeting. [Section 186 (3)]
The XYZ Ltd. should also comply with other provisions of the Section 186 of the Companies Act, 2013.
INVESTMENT IN THE NAME OF OTHERS
Que. No. 11] All investment made by a company must be held by its own name. Comment.
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Ans.: Investments of company to be held in its own name [Section 187(1)]: All investments made or held by a
company in any property, security or other asset shall be made and held by it in its own name.
Investment in other name is permitted only in following circumstances. [Section 187(2)]
(1) Shares in the name of nominee in subsidiary company: The company may hold shares in its subsidiary
company in the name of any nominee, if it is necessary to ensure that the number of members of the subsidiary
company is not reduced below the statutory limit i.e. two in case of private company and 7 in case of public
company.
(2) Depositing shares or securities with banks for collection of dividend and interest: shares or securities can
be deposited with bankers of the company for collection of any dividend or interest payable thereon.
(3) Transfer in the name of banker for further transfer: A company can transfer securities in the name of its
bankers (State Bank of India or any scheduled bank) to facilitate further transfer. However, if the securities are not
further transferred within 6 months, the securities should be retransferred in the name of the company within 6
months.
(4) Transfer as security for loans: If a company has obtained loan by giving security its investment in securities,
such securities can be deposited with or transferred in the name of lender.
(5) Holding securities in depository mode: A company can hold investment in the name of depository. However,
name of the company should be recorded as beneficial owner in the records of the depository.
Register of investment not in own name [Section 187(3)]: Where any securities in which investments have been
made by a company are not held by it in its own name, the company shall maintain a register in prescribed form.
Inspection of register: Such register shall be open to inspection by members or debenture-holders without any
charge during business hours subject to such reasonable restrictions as the company may impose.
As per Rule 14 of the Companies (Meetings of Board and its Powers) Rules, 2014, every company shall maintain
a register in Form MBP-3 and enter chronologically, the particulars of investments not held in its own name. The
company shall also record the reasons for not holding the investments in its own name and the relationship or
contract under which the investment is held in the name of any other person.
The register shall be maintained at the registered office of the company. The register shall be preserved
permanently and shall be kept in the custody of the Company Secretary or any director or any other officer
authorized by the Board.
The entries in the register shall be authenticated by the Company Secretary or by any other person authorized by
the Board.
RELATED PARTY TRANSACTIONS
Que. No. 12] Define the term 'related party' as defined in Companies Act, 2013.
Distinguish between: 'Related Party' and 'Relative' as defined and applied under the Companies Act, 2013.
CS (Executive) - Dec 2017 (4 Marks) '
Ans.: Related Party [Section 2 (76)]: Related party, with reference to a company, means -
(i) a director or his relative
(ii) a key managerial personnel or his relative
(iii) a firm, in which a director, manager or his relative is a partner
(iv) a private company in which a director or manager is a member or director
(v) a public company in which a director or manager is a director or holds along with his relatives, more than 2%
of its paid-up share capital
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act
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Provided that nothing in clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a
professional capacity
(viii) any company which is -
(A) a holding, subsidiary or an associate company of such company or
(B) a subsidiary of a holding company to which it is also a subsidiary
(C) an investing company or the venturer of the company
Explanation: "the investing company or the venturer of a company" means a body corporate whose investment in
the company would result in the company becoming an associate company of the body corporate.
(ix) such other person as may be prescribed.
Relative [Section 2(77)]: Relative, with reference to any person, means anyone who is related to another, if -
(i) they are members of a Hindu Undivided Family
(ii) they are husband and wife or
(iii) one person is related to the other in such manner as may be prescribed
As per Rule 4 of the Companies (Specification of definitions details) Rules, 2014, a person shall be deemed to be
the relative of another, if he or she is related to another in the following manner, namely:-
(1) Father (the term "Father" includes step-father)
(2) Mother (the term "Mother" includes the step-mother)
(3) Son (the term "Son" includes the step-son)
(4) Son's wife
(5) Daughter
(6) Daughter's husband
(7) Brother (term "Brother" includes the step-brother)
(8) Sister (the term "Sister" includes the step-sister)
Que. No. 13] State the legal requirements to be complied with by company for entering related party
transactions.
What transactions are considered as 'related party transactions' under the Companies Act, 2013?
What do you understand by the term 'office or place of profit' held by a relative of a director in the company?
Ans.: Related party transactions [Section 188(1)]: A company may enter into related party transaction only with
the approval by a resolution at a meeting of the Board. A related party transaction cannot be approved by
circular resolution.
The provision applies to following related party contracts or arrangements:
(a) sale, purchase or supply of any goods or materials
(b) selling or disposing of, or buying, property of any kind
(c) leasing of property
(d) availing or rendering of services
(e) appointment of any agent for purchase or sale of goods, materials, services or property
(f) related party's appointment to any office or place of profit in the company, its subsidiary company or associate
company
(g) underwriting the subscription of any securities or derivatives of the company:
"Office or place of profit" means any office or place -
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(i) Where such office or place is held by a director, if the director holding it receives from the company anything by
way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee,
commission, perquisites, any rent-free accommodation, or otherwise;
(ii) Where such office or place is held by an individual other than a director or by any firm, private company or
other body corporate, if the individual, firm, private company or body corporate holding it receives from the
company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or
otherwise
However no contract or arrangement, in the case of a company having a paid-up share capital of not less than such
amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior
approval of the company by a resolution. [First Proviso to Section 188(1)]
Related party not to vote at the general meeting: A member who is a related party shall not vote on resolution at
the general meeting called to approve any contract or arrangement with related party. However this provision shall
not apply to a company in which 90% or more members, in number, are relatives of promoters or are related parties.
Non applicability: Provisions of Section 188 shall not apply to any transactions entered into by the company in its
ordinary course of business and which are on an arm's length basis.
The expression "arm's length transaction" means a transaction between two related parties that is conducted as if
they were unrelated, so that there is no conflict of interest.
Relaxation in case of holding and wholly owned subsidiary: The requirement of passing the resolution under first
proviso shall not be applicable for transactions entered into between a holding company and its wholly owned
subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the
general meeting for approval.
Disclosure in Board's report of related party transaction [Section 188(2)]: Every contract or arrangement entered
into Section 188 (1) shall be referred to in the Board's report to the shareholders along with the justification for
entering into such contract or arrangement.
Consequences if contract or arrangement is not ratified by Board or general meeting [Section 188(3) & (4)]:
Where any contract or arrangement is entered into by a director or any other employee, without obtaining the
consent of the Board or approval by a resolution in the general meeting and if it is not ratified by the Board or, as
the case may be, by the shareholders at a meeting within 3 months from the date on which such contract or
arrangement was entered into, then following consequences shall follow:
(1) such contract or arrangement shall be voidable at the option of the Board or, as the case may be, of the
shareholders and
(2) if the contract or arrangement is with a related party to any director, or is authorized by any other director,
the directors concerned shall indemnify the company against any loss incurred by it.
(3) it shall be open to the company to proceed against a director or any other employee who had entered into
such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained
by it as a result of such contract or arrangement.
Penalty [Section 188(5)]: Any director or any employee of a company, who had entered into or authorized the
contract or arrangement in violation of the provisions of this section shall -
(1) In case of listed company, be punishable:
- with both
(2) In case of any other company, be punishable with fine which shall not be less than ` 25,000 but which may
extend to ` 5,00,000.
Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 makes the following provisions relating
to related party transactions:
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
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(i) the name of the related party and nature of relationship
(ii) the nature, duration of the contract and particulars of the contract or arrangement (iii) the material terms
of the contract or arrangement including the value, if any
(iv) any advance paid or received for the contract or arrangement, if any
(v) the manner of determining the pricing and other commercial terms, both included as part of contract and
not considered as part of the contract
(vi) whether all factors relevant to the contract have been considered, if not, the details of factors not considered
with the rationale for not considering those factors
(vii) any other information relevant or important for the Board to take a decision on the proposed transaction.
Rule 15 of the Companies (Meetings of board and its Powers) Rules, 2014:
Conditions subject to which related party transaction can be entered [Rule 15]: A company shall enter into any
contract or arrangement with a related party subject to the following conditions:
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose -
(a) The name of the related party and nature of relationship.
(b) The nature, duration of the contract and particulars of the contract or arrangement.
(c) The material terms of the contract or arrangement including the value, if any.
(d) Any advance paid or received for the contract or arrangement, if any,
(e) The manner of determining the pricing and other commercial terms, both included as part of contract and
not considered as part of the contract.
(f) Whether all factors relevant to the contract have been considered, if not, the details of factors not considered
with the rationale for not considering those factors.
(g) Any other information relevant or important for the Board to take a decision on the proposed transaction.
Interested director not to present at the meeting [Rule 15(2)]: Where any director is interested in any contract or
arrangement with a related party, such director shall not be present at the meeting during discussions on the
subject matter of the resolution relating to such contract or arrangement
Company not to enter into related party transaction without prior approval [Rule 15(3)]: For the purposes of first
proviso to Section 188(1), except with the prior approval of the company by a resolution, a company shall not enter
into a transaction or transactions, where the transaction or transactions to be entered into -
(a) As contracts or arrangements with respect to clauses (a) to (e) of'Section 188(1), with criteria as mention
below:
(i) Sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to
10% or more of the turnover of the company or ` 100 Crore, whichever is lower, as mentioned in clauses (a) and
(e) respectively of Section 188(1).
(ii) Selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent,
amounting to 10% or more of net worth of the company ` 100 Crore, whichever is lower, as mentioned in clauses
(b) and (e) respectively of Section 188(1).
(iii) Leasing of property any kind amounting to 10% or more of the net worth of company or 10% or more of the
turnover of the company or ` 100 Crore, whichever is lower, as mentioned in Section 188(l)(c).
(iv) Availing or rendering of any services, directly or through appointment of agent, amounting to 10% or more of
the turnover of the company or ` 50 Crore, whichever is lower as mentioned in clauses (tf) and (e) respectively of
Section 188(1)
Explanation: It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply for transaction or
transactions to be entered into either individually or taken together with the previous transactions during a
financial year.
(b) Is for appointment to any office or place of profit in the company, its subsidiary company or associate
company at a monthly remuneration exceeding ` 2.5 lakh as mentioned in clause (/) of Section 188(1).
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(c) Is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company
exceeding 1% of the net worth as mentioned in clause (g) of Section 188(1).
Explanation (1): The turnover or net worth shall be computed on the basis of the audited financial statement of
the preceding financial year.
Explanation (2): In case of wholly owned subsidiary, the resolution is passed by the holding company shall be
sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding
company.
Explanation (3): The explanatory statement to be annexed to the notice of a general meeting convened pursuant
to Section 101 shall contain the following particulars, namely:
(a) name of the related party;
(b) name of the director or key managerial personnel who is related, if any;
(c) nature of relationship;
(d) nature, material terms, monetary value and particulars of the contract or arrangements;
(e) any other information relevant or important for the members to take a decision on the proposed resolution.
Que. No. 14] Kith & Consultants Pvt. Ltd. seeks your legal advice regarding the following appointments relating
to directors and their relative.
(1) Miss N, a relative of a director, is to be appointed as Chief Public Relation Officer on a salary of ` 65,000
per month.
(2) Mr. W, a relative of director, is to be appointed as Chief Executive Officer on salary of ` 3,00,000 per month.
(3) Mr. X, who is relative of the director, is to be appointed as Managing Director on monthly salary of `
3,50,000 plus other perquisites as applicable to other executives of the company.
Advise explaining relevant provisions of the Companies Act, 2013. CA (Final) - May 2002 (6 Marks)
Ans.: The term 'related party' is defined in Section 2 (76) and legal requirements to be complied with by company
for entering 'related party transaction' are specified in Section 188. Keeping in view the provisions of Section 2 (76)
and Section 188, answers to given problems is as follows:
(1) Miss N is a relative of a director. As per Section 2 (76), a relative of director is a related party. Thus, appointment
of Miss N as a Chief Public Relation Officer on a salary of t 65,000 p.m. amounts to appointment of a related party
to an office or place of profit in the company. However, such appointment does not require the prior approval of
the members by passing a resolution since the monthly remuneration does not exceeds ` 2,50,000.
The appointment of Miss N as Chief Public Relation Officer on a salary of ` 65,000 p.m. is to be made by complying
the following:
(a) Consent of the Board is to be obtained by passing a resolution at a Board Meeting.
(b) The agenda of the Board Meeting in which the approval of the Board is to be obtained shall contain the
particulars prescribed under Rule 15(1) of the Companies (Meeting of Board and its Powers) Rule, 2014.
(c) If any director is interested in such appointment, he shall not be present at the Board Meeting during
discussion on such appointment.
(2) Mr. W is a relative of a director. As per Section 2 (76), a relative of director is a related party. Thus,
appointment of Mr. W as a Chief Executive Officer on a salary of ` 3,00,000 p.m. amounts to appointment of a
related party to an office or place of profit in the company. Such appointment require the prior approval of the
members by passing a resolution since the monthly remuneration exceeds ` 2,50,000.
The appointment of Mr. W as Chief Executive Officer on a salary of ` 3,00,000 per month is to be made by complying
the following:
particulars prescribed under Rule 15 (1) of the Companies (Meeting of Board and its Powers) Rule, 2014.
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(c) If any director is interested in such appointment, he shall not be present at the Board Meeting during
discussion on such appointment.
(d) The explanatory statement annexed to the notice of general meeting in which resolution is passed, shall
contain the prescribed particulars.
(e) If Mr. W is also member of the company, he shall not vote on such resolution at general meeting.
(3) Mr. X is a relative of a director. As per Section 2(76), a relative of director is a related party. However, when
a person is appointed as managing director, he does not get anything more than the remuneration to which he is
entitled as a director and thus he cannot be said to be appointed to any office or place of profit in the company
and hence Section 188 is not attracted.
Que. No. 15] Reliable Casing Ltd. is a subsidiary of Unique Machineries Ltd. and its Board of Director have
appointed on a consolidated monthly salary of ` 3,00,000 to Ram Singh, a director of Unique Machineries Ltd.,
as its Factory Manager. State the legal requirements to be complied with under the Companies Act, 2013 to give
effect to above appointment. CA (Final) - May 1997 (2 Marks)
Ans.: The term 'related party' is defined in Section 2(76) and legal requirements to be complied with by company
for entering 'related party transaction' are specified in Section 188. Keeping in view the provisions of Section 2(76)
and Section 188, answers to given problem is as follows:
(i) A subsidiary company i.e. Reliable Casing Ltd. proposes to appoint Ram Singh, a director of its holding company
i.e. Unique Machineries Ltd. Such appointments amounts to holding office or place of profit and provisions of the
Section 188 get attracted. Thus, Ram Singh can be appointed as factory manager after complying the following
provisions:
(c) The apportionment shall require the prior approval of members by a resolution as monthly remuneration is
exceeding ` 2,50,000.
(d) The explanatory statement annexed to the notice of general meeting in which special resolution is passed, shall
Que. No. 16] Rakesh Sharma, not related to any director of the Unique Machineries Ltd. appointed as Chief
Accountant on 1.6.2018, but his relative has been appointed as additional director of Unique Machineries Ltd.
w.e.f. 1.7.2018. CA (Final) - May 1997 (2 Marks)
Ans.: Rakesh Sharma is not a relative of director at the time of his appointment and thus he not related party at
the time of his appointment as per Section 2(76). Hence, provision of Section 188 is not attracted and he can be
appointed as Chief Accountant in Unique Machineries Ltd. at a monthly salary of ` 3,00,000 without requiring any
compliance with any legal requirement of Section 188.
Que. No. 17] Sweet Tea Ltd. wants to sell its tea by entering into contract with the following parties
(1) Tea Bros, a partnership firm in which a director of Sweet Tea Ltd. is a partner.
(2) R & T Pvt. Ltd. in which one of the director of Sweet Tea Ltd. is a member.
(3) Strong Tea Ltd. in which one of the directors of Sweet Tea Ltd. is a director holding 3% of the paid up capital
of Strong Tea Ltd.
Kdvise the steps that should be taken by Sweet Tea Ltd. taking into account the relevant provisions of the
Companies Act, 2013 for entering into contracts in which the directors are interested.
Ans: The term 'related party' is defined in Section 2(76) and legal requirements to be complied with by company
for entering 'related party transaction' are specified in Section 188. Keeping in view the provisions of Section 2(76)
and Section 188, answers to given problem is as follows:
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(1) Tea Bros., a partnership firm in which a director of Sweet Tea Ltd. is a partner, is related party as per Section
2(76) and hence provisions of Section 188 are attracted.
(2) R & T Pvt. Ltd. in which one of the director of Sweet Tea Ltd. is a member, is related party as per Section
2(76) and hence provisions of Section 188 are attracted.
(3) Strong Tea Ltd. in which one of the directors of Sweet Tea Ltd. is a director holding 3% of the paid up capital
of Strong Tea Ltd., is related party as per Section 2(76) as holding of director is more than 2% and hence provisions
of Section 188 are attracted.
Following legal requirements are required to be complied with for sale of tea to any of the above parties:
(c) If any director is interested in such contract or arrangement, he shall not be present at the Board Meeting
during discussion on any such contract or arrangement.
(d) The contract or arrangement shall require the prior approval of the member by a resolution if the value of the
contract or arrangement for sale, purchase or supply of any goods or materials exceeds 10% or more of the
turnover of the company or ` 100 Crore, whichever is lower
(e) The explanatory statement annexed to the notice of general meeting in which resolution is passed, shall
(f) If member is related party, he shall not vote on resolution.
Que. No. 18] The Managing Director of a public company wants to purchase furniture of the company's guest
house at a book value. Comment. CS (Inter) - Dec 2001 (4 Marks)
Ans.: As per Section 2(76), a director of the company is a related party and sale of furniture to director is related
party transaction and hence provisions of Section 188 gets attracted.
However, as per Rule 15 of Companies (Meeting of Board and its Power) Rule, 2014, such transaction will require
prior approval of shareholder by way of passing special resolution if value of property exceeds 10% of net worth
of the company or ` 100 Crore, whichever is lower.
Following legal requirements are required to be complied with for sale of furniture of the company's guest house
at a book value to the managing director.
(c) If any director is interested in such contract, he shall disclose his interest and shall not be present at the
Board Meeting during discussion on any such contract or arrangement.
(d) The explanatory statement annexed to the notice of general meeting shall contain the prescribed particulars.
(e) If managing director is also members of company, he cannot vote at the meeting of shareholders resolution.
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CHAPTER
21
TRANSPARENCY & DISCLOSURES
ANNUAL RETURN
Que. No. 1] Write a short note on: Annual Return
Right of member to obtain copy of annual return. Discuss. CS (Inter) - Dec 2001 (2 Marks)
Pioneer Fisheries Ltd. has borrowed an amount of 7 50 Crore from a financial institution. The annual general
meeting of the company was held on 1st September, 2015. Examining the provisions of the Companies Act, 2013,
state as to who will sign and certify the annual return while filing the same with the Registrar of Companies after
the annual general meeting. CS (Executive) - June 2016 (4 Marks)
Ans.: Annual Return [Section 92(1)]: Every company shall prepare an annual return in the prescribed form
containing the particulars as they stood on the close of the financial year regarding -
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate
companies
(b) its shares, debentures and other securities and shareholding pattern
(c) its indebtedness [Deleted by Companies (Amendment) Act, 2017]
(d) its members and debenture-holders along with changes therein since the close of the previous financial year
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous
financial year
(f) meetings of members or a class thereof, Board and its various committees along with attendance details
(g) remuneration of directors and key managerial personnel
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of
offences and appeals made against such penalty or punishment
(i) matters relating to certification of compliances, disclosures as may be prescribed
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors
(k) other prescribed matters.
Signing of Annual Return: Annual Return has to be and signed by a director and the Company Secretary, or where
there is no Company Secretary, by Practicing Company Secretary.
In case of OPC and small company, the annual return shall be signed by the Company Secretary, or where there is
no Company Secretary, by the director of the company.
The Central Government may prescribe abridged form of annual return for OPC, small company and such other
Annual return in case of bigger companies [Section 92(2)]: The annual return, filed by a listed company or, by a
company having prescribed paid-up capital or turnover, shall be certified by a Practicing Company Secretary [PCS]
in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the
company has complied with all the provisions of the Companies Act, 2013.
The annual return, filed by a listed company or a company having paid-up share capital of ` 10 Crore or more or
turnover of ` 50 Crore or more, shall be certified by Practicing Company Secretary and the certificate shall be in
Form MGT-8. [Rule 7(2) of the Companies (Management & Administration) Rules, 2014]
Form of Annual Return [Section 92(3)]: Every company shall place a copy of the annual return on the website of
the company, if any, and the web-link of such annual return shall be disclosed in the Board's report.
As per Rule 7(1) of the Companies (Management & Administration) Rules, 2014, every company shall prepare its
annual return in Form No. MGT-7.
Filing of Annual Return [Section 92(4)]: Every company shall file with the Registrar a copy of the annual return,
within 60 days from the date on which the AGM is held or where no AGM is held in any year within 60 days from
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the date on which the AGM should have been held together with the statement specifying the reasons for not
holding the AGM.
Punishment for default in filing annual return [Section 92(5)]: If a company fails to file its annual return or within
extended time with late fee,
(a) The company shall be punishable with fine which shall not be less than ` 50,000 but which may extend to `
5,00,000 and
(b) Every officer of the company who is in default shall be punishable
- with imprisonment for a term which may extend to 6 months,
- with fine which shall not be less than ` 50,000 but which may extend to ` 5,00,000, or
- with both.
If Practicing Company Secretary certifies the annual return otherwise than in conformity with the requirements of
Section 92 or the rules made there under, he shall be punishable with fine which shall not be less than ` 50,000 but
which may extend to ` 5,00,000.
Que. No. 2] Virat, a person of 21 years of age is pursuing MBA (Finance) course at a reputed recognized business
school. He is not a shareholder of Grow (Pvt.) Ltd. He wishes to inspect the register of investments in securities
not held in company's name and annual return of Grow (Pvt.) Ltd. He also wants to take copies thereof.
Examining the relevant provisions of the Companies Act, 2013, advise Virat whether he would be successful in
this regard. CS (Executive) - June 2016 (4 Marks)
Ans.: Inspection and copies of "Register of Investment not held in Company's name": As per Section 187, any
shares or securities in which investments have been made by a company are not held by it in its own name, the
company shall maintain a register which shall contain such particulars as may be prescribed and such register shall
be open to inspection by any member or debenture-holder of the company without any charge during business
hours subject to such reasonable restrictions as the company may by its articles or in general meeting impose.
As per facts given in case Virat is not shareholder of Grow (P) Ltd. and hence he cannot inspect or take copies of
"Register of Investment not held in Company's name".
Inspection and copies of Annual Return: The register of security holders and their indices, except when they are
closed and the copies of all the returns shall be open for inspection by any member, debenture-holder, other
security holder or beneficial owner, during business hours without payment of any fees. Any other person can also
inspect the same but on payment of prescribed fees.
Any such member, debenture-holder, other security holder or beneficial owner or any other person may-
(a) Take extracts from any register, or index or return without payment of any fee; or
(b) Require a copy of any such register or entries therein or return on payment of such fees as may be prescribed.
If any inspection or the making of any extract or copy required is refused, the company and every officer of the
company who is in default shall be liable, for each such default, to a penalty of ` 1,000 for every day subject to a
maximum of ` 1 lakh during which the refusal or default continues.
Thus, Virat can inspect and can also take copies of Annual Return but on payment of prescribed fees even though
he is not shareholder of Grow (P) Ltd.
Que. No. 3] Is any return is required to be submitted for changes in promoter's shareholding under the
Ans.: Return to be filed with Registrar in case promoter's stake changes [Section 93]: Deleted by Companies
(Amendment) Act, 2017
■ ■■ BOARD REPORT/ANNUAL REPORT
Que. No. 4] What do you understand by the 'Board Report'?
Ans.: The Board's Report is an important means of communication by the Board of Directors, serving to inform the
stakeholders about the performance and prospects of the company, relevant changes in management, capital
structure, major policies, and recommendations as to the distribution of profits, future programmes of expansion,
modernization and diversification, capitalization of reserves, further issue of capital, etc.
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♦ The matters to be included in the Board's Report have been specified in Section 134(3). Apart from this,
Sections 92,102(2), 131,135(2), 135(5), 136,137,177(8), 178(4), 179(3) (g), 188(2), 197(12), 197(14), 204(1), 204(3)
also contain provisions in relation to the Board's Report.
♦ The Board's Report of companies whose shares are listed on a stock exchange must include additional
information as specified in the Listing Agreement.
♦ Further, the RBI Act, 1934, the SEBI Act, 1992 and the regulations, rules, directions, guidelines, circulars, etc.
issued there under, necessitate certain additional disclosures to be made in the Board's Report.
♦ In addition to above provisions, the company should also comply with the provisions of secretarial standards
issued by ICSI.
Que. No. 5] What matters to be included in the Board's Report under Section 134 and other provisions under
the Companies Act, 2013? CS (Inter) - Dec 2002 (2 + 2 + 1 = 5 Marks), June 2003 (4 Marks)
Ans.: Board's Report [Section 134(3)]: There shall be attached to statements laid before a company in general
meeting, a report by its Board of Directors, which shall include -
(a) The web address where annual return has been placed.
(b) Number of meetings of the Board.
(c) Directors' Responsibility Statement.
(d) Details in respect of frauds reported by the auditor u/s 143(12) other than those which are reportable to the
Central Government.
(e) A statement on declaration given by independent directors u/s 149(6).
(f) In case of a company required to constitute Nomination & Remuneration Committee, company's policy on
directors appointment and remuneration including criteria for determining qualifications, positive attributes,
independence of a director and other matters provided u/s 178 (3).
(g) Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer
made:
(i) by the auditor in his report and
(ii) by the Company Secretary in practice in his secretarial audit report.
(h) Particulars of loans, guarantees or investments under Section 186.
(i) Particulars of contracts or arrangements with related parties referred to Section 188(1) in the prescribed
form.
(j) The state of the company's affairs.
(k) The amounts, if any, which it proposes to carry to any reserves.
(l) The amount, if any, which it recommends should be paid by way of dividend.
(;rn) Material changes and commitments, if any, affecting the financial position of the company which have
occurred between the end of the financial year of the company to which the financial statements relate and the
date of the report.
(n) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in prescribed
manner.
(o) A statement indicating development and implementation of a risk management policy for the company
including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the
existence of the company.
(p) The details about the policy developed and implemented by the company on corporate social responsibility
initiatives taken during the year.
(q) In case of a listed company and every other public company having prescribed paid-up share capital, a
statement indicating the manner in which formal annual evaluation has been made by the Board of its own
performance and that of its committees and individual directors.
(r) Such other matters as may be prescribed.
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If the above disclosures are included in the financial statements then such disclosures need not be again repeated
Where the policy referred to in clause (e) or (o) is made available on company's website, if any, it shall be sufficient
compliance of the requirements under such clauses if the salient features of the policy and any change therein are
specified in brief in the Board's report and the web-address is indicated therein at which the complete policy is
available.
The Central Government may prescribe an abridged Board's report, for the purpose of compliance with this section
by OPC or Small Company.
Report of the Board of Directors in case of OPC [Section 134(4)]: In case of OPC, the report of the Board of
Directors to be attached to the financial statement should contain explanations or comments by the Board on
every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
Thus, in case of OPC, details as required by under Section 134(3) are not required.
Directors' Responsibility Statement [Section 134 (5)]: Separately discussed in next question.
Other provisions of the Companies Act, 2013 relating to Board's Report:
♦ An extract of the annual return shall form part of the Board's report. [Section 92(3)]
♦ The consideration of the Board's report is ordinary business. [Section 102(2)]
♦ If it appears to the directors of a company that the financial statement of the company or the report of the
Board, do not comply with the provisions of Section 129 or 134, they may prepare revised financial statement or a
revised report in respect of any of the 3 preceding financial years after obtaining approval of the Tribunal. Such
application has to be made by the company in prescribed form and in prescribed manner and a copy of the order
passed by the Tribunal shall be filed with the Registrar. [Section 131]
♦ The Board's report shall disclose the composition of the CSR Committee. [Section 135(2)]
♦ The Board of every company referred to Section 135 (1), shall ensure that the company spends, in every
financial year, at leas` 2% of the average net profits of the company made during the 3 immediately preceding
financial years, in pursuance of its Corporate Social Responsibility Policy. [Section 135(5)]
♦ Financial statement and Board's Report shall be sent to every member of the company, to every trustee for
the debenture-holder of any debentures issued by the company, and to all persons other than such member or
trustee, being the person so entitled, not less than 21 days before the date of the meeting. [Section 136(1)]
♦ A copy of the financial statements and Board's report duly adopted at the AGM shall be filed with the
Registrar within 30 days of the date of AGM. [Section 137(1)]
♦ The Board's report shall disclose the composition of an Audit Committee and where the Board had not
accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the
reasons. [Section 177(8)]
♦ The policy adopted by the Nomination and Remuneration Committee is also required to be disclosed in
Board's report. [Section 178(4)]
♦ The Board of Directors of a company shall approve financial statement and the Board's report by means of
resolutions passed at meetings of the Board. [Section 179(3) (g)]
♦ Every related party transactions entered by the company under Section 188 (1) shall be referred to in the
Board's report to the shareholders along with the justification for entering into such related party transactions.
[Section 188(2)]
♦ Every listed company shall disclose in the Board's report, the ratio of the remuneration of each director to
the median employee's remuneration and such other details as may be prescribed. [Section 197(12)]
♦ A whole time director or managing director who is getting commission from the company can get
commission or remuneration form its holding or subsidiary company, subject to disclosure by the company in its
Board's report. [Section 197(14)]
♦ Every listed company and a company belonging to prescribed class of companies shall annex with its Board's
report, a secretarial audit report, given by a Company Secretary in practice, in prescribed form. [Section 204(1)]
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♦ The Board of Directors, in their report, shall explain in full any qualification or observation or other remarks
made by the Company Secretary in practice in his report under Section 204 (1). [Section 204(3)]
Matters to be included in Board's report [Rule 8 of the Companies (Accounts) Rules, 2014]:
(1) The Board's Report shall be prepared based on the stand alone financial statements of the company and the
report shall contain a separate section wherein a report on the performance and financial position of each of the
subsidiaries, associates and joint venture companies included in the consolidated financial statement is presented.
(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties
Section 188 (1) in the Form AOC-2.
(3) The report of the Board shall contain the following information and details, namely:
(A) Conservation of energy:
(i) The steps taken or impact on conservation of energy;
(ii) The steps taken by the company for utilizing alternate sources of energy;
(iii) The capital investment on energy conservation equipments.
(B) Technology absorption-
(i) The efforts made towards technology absorption;
(ii) The benefits derived like product improvement, cost reduction, product development or import substitution;
(iii) In case of imported technology (imported during the last three years reckoned from the beginning of the
financial year)-
(a) the details of technology imported;
(b) the year of import;
(c) whether the technology been fully absorbed;
(d) if not fully absorbed, areas where absorption has not taken place, and the reasons thereof; and
(iv) The expenditure incurred on Research and Development.
(C) Foreign exchange earnings and Outgo-
The Foreign Exchange earned in terms of actual inflows during the year and the Foreign Exchange outgo during the
year in terms of actual outflows.
(4) Every listed company and every other public company having a paid up share capital of ` 25 Crores or more
calculated at the end of the preceding financial year shall include, in the report by its Board of directors, a
statement indicating the manner in which formal annual evaluation has been made by the Board of its own
performance and that of its committees and individual directors.
(5) In addition to the information and details specified in Rule 8 (4), the report of the Board shall also contain -
(i) The financial summary or highlights;
(ii) The change in the nature of business, if any;
(iii) The details of directors or key managerial personnel who were appointed or have resigned during the year;
(iv) The names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate
companies during the year;
(v) The details relating to deposits, covered under Chapter V of the Act,-
(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or payment of interest thereon during the year
and if so, number of such cases and the total amount involved-
- at the beginning of the year;
- maximum during the year;
- at the end of the year;
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(vi) The details of deposits which are not in compliance with the requirements of Chapter V of the Companies
Act, 2013;
(vii) The details of significant and material orders passed by the regulators or courts or tribunals impacting the
going concern status and company's operations in future;
(viii) The details in respect of adequacy of internal financial controls with reference to the Financial Statements.
Disclosure and requirements of SEBI Guideline and Listing Agreement: In addition to compliance of the various
provisions of the Companies Act, 2013, the company should also comply with SEBI Guideline and Listing Agreement
as applicable to preparation and presentation of Board's Report.
Details as required in Board's Report as per listing agreement:
♦ Report on Corporate Governance
♦ Compliance certificate regarding Corporate Governance
♦ Disclosure of remuneration to non-executive directors
♦ Management Discussion and Analysis Report
♦ Code of Conduct as per listing agreement
♦ Deviation in projected utilization and actual utilization of funds, if company had raised funds by issue of
prospectus
♦ Cash flow statement
♦ Deviation from accounting standards
♦ Disclosure about relationship between directors
♦ Business responsibility statement
Details as required in Board’s Report as per various SEBI Regulations:
♦ Details of ESOS/ESOP
♦ Details of change in name
♦ Details of issue of securities.
Que. No. 6] Write a short note on: Directors Responsibility Statement
The Board of directors of Charming Ltd. seek your advice on the matters to be included in the directors'
responsibility statement forming part of the company's annual report to shareholders. As the Company
Secretary of Charming Ltd., advise the Board. CS (Executive) - June 2015 (4 Marks)
Ans.: As per Section 134(3) (c), Directors Responsibility Statement is required to be attached to the Board's Report.
Directors Responsibility Statement [Section 134(5)]: The Directors', Responsibility Statement referred to in 134(3)
(c) shall state that -
(a) In the preparation of the annual accounts, the applicable accounting standards had been followed along with
proper explanation relating to material departures;
(b) The directors had selected such accounting policies and applied them consistently and made judgments and
estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company
at the end of the financial year and of the profit and loss of the company for that period;
(c) The directors had taken proper and sufficient care for the maintenance of adequate accounting records in
accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities;
(d) The directors had prepared the annual accounts on a going concern basis;
(e) The directors, in the case of a listed company, had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate and were operating effectively; and *
(f) The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and
that such systems were adequate and operating effectively.
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Que. No. 7] State the provisions relating to signing of Board's Report? CS (Inter) - Dec 2005 (5 Marks)
Ans.: Signing of Board's report [Section 134(6)]: The Board's report and any annexures thereto shall be signed by
its Chairperson of the company if he is authorized by the Board and where he is not so authorized, shall be signed
by at leas` 2 directors, one of whom shall be a Managing Director, or by the director where there is one director.
Que. No. 8] State the provisions of the Companies Act, 2013 relating to filing of the board's report?
Ans.: As per Section 137(1), a copy of the financial statements and Board's report duly adopted at the AGM shall
be filed with the Registrar within 30 days of the date of AGM.
Que. No. 9] The Directors Report of Ayush Ltd. for the financial year ended 31st March, 2015 has been dated
15th May, 2015, whereas the Auditors' Report for the same period is dated 16th May, 2015. Is this in order?
Explain. CS (Executive) - June 2013 (4 Marks)
Ans.: As Section 134(3)(/), there shall be attached to statements laid before a company in general meeting, a report
by its Board of Directors, which shall include explanations or comments by the Board on every qualification,
reservation or adverse remark or disclaimer made by the auditor in his report.
Thus, ideally the date of Directors Report should be on same date or later than the date of Auditors Report. If the
Auditors Report is subsequent to the date of Directors Report it would not be possible for the board to comply
with the requirements of Section 134(3)(/). Hence, dating of Directors Report earlier than Auditors Report is not in
order.
Que. No. 10] Who are entitled to receive the copy of Financial Statement/Annual Report and auditor's report?
Can company sent abridged financial statement instead of sending full financial statement?
Ans.: Right of member to copies of audited financial statement [Section 136(1)]: A copy of the financial
statements, auditor's report and every other document required by law to be annexed or attached to the financial
statements, which are to be laid before a company in its general meeting, shall be sent to -
The notice of the meeting is required to be sent atleast 21 clear days. Hence, financial statements have also to be
sent atleast 21 clear days before the meeting.
Exception: If the copies of the documents are sent less than 21 days before the date of the meeting, they shall,
notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members -
(a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less
than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the
meeting.
Abridged financial statement in case of listed company [Proviso to Section 136(1)]: A listed company can send
abridged financial statement in Form AOC-3 [Rule 10 of the Companies (Accounts) Rules, 2014].
However, copies of the financial statement and other documents should be made available for inspection at its
registered office during working hours for a period of 21 days before the date of the meeting. If a shareholder asks
for full financial statement, it shall be send to him.
Financial statement on website in case of listed company: A listed company shall also place its financial statements
including consolidated financial statements, if any, and all other documents required to be attached thereto, on
its website, which is maintained by or on behalf of the company.
Every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each
of subsidiary on its website, if any.
However, a listed company which has foreign subsidiary -
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(a) Where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any
law of the country of its incorporation, the requirement shall be deemed to be met if consolidated financial
statement of such foreign subsidiary is placed on the website of the listed company.
(b) Where such foreign subsidiary is not required to get its financial statement audited under any law of the
country of its incorporation and which does not get such financial statement audited, the holding Indian listed
company may place such unaudited financial statement on its website and where such financial statement is in a
language other than English, a translated copy of the financial statement in English shall also be placed on the
website.
Que. No. 11] What disclosures are required to be made in 'Directors Report' for ESOS & ESPS?
During the financial year 2016-2017, the Board of Directors of CARE Automation Services Limited has issued
shares to employees under Employees Stock Option Scheme. Ms. Excellent has recently joined the Board of the
company and asks you, the Secretary of the company, as to what details are to be disclosed in the Board's Report
for the year ending 31st March, 2017 in this regard. Advise her.
Ans.: The Board of Directors is required to disclose the following details in relation to ESOS & ESPS in the Directors
Report:
(a) Options granted
(b) Pricing formula
(c) Options vested
(d) Options exercised
(e) Total number of shares arising as a result of exercise of option
(f) Options lapsed
(g) Variation of terms of options
(h) Money realised by exercise of options
(i) Total number of options in force
(j) Employee-wise details of options
(k) Diluted Earnings Per Share (DEPS)
(l) Weighted-average exercise prices and weighted-average fair values of options
(m) A description of the method and significant assumptions used during the year to estimate the fair values of
options, including the following weighted average information:
- Risk-free interest rate
- Expected life
- Expected volatility
- Expected dividends and
- Price of the underlying share in market at the time of option grant.
Que. No. 12] What disclosures are required to be made in 'Directors Report' for issuing "shares with differential
voting rights"?
Ans.: Disclosures in the Board's Report [Rule 4(4) of the Companies (Share Capital & Debentures) Rules, 2014]:
The board of directors shall disclose in the Board's Report, the following details, namely:
(i) Number of shares allotted with differential rights.
(ii) Details of the differential rights relating to voting rights and dividends.
(iii) Percentage of the shares with differential rights to the total post issue equity share capital with differential
rights issued at any point of time and percentage of voting rights which the equity share capital with differential
voting right shall carry to the total voting right of the aggregate equity share capital.
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(iv) Price at which such shares have been issued.
(v) Particulars of promoters, directors or key managerial personnel to whom such shares are issued.
(vi) Change in control, if any, in the company consequent to the issue of equity shares with differential voting
rights.
(vii) Diluted EPS calculated in accordance with the applicable accounting standards.
(viii) The pre and post issue shareholding pattern along with voting rights.
Que. No. 13] What disclosures are required to be made in 'Directors Report' for issuing "sweat equity shares"?
Ans.: Disclosure in Board's Report [Rule 8(13) of the Companies (Share Capital & Debentures) Rules, 2014]:
The Board of Directors shall, inter alia, disclose in the Directors' Report for the year in which such shares are issued,
the following details of issue of sweat equity shares namely:
(a) The class of director or employee to whom sweat equity shares were issued.
(b) The class of shares issued as Sweat Equity Shares.
(c) The number of sweat equity shares issued to the directors, key managerial personnel or other employees
showing separately the number of such shares issued to them, if any, for consideration other than cash and the
individual names of allottees holding 1% or more of the issued share capital.
(d) The reasons or justification for the issue.
(e) The principal terms and conditions for issue of sweat equity shares, including pricing formula.
(f) The total number of shares arising as a result of issue of sweat equity shares.
(g) The percentage of the sweat equity shares of the total post issued and paid-up share capital.
(h) The consideration (including consideration other than cash) received or benefit accrued to the company from
the issue of sweat equity shares.
(i) The diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares. ,
Que. No. 14] What type of disclosure are required to be made in Board's Report pertaining to remuneration of
directors and employees?
Ans.: Disclosures pertaining to remuneration of directors and employees [Section 197(12)]: Section 197(12) read
with Rule 5 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014
provides that Board's Report of every listed company shall include:
(a) The ratio of the remuneration of each director to the median remuneration of the employees of the company
for the financial year.
(b) The percentage increase in remuneration of each director, CFO, CEO, Company Secretary or Manager, if any,
in the financial year.
(c) The percentage increase in the median remuneration of employees in the financial year.
(d) The number of permanent employees on the rolls of company.
(e) Average percentile increase already made in the salaries of employees other than the managerial personnel in
the last financial year and its comparison with the percentile increase in the managerial remuneration and
justification thereof and point out if there are any exceptional circumstances for increase in the managerial
remuneration.
(f) Affirmation that the remuneration is as per the remuneration policy of the company.
(g) The Board's report shall include a statement showing the names of the top ten employees in terms of
remuneration drawn and the name of every employee, who -
(h) If employed throughout the financial year, was in receipt of remuneration for that year which, in the
aggregate, was not less than X 1 Crore and X 2 lakh;
(i) If employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate
which, in the aggregate, was not less than X 2 lakh and X 50,000 month;
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(j) If employed throughout the financial year or part thereof, was in receipt of remuneration in that year which,
in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing
director or whole-time director or manager and holds by himself or along with his spouse and dependent children,
not less than two per cent of the equity shares of the company.
The statement referred to above shall include the following as under:
(i) Designation of the employee
(ii) Remuneration received
(iii) Nature of employment, whether contractual or otherwise
(iv) Qualifications and experience of the employee
(v) Date of commencement of employment
(vi) The age of such employee
(vii) The last employment held by such employee before joining the company
(yiii) The percentage of equity shares held by the employee in the company
(ix) Whether any such employee is a relative of any director or manager of the company and if so, name of such
director or manager.
The particulars of employees posted and working in a country outside India, not being directors or their relatives,
drawing more than X 60 lakh per financial year or X 5 lakh per month, as the case may be, as may be decided by
the Board, shall not be circulated to the members in the Board's report, but such particulars shall be filed with the
ROC while filing the financial statements and Board's Report.
These particulars shall be made available to any shareholder on a specific request made by him in writing before
the date of such AGM wherein financial statements for the relevant financial year are proposed to be
adopted by shareholders and such particulars shall be made available by the company within three days from the
date of receipt of such request from shareholders.
In case of request received even after the date of completion of AGM, such particulars shall be made available to
the shareholders within 7 days from the date of receipt of such request, on a quarterly basis for public issue, rights
issue, preferential issue, etc. -
(a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or
explanatory statement to the notice for the general meeting, as applicable;
(b) indicating category wise variation (capital expenditure, sales and marketing, working capital, etc.) between
projected utilization of funds made by it in its offer document or explanatory statement to the notice for general
meeting, as applicable and the actual utilization of funds.
Que. No. 15] State the disclosure requirements to be made in annual report under the Sexual Harassment of
Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013.
Ans.: The Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013 mandates
that all companies having more than 10 women employees shall disclose in annual report following details as per
Sections 22 and 28.
Rule 14 of Sexual Harassment of Women at W orkplace (Prevention, Prohibition & Redressal) Rules, 2013 provides
that the annual report which the Complaints Committee shall prepare shall contain following information -
(a) Number of complaints of sexual harassment received in the year;
(b) Number of complaints disposed off during the year;
(c) Number of cases pending for more than ninety days;
(d) Number of workshops or awareness programme against sexual harassment carried out;
(e) Nature of action taken by the employer or District Officer.
Que. No. 16] State any eight provisions of the Companies Act, 2013 and rules made thereunder relating to
'website of company'.
Ans.:
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1. Information pertaining to registered office [Section 12(3)(c)]: Every Company must get its e-mail id and
website address, if any, printed on its letterheads, business letters, billheads, letter papers and in all its notices and
other official publications.
2. Change of object for raising money through prospectus [Section 13(8)(i)]: A company which has raised
money by issuing prospectus and has still some unutilized amount of the money so raised shall not change its
objects for which it raised money through the prospectus unless a special resolution is passed by the company.
The details of such a resolution as may be prescribed shall be published on the Website of the company, if any,
indicating there in the justification for such change.
3. Annual Return [Section 92(3)]: Every company shall place a copy of the annual return on the website of the
company, if any, and the web-link of such annual return shall be disclosed in the Board's report.
4. Unpaid Dividends [Section 124(2)]: A company after transferring the amount of unpaid dividends to a
separate bank account of "Unpaid Dividend Account" will have to prepare a statement containing the shareholder's
names, their, last known addresses, and the unpaid dividend to be paid to them on the company's Website, if any.
5. CSR [Section 135(4)(a)]: The Board of every company to whom provisions of CSR are applicable shall after
taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company
and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner
as may be prescribed under the Rule 9 of the Companies (CSR Policy) Rules, 2014.
6. Placing of financial statements and other documents of a listed company on the website [Section
136(l)(a)]: A listed company shall also place its financial statements including consolidated financial statements, if
any, auditor's report and all other documents required by law to be attached thereto, on its
website, which is maintained by or on behalf of the company. The third proviso to this section provides that every
company having a subsidiary or subsidiaries shall publish separate audited accounts in respect of each of its
subsidiary on its website, if any. However, every listed company having a subsidiary or subsidiaries shall place
separate audited accounts in respect of each of subsidiary on its website, if any.
7. Vigil Mechanism in Audit Committee for Listed Companies and other Prescribed Companies [Proviso to
Section 177(10)]: The vigil mechanism pertaining to setting up of an Audit Committee shall provide for adequate
safeguards against victimization of persons who use such mechanism and make provision for direct access to the
chairperson of the Audit Committee in appropriate or exceptional cases. The details of establishment of such
mechanism shall be disclosed by the company on its website, if any, and in the Board's report.
8. Nomination and Remuneration Policy [Section 178(4)(c)]: The Nomination and Remuneration Committee
shall formulate the criteria and policy for determining qualifications, positive attributes and independence of a
director Provided that such policy shall be placed on the website of the company, if any, and the salient features
of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the
Board's report.
9. Compromises, Arrangements and Amalgamation [Proviso to Section 230(3)]: A notice of meeting ordered
by the Tribunal for the purpose of Compromise and Arrangements must be served upon the creditors or class of
creditors, shareholders or debenture holders and other members. Such notice should also be published on the
website of the company, if any.
10. Code for Independent Directors [Schedule IV(6)]: The terms and conditions of appointment of independent
directors shall also be posted on the company's website.
11. Notice of candidature of a person for directorship [Rule 13(2) of the Companies (Appointment &
Qualification of Directors) Rules, 2014]: The company shall, atleas` 7 days before the general meeting, inform its
members of the candidature of a person for the office of a director or the intention of a member to propose such
person as a candidate for that office by placing notice of such candidature or intention on the website of the
company, if any.
12. Notice of resignation of director [Rule 15 of the Companies (Appointment and Qualification of Directors)
Rules, 2014]: The Company shall within 30 days from the date of receipt of notice of resignation from a director,
intimate the ROC in Form DIR-12 and post the information on its website, if any.
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13. Form and particulars of advertisement or circulars [Rule 4(3) of the Companies (Acceptance of Deposits)
Rules, 2014]: Every company inviting deposits from the public shall upload a copy of the circular on its website, if
any.
14. Variation of terms of contracts referred to in the prospectus or objects for which prospectus was issued
[Rule 7(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014]: The notice shall also be placed
on the website of the company, if any.
15. Other compliances for conversion of Section 8 companies to any other kind [Rule 22(l)(b) of the Companies
(Incorporation) Rules, 2014]: The Company shall, within a week from the date of submitting the application to the
Regional Director, publish a notice at its own expense, and a copy of the notice in Form No. INC-19 shall be sent
forthwith to the Regional Director and the said notice shall be published on the website of the company, if any,
and as may be notified or directed by the Central Government.
16. Change of objects for which money is raised through prospectus [Rule 32(3) of the Companies
(Incorporation) Rules, 2014]: Where there is change of objects for which money is raised through prospectus, a
notice shall also be placed on the website of the company, if any pertaining to the same.
17. Closure of register of members or debenture holders or other security holders [Rule 10(1) of the
Companies (Management and Administration) Rules, 2014]: A company closing the register of members or the
register of debenture holders or the register of other security holders shall give atleas` 7 days previous notice and
in such manner, as may be specified by SEBI, if such company is a listed company or intends to get its securities
listed, by advertisement at least once in a vernacular newspaper in the principal vernacular language of the district
and having a wide circulation in the place where the registered office of the company is situated, and atleast once
in English language in an English newspaper circulating in that district and having wide circulation in the place
where the registered office of the company is situated and publish the notice on the website as may be notified by
the Central Government and on the website, if any, of the Company.
18. Notice of meeting [Rule 18(3)(ix) of the Companies (Management & Administration) Rules, 2014]:
The notice of the general meeting of the company shall be placed on the website of the Company, if any.
19. Voting through electronic means [Rule 20(3)(ii) of the Companies (Management & Administration) Rules,
2014]: The notice of voting through electronic means shall also be placed on the website of the company, if any
and of the agency forthwith after it is sent to the members.
20. Voting through Electronic Means [Rule 20(3) (xiv) of the Companies (Management & Administration)
Rules, 2014]: The results declared along with the scrutinizer's report shall be placed on the website of the company
and on the website of the agency within 2 days of passing of the resolution at the relevant general meeting of
members.
21. Procedure to be followed for conducting business through postal ballot [Rule 22(4) of the Companies
(Management & Administration) Rules, 2014]: The notice of the postal ballot shall also be placed on the website
of the company forthwith after the notice is sent to the members and such notice shall remain on such website till
the last date for receipt of the postal ballots from the members.
22. Postal Ballot [Rule 22(13) of the Companies (Management & Administration) Rules, 2014]: The results of
the poll shall be declared by placing it, along with the scrutinizer's report, on the website of the company.
23. Special notice [Rule 23(3) of the Companies (Management & Administration) Rules, 2014]: Where it is not
practicable to give the notice in the same manner as the company gives it gives notice of any general meetings,
the notice shall be published in English language in English newspaper and in vernacular language in a vernacular
newspaper, both having wide circulation in the State where the registered office of the Company is situated and
such notice shall also be posted on the website, if any, of the Company.
■ ■■■ CORPORATE GOVERNANCE
Que. No. 17] Explain the term: Corporate Governance. CS (Executive) - Dec 2009 (3 Marks)
Narrate briefly the importance of Corporate Governance Report and state who can certify such report.
Corporate governance is looked upon as a distinctive brand and benchmark in the profile of corporate
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excellence. Comment. CS (Executive) - June 2016 (4 Marks)
Ans.: Corporate Governance is a system of rules, practices and processes by which a company is directed and
controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a
company - these include its shareholders, management, customers, suppliers, financiers, government and the
community.
Corporate Governance stipulates parameters of accountability, control and reporting functions of the board of
directors. It is set of systems and procedures to ensure that the company is managed to suit best interest of all
stakeholders.
In India, requirements of corporate governance have been specified by SEBI through SEBI (LODR) Regulations,
2015.
The company shall obtain a certificate from either the auditors or Practicing Company Secretaries regarding
compliance of conditions of corporate governance of the listing agreement and annex the certificate with the
director's report, which is sent annually to all the shareholders of the company. The same certificate shall also be
sent to the Stock Exchanges along with the annual report filed by the company.
The reference of inclusion of report on corporate governance in the annual report should be made in the Board's
Report and, as a good corporate practice, information relating to any non-compliance of the requirements of the
listing agreement should be incorporated in the Board's Report.
Que. No. 18] Write a short note on: Management Discussion and Analysis Report Priya, a nominee director on
the Board of Aroma Ltd., a listed company, informed the Board of directors during a Board meeting that the next
annual report of the company shall contain a 'Management Discussion and Analysis Report'. You being the
Company Secretary have been asked by the Board to prepare the said report. State the matters you would
include in the report. CS (Executive) - Dec 2016 (4 Marks)
Ans.: As part of the Annual Report a Management Discussion and Analysis report should form part of the Annual
Report to the shareholders. This Management Discussion & Analysis should include discussion on the following
matters within the limits set by the company's competitive position:
♦ Industry structure and developments
♦ Opportunities and threats
♦ Segment/product wise performance
♦ Outlook
♦ Risks and concerns
♦ Internal control systems and their adequacy
♦ Discussion on financial performance with respect to operational performance.
♦ Material developments in Human Resources/Industrial Relations front, including number of people
employed.
Que. No. 19] State the contents of Corporate Governance Report.
Ans.: As per Schedule V of the SEBI (LODR) Regulation, 2015 following disclosures shall be made in the section on
the Corporate Governance of the Annual Report.
(1) A brief statement on listed entity's philosophy on code of governance.
(2) Board of directors:
(a) Composition and category of directors (e.g. promoter, executive, non-executive, independent, non-
executive, nominee director - institution represented and whether as lender or as equity investor).
(b) Attendance of each director at the meeting of the board of directors and the last AGM.
(c) Number of other board of directors or committees in which a director is a member or chairperson, (d)
Number of meetings of the board of directors held and dates on which held.
(e) Disclosure of relationships between directors inter-se.
(f) Number of shares and convertible instruments held by non-executive directors.
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(g) Web link details of familiarization programmes imparted to independent directors.
(3) Audit committee:
(a) Brief description of terms of reference.
(b) Composition, name of members and chairperson.
(c) Meetings and attendance during the year.
(4) Nomination and Remuneration Committee:
(a) Brief description of terms of reference
(b) Composition, name of members and chairperson
(c) Meeting and attendance during the year
(d) Performance evaluation criteria for independent directors.
(5) Remuneration of Directors:
(a) All pecuniary relationship or transactions of the non-executive director's vis-a-vis the listed entity shall be
disclosed in the annual report.
(b) Criteria of making payments to non-executive directors. Alternatively, this may be disseminated on the listed
entity's website and reference drawn thereto in the annual report.
(c) Disclosures with respect to remuneration. In addition to disclosures required under the Companies Act, 2013,
the following disclosures shall be made:
(i) All elements of remuneration package of individual directors summarized under major groups, such as salary,
benefits, bonuses, stock options, pension etc.
(ii) Details of fixed component and performance linked incentives, along with the performance criteria.
(iii) Service contracts, notice period, severance fees.
(iiv) Stock option details, if any and whether issued at a discount as well as the period over which accrued and over
which exercisable.
(6) Stakeholders grievance committee:
(a) Name of non-executive director heading the committee.
(b) Name and designation of compliance officer
(c) Number of shareholders complaints received so far.
(d) Number not solved to the satisfaction of shareholders.
(e) Number of pending complaints.
(7) General body meetings:
(a) Location and time, where last three AGMs held.
(b) Whether any special resolutions passed in the previous three annual general meetings.
(c) Whether any special resolution passed last year through postal ballot - details of voting pattern.
(d) Person who conducted the postal ballot exercise.
(e) Whether any special resolution is proposed to be conducted through postal ballot.
(f) Procedure for postal ballot.
(8) Means of communication:
(a) Quarterly results
(b) Newspapers wherein results normally published
(c) Any website, where displayed
(d) Whether it also displays official news releases
(e) Presentations made to institutional investors or to the analysts.
(9) General shareholder information:
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(a) AGM - date, time and venue.
(b) Financial year.
(c) Dividend payment date.
(d) Name and address of each stock exchange at which the listed entity's securities are listed and a confirmation
about payment of annual listing fee to each of such stock exchange.
(e) Stock code.
(f) Market price data - high, low during each month in last financial year.
(g) Performance in comparison to broad-based indices such as BSE SENSEX, CRISIL Index etc.
(h) In case the securities are suspended from trading, the director's report shall explain the reason thereof.
(i) Registrar to an issue and share transfer agents.
(j) Share transfer system.
(k) Distribution of shareholding
(/) Dematerialization of shares and liquidity.
(m) Outstanding GDRs or ADRs or warrants or any convertible instruments, conversion date and likely impact on
equity.
(n) Commodity price risk or foreign exchange risk and hedging activities.
(o) Plant locations.
(p) Address for correspondence.
(10) Other Disclosures:
(a) Disclosures on materially significant related party transactions that may have potential conflict with the
interests of listed entity at large.
(b) Details of non-compliance by the listed entity, penalties and restrictions imposed on the listed entity by stock
exchange or the board or any statutory authority, on any matter related to capital markets, during the las` 3 years.
(c) Details of establishment of vigil mechanism whistle blower policy, and affirmation that no personnel have
been denied access to the audit committee.
(d) Details of compliance with mandatory requirements and adoption of the non-mandatory requirements.
(e) Web link where policy for determining material subsidiaries is disclosed.
(J) Web link where policy on dealing with related party transactions.
(g) Disclosure of commodity price risks and commodity hedging activities.
(11) Non-compliance of any requirement of corporate governance report, with reasons thereof shall be disclosed.
■■■ SEBI (LISTING OBLIGATIONS & DISCLOSURE REQUIREMENTS) REGULATIONS, 2015
Que. No. 20] State the compliance requirements under the SEBI (LODR) Regulations, 2015 relating to "Annual
Report".
Ans.: Annual Report [Regulation 34]: The listed entity shall submit the annual report to the stock exchange within
21 working days of it being approved and adopted in AGM.
Annual report shall contain the following:
(a) Audited financial statements i.e. balance sheets, profit and loss accounts and Statement on Impact of Audit
Qualifications.
(b) Consolidated financial statements audited by its statutory auditors.
(c) Cash flow statement presented only under the indirect method as prescribed in AS-3 or IAS-7
(d) Directors report.
(e) Management discussion and analysis report - either as a part of directors report or addition thereto
(f) For the top 500 listed entities based on market capitalization (calculated as oh March 31 of every financial year),
business responsibility report describing the initiatives taken by them from an environmental, social and
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governance perspective, in the format as specified by the SEBI from time to time. However, listed entities other
than top 500 listed companies based on market capitalization and listed entities which have listed their specified
securities on SME Exchange, may include these business responsibility reports on a voluntary basis in the format
as specified.
(g) The annual report shall contain other disclosures specified in Companies Act, 2013 along with other
requirements as specified in Schedule V i.e. Corporate Governance Report.
Que. No. 21] You are working as Company Secretary in Reliance Ltd., a listed company. Your company's
Managing Director wants to know what compliance has to be made in respect of following matters:
(a) Copies of annual report to shareholder
(b) Information to be provided to shareholder for appointment of a new director.
Ans.: Documents & information to shareholders [Regulation 36]:
(1) The listed entity shall send the annual report in the following manner to the shareholders:
(a) Soft copies of full annual report to all those shareholders who have registered their e-mail addresses for the
purpose
(b) Hard copy of statement containing the salient features of all the documents, as prescribed in Section 136 of
Companies Act, 2013 or rules made thereunder to those shareholders who have not so registered.
(c) Hard copies of full annual reports to those shareholders, who request for the same.
(2) The listed entity shall send annual report, to the holders of securities, not less than 21 days before AGM.
(3) In case of the appointment of a new director or re-appointment of director the shareholders must be
provided with the following information:
- A brief resume of the director
- Nature of his expertise in specific functional areas
- Disclosure of relationships between directors inter-se
- Names of listed entities in which the person also holds the directorship and the membership of Committees
of the board
- Shareholding of non-executive directors.
Que. No. 22] State the compliance requirements under the SEBI (LODR) Regulations, 2015 relating to "Website".
Ans.: Website [Regulation 46]:
(1) Listed entity shall maintain a functional website containing the basic information about the listed entity.
(2) The listed entity shall disseminate the following information on its website:
(a) Details of its business.
(b) Terms and conditions of appointment of independent directors.
(c) Composition of various committees of board of directors.
(d) Code of conduct of board of directors and senior management personnel.
(e) Details of establishment of vigil mechanism/Whistle Blower Policy.
(J) Criteria of making payments to non-executive directors, if the same has not been disclosed in annual report.
(g) Policy on dealing with related party transactions.
(h) Policy for determining 'material subsidiaries'.
(i) Details of familiarization programmes imparted to independent directors including the following details -
(i) number of programmes attended by independent directors (during the year and on a cumulative basis till date),
(ii) number of hours spent by independent directors in such programmes (during the year and on Cumulative basis
till date), and
(iii) other relevant details
(j) The e-mail address for grievance redressal and other relevant details;
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(k) Contact information of the designated officials of the listed entity who are responsible for assisting and
handling investor grievances.
(l) Financial information including:
(i) Notice of meeting of the board of directors where financial results shall be discussed.
(ii) Financial results, on conclusion of the meeting of the board of directors where the financial results were
approved.
(ii) Complete copy of the annual report including balance sheet, profit and loss account, directors report, corporate
governance report etc.
(m) Shareholding pattern.
(n) Details of agreements entered into with the media companies and/or their associates, etc.
(o) Schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or
institutional investors simultaneously with submission to stock exchange.
(p) New name and the old name of the listed entity for a continuous period of one year, from the date of the
last name change.
(3) The listed entity shall ensure that the contents of the website are correct.
The listed entity shall update any change in the content of its website within 2 working days from the date of such
change in content.
■ ■■ POLICIES
The Companies incorporated under the Company Law are required to frame different Policies/maintain
systems/plans and devise Codes for the Company/Board of Directors and Senior Management
Personnel/Employees pursuant to the provisions of the Companies Act, 2013 and other corporate laws. However,
companies whose shares are listed on Stock Exchanges in India are additionally required to frame some other
policies/code as well, in compliance of the SEBI (LODR) and SEBI Regulations.
The Policies and Codes that are required to be framed by companies, needs also to be disclosed in the Board's Report
forming part of the Annual Report and uploaded on Company's website, wherever applicable.
Que. No. 23] Write a short note on: CSR Policy
Ans.: CSR Policy - meaning [Rule 2(e) of the Companies (CSR Policy) Rules, 2014]: CSR Policy relates to the
activities to be undertaken by the company as specified in Schedule VII of the Companies Act, 2013 and the
expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company.
CSR Policy [Rule 6]: The CSR Policy of the company shall, inter alia, include the following namely: —
(a) A list of CSR projects or programs which a company plans to undertake falling within the purview of the
Schedule VII, specifying modalities of execution of such project or programs and implementation schedules for the
same; and
(b) Monitoring process of such projects or programs:
CSR activities do not include the activities undertaken in pursuance of normal course of business of a company.
The Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility
Policy are related to the activities included in Schedule VII.
The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities
shall not form part of the business profit of a company.
Que. No. 24] State the compliance requirement under the SEBI (LODR) Regulations, 2015 relating to "Vigil
Mechanism".
Write a short note on : Whistle Blower Policy CS (Executive) - June 2015 (4 Marks), June 2016 (4 Marks)
Ans.: Regulation 22 of the SEBI (LODR) Regulations, 2015 makes the following provisions on Whistle Blower Policy.
Vigil Mechanism [Regulation 22]: The listed entity shall formulate a vigil mechanism for directors and employees
to report genuine concerns.
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The vigil mechanism shall provide for adequate safeguards against victimization of directors or employees or any
other person who avail the mechanism and also provide for direct access to the chairperson of the audit committee
in appropriate or exceptional cases.
Whistle Blower Policy’/‘vigil mechanism' explained:
The concept of'Whistle Blower Policy'/'vigil mechanism’ is borrowed from western thinking. The concept is that
there are many employees at various levels in the organization who feel that something is going wrong e.g.
corruption, violation oflaio, wastages, unethical practices etc. The policy/mechanism to report such corruption,
violation of law, wastages, and unethical practices is known as vigil mechanism.
In many cases when lower level employee reports such incidence and they are victimized - may be demoted or
removed from his job. In fear of losing job he will not report such incidence hence regulation provides that vigil
mechanism shall provide adequate safeguards against victimization of directors or employees or any other person
who avail the mechanism.
Que. No. 25] What are the provisions of the Companies Act, 2013 regarding establishment of Vigil Mechanism?
Ans.: Establishment of Vigil Mechanism [Section 177(9)]: Every listed company or prescribed classes of companies
shall establish a vigil mechanism for directors and employees to report genuine concerns in prescribed manner.
Requirements of Vigil Mechanism [Section 177(10)]: The vigil mechanism shall provide for adequate safeguards
against victimization of persons who use such mechanism and make provision for direct access to the chairperson
of the Audit Committee in appropriate or exceptional cases.
Disclosure: The details of establishment of vigil mechanism shall be disclosed by the company on its website and
As per Rule 7 of the Companies (Meetings of Board & its Powers) Rule, 2014, every listed company and the
companies belonging to the following class or classes shall establish a vigil mechanism for their directors and
employees to report their genuine concerns or grievances-
(a) The Companies which accept deposits from the public
(b) The Companies which have borrowed money from banks and public financial institutions in excess of ` 50
Crore.
Audit committee to see the vigil mechanism: The companies which are required to constitute an audit committee
shall oversee the vigil mechanism through the committee and if any of the members of the committee have a
conflict of interest in a given case, they should rescue themselves and the others on the committee would deal
with the matter on hand.
In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for
the purpose of vigil mechanism to whom other directors and employees may report their concerns.
Safeguards against victimization and access to audit committee: The vigil mechanism shall provide for adequate
safeguards against victimization of employees and directors who avail of the vigil mechanism and also provide for
direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit
Committee in exceptional cases.
Safeguards against frivolous complaints: In case of repeated frivolous complaints being filed by a director or an
employee, the audit committee or the director nominated to play the role of audit committee may take suitable
action against the concerned director or employee including reprimand.
Que. No. 26] Write a short note on: Policy on directors appointment and remuneration
Ans.: Policy on directors appointment and remuneration [Section 178(2) to (5)]: The Nomination & Remuneration
Committee shall identify persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, recommend to the Board their appointment and removal
and shall carry out evaluation of every director's performance.
The N omination & Remuneration Committee shall formulate the criteria for determining qualifications, positive
attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for
the directors, KMP and other employees.
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The Nomination and Remuneration Committee shall, while formulating the policy ensure that —
(a) The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully.
(b) Relationship of remuneration to performance is clear and meets appropriate performance benchmarks.
(c) Remuneration to directors, KMP and senior management involves a balance between fixed and incentive
pay reflecting short and long-term performance objectives appropriate to the Working of the company and its
goals. Such policy shall be disclosed in the Board's report.
Que. No. 27] Write a short note on: Dividend Distribution Policy
Ans.: Dividend Distribution Policy [Regulation 43A of the SEBI (LODR) Regulations, 2015]: The top 500
listed entities based on market capitalization shall formulate a dividend distribution policy which shall be disclosed
in their annual reports and on their websites.
The dividend distribution policy shall include the following parameters:
(a) Circumstances under which the shareholders of the listed entities may or may not expect dividend.
(b) Financial parameters that shall be considered while declaring dividend.
(c) Internal and external factors that shall be considered for declaration of dividend.
(d) Policy as to how the retained earnings shall be utilized.
(e) Parameters that shall be adopted with regard to various classes of shares.
The listed entities other than top 500 listed entities based on market capitalization may disclose their dividend
distribution policies on a voluntary basis in their annual reports and on their websites.
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CHAPTER
22
REGISTERS, FORMS S RETURNS
Que. No. 1] Write a short note on: Statutory Books
What are the statutory books prescribed under Companies Act, 2013? CS (Inter) - June 2004 (4 Marks)
Ans.: The Companies Act, 2013 lays down that every company incorporated under this Act must maintain and keep
at its registered office certain books, registers and copies of certain returns, documents etc. and to give certain
notices, file certain returns, forms, reports, documents etc. with the Registrar of Companies within certain specified
time limits and with the prescribed filing fees. These books are known as Statutory Books. Some of the statutory
registers are required to be kept open by the company for inspection by directors, members, creditors of the
company and by other persons. The company is also required to allow extracts to be taken from certain documents,
registers, returns etc. and furnish copies of certain documents on demand by a member or by any other person on
payment of specified fees.
Every company incorporated under the Act is required to keep at its registered office, inter alia, the following
statutory books and registers:
Name of Register Form No. Relevant SectioiVRule
Register of renewed and duplicate SH-2 Section 46(3) & Rule 6(3) (a) of the Companies (Share Capital &
share certificate Debentures) Rules, 2014
Register of sweat equity shares SH-3 Section 54 & Rule 8 (14) of the Companies (Share Capital &
Debentures) Rules, 2014
Register of employee stock option SH-6 Section 62(l)(b) & Rule 12(10) of the Companies (Share Capital
& Debentures) Rules, 2014
Register of shares/other securities SH-10 Section 68(9) & Rule 17(12) of the Companies (Share Capital &
bought back Debentures) Rules, 2014
Register of deposits Section 73 & 74 & Rule 14 of the Companies (Acceptance of

Deposits) Rules, 2014
Register of charges CHG-7 Section 85 & Rule 10(1) of the Companies (Registration of
Charges) Rules, 2014
Register of Members MGT-1 Section 88(l)(a) & Rule 3 (1) of the Companies (Management &
Administration) Rules, 2014
Register of debenture holders and MGT-2 Section 88 (l)(b) & (c) & Rule 4 of the Companies (Management
other securities holders & Administration) Rules, 2014
Foreign register of members, Section 88(4) & Rule 7 of the Companies (Management &
debenture holders, other security Administration) Rules, 2014
holders or beneficial owners
residing outside India
Register of Renewed & Duplicate SH-2 Rule 6(3) of the Companies (Share Capital & Debentures) Rules,
Share Certificate 2014
372
Annual Return Section 92
Register of postal ballot - Section 110 & Rule 22 of the Companies (Management &
Administration) Rules, 2014
Name of Register Form No. Relevant Section/Rule
Minutes of proceedings of general Section 118

meeting, meeting of board of
directors and other meeting &
resolutions passed by postal ballot.
Books of account - Section 128
Register of directors and key - Section 170 & Rule 17 of the Companies (Appointment &
managerial personnel and their Qualification of Director) Rules, 2014
shareholding
Register of loans, guarantee, MBP-2 Section 186(9) & Rule 12 (1) of the Companies (Meetings of
security & acquisition made by Boards & its Powers) Rules, 2014
company
Register of investment not held in MBP-3 Section 187(3) & Rule 14 (1) of the Companies (Meetings of
its own name by the company Boards & its Powers) Rules, 2014
Register of contracts with related MBP-4 Section 189 & Rule 16 (1) of the Companies (Meetings of Boards
party and contracts and bodies etc. & its Powers) Rules, 2014
in which directors are interested
Que. No. 2] Write a short note on: Statistical Books

Ans.: In addition to books of account and statutory books, companies usually maintain the certain books which
give details information regarding holding and transfer of shares and debentures, calls made on shareholders and
debenture holders, interest paid to debenture holders, interest paid to debenture holders share warrants issued
and surrendered and such other matters not covered by the books of account and such other matter not covered
by the books of account and statutory books:
Name of the register/book
(1) Share application and allotment book
(2) Share call book
(3) Debenture call book
(4) Register of share transfers
(5) Shareholders dividend book
(6) Debenture interest book
(7) Register of certification & balance tickets
(8) Debenture transfer register j
(9) Register of share certificates
(10) Register of probates
(11) Register of share warrants
(12) Register of dividend mandates
(13) Agenda book
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(14) Register of sealed documents
(15) Register of powers of attorney
Que. No. 3] Distinguish between: Statutory Books & Statistical Books
CS (Executive) - Dec 2008 (4 Marks) CS (Executive) - June 2011 (3 Marks), June 2012 (4 Marks)
Ans.: Following are the main points of distinction between statutory books & statistical books:
Point Statutory Books Statistical Books
Meaning As per the provisions of different sections of In addition to books of account and statutory
the Companies Act, 2013 the certain books books, companies usually maintain the certain
must be maintained by the company which are books which are known as Statistical books.
known as statutory books.
Point Statutory Books Statistical Books
Place Statutory books must be kept at the register Statistical books may be kept at any place other
office of the company. than register office of the company.
Compulsion Keeping of statutory books is compulsory. Keeping of Statistical books is optional.
Examples - Register of charges - Share application & allotment book
. - Register & index of members, debenture - Share call book

holders - Debenture call book
- Minutes of proceedings of general - Register of share transfers
meeting, meeting of Board of Directors
- Shareholders dividend book
- Register of investments not held in the
- Debenture interest book
company name
- Debenture transfer register
- Register of contracts or arrangements in
which directors are interested - Register of share certificates
- Register of directors and key managerial - Register of probates
personnel and their shareholding. - Register of share warrants
- Register of loans and investment made - Register of dividend mandates
other body corporate - Agenda book
- Register of sealed documents

- Register of powers of attorney
■ ■■ STATUTORY REGISTERS
Que. No. 4] Write a short note on: Register of renewed and duplicate share certificate Ans.: Refer to Question
No. 6 of Chapter No. 5 - "Allotment & Issue of Certificates".
Que. No. 5] Write a short note on: Register of sweat equity shares
Ans.: Refer to Question No. 18 of Chapter No. 2 - "Concept of Capital & Financing of Companies". Que. No. 6]
Write a short note on: Register of employee stock option
Ans.: Refer to Question No. 27 of Chapter No. 2 - "Concept of Capital & Financing of Companies". Que. No. 7]
Write a short note on: Register of shares/other securities bought back Ans.: Refer to Question No. 8 of Chapter
No. 3 - "Alteration of Share Capital".
Que. No. 8] Write a short note on: Register of deposits Ans.: Refer to Question No. 33 of Chapter No. 9 -
"Deposits".
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Que. No. 9] Write a short note on: Register of charges
Ans.: Refer to Question No. 20 of Chapter No. 10 - "Creation & Registration of Charges".
Que. No. 10] Write a short note on: Register of Members Ans.: Refer to Question No. 15 of Chapter No. 7 -
"Membership".
Que. No. 11] Write a short note on: Register of debenture holders and other securities holders Ans.: Refer to
Question No. 15 of Chapter No. 7 - "Membership".
Que. No. 12] Write a short note on: Foreign register of members, debenture holders, other security holders or
beneficial owners residing outside India
Ans.: Refer to Question No. 23 of Chapter No. 7 - "Membership".
Que. No. 13] Write a short note on: Register of postal ballot
Ans.: Refer to Question No. 59 of Chapter No. 14 - "Meetings".
Que. No. 14] Write a short note on: Register of directors and key managerial personnel and their shareholding
Ans.: Refer to Question No. 70 of Chapter No. 15 - "Institution of Directors".
Que. No. 15] Write a short note on: Register of contracts with related party and contracts and bodies etc. in
which directors are interested
Ans.: Refer to Question No. 31 of Chapter No. 16 - "Powers & Duties of Directors".
OTHER REGISTERS
Que. No. 16] Write a short note on: Directors Attendance Book
Ans.: A company must possess proof or evidence of the fact that at a particular Board meeting, the directors who
were present, absent and who had sought leave of absence from the Board because of their inability to attend a
meeting.
According to Section 167, the office of a director becomes vacant if he absents himself from all the meetings of
the Board of Directors held during a period of 12 months with or without seeking leave of absence of the Board.
If at any stage, the Board declares vacant the office of any one of its directors, the company must have a proper
record of attendance of its directors at each Board meeting to establish that the particular director had in fact
absented, without leave of the Board, from the specified number of meetings or from all the meetings for the
specified period of time.
In compliance with the provisions of Section 118(4), the minutes of each Board meeting contain the names of all
the directors present at the meeting. In fact minutes of each Board meeting commence with the caption -
"Directors present at the meeting".
Articles of most of the companies contain a provision to the effect that the directors attending a Board meeting
must sign in the book kept by the company for the purpose. This is based on Regulation 65 in Table F, which reads
as:
"Every director present at any meeting of the Board or a committee thereof shall sign against his name in a hook
to he kept for that purpose".
In view of the above provisions, a practice has been established with companies to keep a directors attendance
book, in which attendance of each director is marked by writing his name below details of the meeting. Signatures
of all the directors attending Board meetings are obtained by the company secretary before the commencement
of the meeting. Attendance of special invitees, like the solicitors, advocates, advisers, senior managers of the
company etc. is also marked in the said register by writing names and designations.
The Director's attendance book is not open for inspection.
Some companies, instead of keeping a supplementary record in the form of a separate book for directors
attendance, get the signatures of the attending directors on the pages of the minutes themselves instead of
keeping a separate book of directors attendance. This is done by preparing the first page of minutes of each Board
meeting in advance and at the time of the meeting, directors are requested to put their signatures against their
names.
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Entries in the register should be authenticated by the Company Secretary or by any other person authorized by the
Board for the purpose, by appending his signature to each entry. The book should be preserved for a period of 8
years and should be kept in the custody of the Company Secretary or by any other person authorized by the Board
for the purpose.
Que. No. 17] Write a short note on: Shareholders/Proxies Attendance Register
Ans.: For keeping proper record of the members attending every general meeting of a company, shareholders
attendance register is maintained. The secretarial staff present at the venue of each general meeting of the
company, take the signatures of the members/proxies coming for attending the meeting, before they enter the
meeting hall.
The register has the following columns:
1. Name of the shareholder
2. Folio No. of the shareholder
3. No. of shares registered in his/her name
4. Name of the proxy holder and No. of shares for which proxy is given
5. Signature of the shareholder or proxy holder
The register should be maintained at the registered office of the company.
The register of Shareholders/ proxies attendance in relation to a particular meeting should be open for inspection
to every member entitled to vote at that meeting, during the period beginning 24 hours before the time fixed for
the commencement of the meeting and ending with the conclusion of the meeting.
No person is entitled to copies of the register or any portion thereof.
Board for the purpose, by appending his signature to each entry. The register should be preserved for a period of
8 years from the date of the meeting and should be kept in the custody of the Company Secretary or by any other
person authorized by the Board for the purpose.
Que. No. 18] Write a short note on: Dividend Register * 1
Ans.: Whenever a company pays dividend, interim or final, this register is used. Details of every dividend are
entered in the register. This register is to be maintained as a permanent record. The register contains the following
columns:
1. Name of the company
2. Registered office address of the company
3. Name of the shareholder
4. Register of members Folio No.
5. Number of shares held
6. Amount of dividend/ interim dividend payable Remarks column for initials of the authenticating officer of
the company.
Entries in the register should be made within 7 working days of the date of payment of dividend. The register
should be maintained at the registered office of the company.
The register is not open for inspection.
Board for the purpose.
The register should be preserved for a period of 8 years from the date of payment and should be kept in the custody
of the Company Secretary or by any other person authorized by the Board for the purpose.
Dividend reconciliation statement should be preserved as long as any dividend remains unclaimed.
Que. No. 19] Write a short note on: Register of Fixed Assets
376
Ans.: Under the Companies (Auditors Report) Order, 2015 (CARO), the Auditors have to include a statement in
their report which inter alia specify whether the company is maintaining proper records to show full particulars
including quantitative details and situation of fixed assets. Hence, this register is a statutory register.
Each company should keep and maintain this register.
Maintenance of such register shall help the management to fix accountability and detect misuse, misappropriation
and fraud about the assets of the company.
The following may be the columns of this register:
1. Serial No.
2. Date of entry
3. Particulars of assets
4. Quantity
5. Cost price
6. Date of purchase
7. Situation
8. Details of disposal
9. Remarks.
Que. No. 20] Write a short note on: Register of Form No. MBP. 1 from directors
Ans.: Under Section 184, every director of a company has to give a general notice in Form No. MBP-1 prescribed
under the Companies (Meeting of Board and its powers) Rule, 2014, to the board of directors of the company to
the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is
to be regarded as concerned or interested in contracts or arrangements with them.
Failure to comply with the provisions of this section the office of such defaulting director shall become vacant
under Section 167(l)(d).
In view of the above, a Company Secretary has to keep and maintain this register as to ascertain the director whose
office shall fall vacant.
Its columns may be the following:
1. Serial No.
2. Name of director
3. Date of appointment
4. Details of Form No. MBP-1 received
- Date of receipt
- Date of Board meeting where it was read and recorded
- Date of validity.
Que. No. 21] Write a short note on: Register of Nomination
Ans.: As per Section 72, every holder of securities at any time, nominate in the prescribed manner, a person to
whom his securities shall vest in the event of his death.
Under Rules 19 of the Companies (Share Capital & Debentures) Rules, 2014, Form SH-13 has been prescribed. In
view of the above, every company should keep and maintain a Register of Nominees for each class of shares, and
debentures separately. Simultaneously, the details of the nominee should be recorded in the respective folio of
the Register of Members and Register of Debenture holders.
The following may be the columns of this register:
1. Serial No.
2. Date of entry
3. Date of receipt of Nomination Form
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4. Name & address of nominee
5. Date of birth (minor)
6. Name & address of guardian of nominee (minor)
7. No. of shares/debentures
8. Remarks.
This register is required to be maintained permanently.
Que. No. 22] Write a short note on: Register of Share Warrants
Ans.: When a company issues share warrants, this register is required to be maintained. The name of the warrant
holder is struck off from the register of members after making an appropriate reference there. His name and other
relevant particulars are entered in the register of share warrants. The register must have, inter alia, the following
columns:
1. Name of share warrant holder
2. Address of share warrant holder
3. No. and date of issue of share warrant
4. His register of members folio no.
5. No. of shares, with distinctive numbers, in lieu whereof share warrants have been issued
6. Remarks (for any other information and for signature of the Company Secretary, who must authenticate
each entry in the register).
■ ■■ FORMS, FILING FEES AND PUNISHMENT FOR FRAUD AND FALSE STATEMENTS
Que. No. 23] Write a short note on: Filing of Forms & Returns under the Companies Act, 2013
Ans.: As per Section 398, various applications, forms, returns and documents can be filed electronically.
Fee for filing [Section 403(1)]: Fees are payable for registration of company as well as for filing any document.
Mode of Payment [Rule 13 of the Companies (Registration Offices & Fees) Rules 2014]: The fees, charges or other
sums payable for filing any application, form, return or any other document shall be paid by means of credit card;
or internet banking; or remittance at the counter of the authorized banks or any other mode as approved by the
Central Government. /
Payment of additional fees for late filing of documents [Proviso to Section 403(1)]: The documents have to be
filed within the time prescribed in various sections. If filing is delayed, additional fee is payable. If late fee is not
paid, the documents will not be deemed to have been filed. Filing of additional fees has been prescribed in
Annexure to the Rule.
Que. No. 24] Write a short note on: Defective Forms/Documents
Ans.: A form or document is defective for any one of the following reasons:
(i) The form or document does not contain the necessary enclosures.
(ii) Certain particulars in the Document or Form have been left unfilled.
(iii) Certain particulars apparent on the face of it seem false.
(iv) The document is not filed in proper time or is not accompanied by the requisite filing fee.
(v) The document is not properly signed or certified.
If a document is found to be not in order for any of the reasons stated above the Registrar will not register the
document until the particulars left unfilled are filled or the error is rectified by the company. For this purpose,
facility of resubmission is available under MCA-21 portal. However resubmission can be made, only when the
ROC requires that the company resubmit the form with corrections. If within the date document is required to be
filed, the blank is not filled in or the apparent error is not corrected then the Registrar is at liberty to launch
prosecution against the company and its officers for default in filing the document.
If the defect is one which requires filing of a revised document, then, in certain cases, the ROC may accept the
revised form on payment of additional fee which he may determine in terms of Section 403 of the Act.
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Que. No. 25] Chairman of your company wants to know the procedure of condonation of delay by the Central
Government in filing the documents with the ROC. As a Company Secretary, prepare a note for consideration of
the Chairman. CS (Executive) - Dec 2013 (8 Marks) 1 2 3
Ans.: Condonation of delay in certain cases [Section 460]: The Central Government may for reasons to be recorded
in writing, condone the delay in following cases:
(a) Where any application required to be made to the Central Government in respect of any matter is not made
within the time specified therein and
(b) Where any document required to be filed with the Registrar is not filed within the time specified therein.
Procedure for condonation of delay by Central Government in relation to filing of documents with ROC:
(1) Convene a board meeting and pass a resolution for seeking condonation of delay in filing the document.
(2) Submit an application to the Central Government along with the reasons for such delay. The application
should be accompanied by a copy of the board resolution seeking condonation of delay, latest audited balance
sheet and profit and loss account, certified copy of the memorandum and articles of association and filing fees.
(3) The Central Government may for reasons to be recorded in writing, condone the delay.
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CHAPTER
23
MAJORITY RUU S MINORITY RIGHTS
Que. No. 1] The Court of law will not interfere with the internal management of companies acting within their
powers. CS (Executive) - June 2012 (5 Marks)
Discuss the provisions related to 'majority rule' and 'minority rights' with reference to the concept of rights of
majority. CS (Inter) - Dec 2006 (8 Marks), June 2008 (10 Marks)
Discuss the rule of Foss vs. Harbottle. CS (Inter) - Dec 2007 (4 Marks)
Ans.: Powers of Majority: As a company is an artificial person with no physical existence, it functions through the
instrumentality of the Board of directors who is guided by the wishes of the majority. Therefore, a cardinal rule of
company law that prima facie a majority of members of a company are entitled to exercise the powers of the
company and generally to control its affairs.
The principle of non-interference: In case of difference amongst the members the issue is decided by a vote of the
majority. Since the majority of the members are in an advantageous position to run the company according to their
command, the minorities of shareholders are often oppressed. The company law provides for adequate protection
for the minority shareholders when their rights are trampled by the majority. But the protection of the minority is
not generally available when the majority does anything in the exercise of the powers for internal administration
of a company. The court will not usually intervene at the instance of shareholders in matters of internal
administration, and will not interfere with the management of a company by its directors so long they are acting
within the powers conferred on them under the articles of the company. In other words, the articles are the
protective shield for the majority of shareholders who compose the board of directors for carrying out their object
at the cost of minority of shareholders.
The basic principle of non-interference with the internal management of company by the court is laid down in a
celebrated case of Foss v. Harbottle (1843) 2 Hare 461 = (1843) 67 ER189 that no action can be brought by a
member against the directors in respect of a wrong alleged to be committed to a company. The company itself is
the proper party of such an action.
When minority can intervene: The principle that majority rule has certain well established exceptions as follows:
(1) Ultra Vires Acts: Where the directors representing the majority of shareholders perform an illegal or ultra
vires act for the company, an individual shareholder has right to bring an action. The majority of shareholders have
no right to confirm an illegal or ultra vires transaction of the company. In such case a shareholder has the right to
restrain the company by an order or injunction of the Court from carrying out an ultra vires act.
(2) Fraud on Minority: Where an act done by the majority amounts to a fraud on the minority; an action can be
brought by an individual shareholder.
It would be a shocking thing if the majority of shareholders are allowed to put something into their pockets at the
expenses of the minority. In this case, the majority of members of 'Company A' were also members of 'Company
B', and at a meeting of 'Company A' they passed a resolution to compromise an action against 'Company B', in a
manner alleged to be favourable to 'Company B', but unfavourable to 'Company A'. Held, the minority shareholders
of 'Company A' could bring an action to have the compromise set aside. [Menier v. Hooper's Telegraph Works,
(1874) L.R. 9 Ch. App. 350]
(3) Wrongdoers in Control: If the wrongdoers are in control of the company, the minority shareholders
representative action for fraud on the minority will be entertained by the court.
(4) Resolution requiring Special Majority but is passed by a simple majority: A shareholder can sue if
an act requires a special majority but is passed by a simple majority. Simple or rigid, formalities are to be observed
if the majority wants to give validity to an act which purports to impede the interest of minority.
(5) Personal Actions: Individual membership rights cannot be invaded by the majority of shareholders. He is
entitled to all the rights and privileges appertaining to his status as a member. An individual shareholder can insist
on the strict compliance with the legal rules, statutory provisions.
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(6) Breach of Duty: The minority shareholder may bring an action against the company, where although there
is no fraud, there is a breach of duty by directors and majority shareholders to the detriment of the company.
The plaintiff, who was minority shareholders of a company, brought an action against the two directors of the
company and the company itself. In their statement of the claim they alleged that the company, on the instruction
of the two directors who were majority shareholders, sold the company's land to one of the directors (who was
the wife of the other) for £ 4,250 and the directors knew or ought to have known that the sale was at an under
value. Four years after the sale, she sold the same land for £ 1,20,000. The directors applied for the statement of
claim to be disclosed on reasonable cause of action or otherwise as an abuse of the process of the Court. Held, the
application of director should be dismissed. [Daniels v. Daniels, (1978) 2 W.L.R. 73]
Que. No. 2] Sky-High Ltd. is engaged in the business of construction of projects. A, B and C, directors of the Sky-
High Ltd. are holding 75% of the capital of this company. The company passed a resolution at its general meeting
that it would not be interested in a particular contract for construction of bridge. Subsequently, the same
contract was obtained by A, B and C in their own names. Comment.
CS (Final) - Dec 1995 (5 Marks), Dec 2001 (5 Marks)
Ans.: The basic principle of non-interference with the internal management of company by the court is laid down
in a celebrated case of Foss v. Harbottle (1843) 2 Hare 461 = (1843) 67 ER189 that no action can be brought by a
member against the directors in respect of a wrong alleged to be committed to a company. The company itself is
the proper party of such an action.
However, if the majority misuses its powers to defraud or oppress the majority, an action can be brought by
minority shareholders.
As per facts given in case, three directors holding 75% of the capital used their position and obtained contract in
their own names. This amounts to breach of duty and fraud on minority as directors utilized the contract for their
person gain. Thus, minority shareholder can bring action against the directors.
Que. No. 3] Explain the protection accorded to the minority shareholder under the company law.
CS (Inter) - June 1999 (8 Marks) CS (Executive) - Dec 2008 (7 Marks)
Briefly explain the rule of majority and its exceptions. CS (Inter) - Dec 2000 (6 Marks)
How does the Companies Act, 2013 provide the protection of the right of minority shareholder?
Ans.: Though the shareholder's democracy is supreme under the Companies Act and the decided cases suggest
that the majority shall not be allowed to act in an unfair, fraudulent, or oppressive way against the interests of the
minority shareholders.
The Companies Act, 2013, extends protection to minority by granting various rights to minority shareholders which
are discussed as below:
(1) The variation of class rights: The rights attached to the shares of any class can be varied as per Section 48 (1)
with the consent in writing of the holder of not less than 3/4th of the issued shares of that class or with the sanction
of a special resolution passed at a separate meeting of the holders of the issued shares of that class. But the holders
of not less than 10% of the shares of that class who had not assented to the variation may apply to the Tribunal for
the cancellation of the variation as per Section 48(2).
(2) Schemes of reconstruction and amalgamation: The minority is accorded protection in cases where they
dissent to the scheme of reconstruction or amalgamation.
(3) Oppression and mismanagement: The principle of majority rule does not apply to cases where Sections 241
to 246 are applicable for prevention of oppression and mismanagement. A member, who complains that the affairs
of the company are being conducted, in a manner oppressive to some of the members including himself, or against
public interest, he may apply to the Tribunal.
381
(4) Alternative remedy to winding up: Any member or members, who complain that the affairs of the company
are being conducted in a manner oppressive to some of the members including themselves, may apply for winding
up of company.
(5) Investigation by the Government: As per Section 210 the Central Government may appoint one or more
competent persons as inspectors to investigate the affairs of any company and to report thereon in such manner
as the Central Government may direct.
!■■■ OPPRESSION & MISMANAGEMENT
Que. No. 4] Give five example of 'oppression'.
Ans.: The term 'oppression' is not defined in the Companies Act, 2013. Oppression, according to the dictionary
meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful.
Some the acts held as oppressive are as follows:
♦ Continuous refusal to register shares to retain control over affairs of the company.
♦ Illegal removal of director one group and appointing other director without notice to one group of directors.
♦ Calling board meeting with 2 days notice so that NRI directors cannot attend and allotting shares to one
group so that it comes into majority.
♦ Issuing shares to wife of directors for wholly illusive consideration.
♦ Attempt to deprive members of his ordinary membership rights e.g. denial of voting right or denial to contest
election as director
♦ Wrong share transfer of shares to reduce the shares of other groups.
♦ Diversion of business opportunity to another company where some directors are interested.
Que. No. 5] Give five example of 'mismanagement'
Ans.: Some of the acts held as mismanagement are as follows:
♦ Not allowing director to function as director
♦ Reckless sanction and disbursement of loans.
♦ Serious violation of legal provisions
♦ Acting beyond authority of memorandum and articles.
♦ Directors do not take serious actions in case of corruption, embezzlement etc.
♦ Diversion of funds
♦ Operation of bank accounts by unauthorized persons.
Que. No. 6] What are remedial measures available for 'Oppression' & 'Mismanagement' under the Companies
Act, 2013? Who can make such application? CS (Inter) - Dec 2000 (10 Marks)
Explain the power of Tribunal to prevent 'Oppression' & 'Mismanagement'.
Ans.: Application to Tribunal for relief in cases of oppression by members of the company [Section 241 (1)]:
Members of a company as specified in Section 244 may apply to the Tribunal for relief in cases of oppression
& mismanagement. Such application can be made in following cases:
(a) Where the affairs of the company have been or are being conducted in a manner prejudicial to public interest
or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the
interests of the company; or
(b) The material change has taken place ip the management or control of the company and that by reason of
such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or
its members or any class of members.
Such change may relate to alteration in the Board of Directors, or manager, or in the ownership of the company's
shares, or if it has no share capital, in its membership, or in any other manner whatsoever.
Application to Tribunal for relief in cases of oppression by the Central Government [Section 241 (2)]: The
382
Central Government may itself apply to the Tribunal for relief in cases of oppression & mismanagement if it is of
the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest.
Power of Tribunal [Section 242]: On receiving application u/s. 241, the Tribunal may, with a view to bringing to an
end the matters complained of, make such order as it thinks fit.
Right to apply under section 241 [Section 244]: The following members of a company shall have the right to apply
u/s 241, namely:
(a) In the case of a company having a share capital: 100 members of the company or 10% of the total number
of members, whichever is less. (The applicants must have paid all calls and other sums due on their shares. Thus,
holders of partly paid-up shares cannot apply)
(b) In the case of a company not having a share capital: 20% of the total number of members
However, the Tribunal may, on an application, waive all or any of the above requirements so as to enable the
members to apply u/s 241.
Where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
Where any members of a company are entitled to make an application section 244, any one or more of them
having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of
them.
Que. No. 7] Distinguish between: Oppression & Mismanagement
Ans.: Following are the main points of distinction between oppression & mismanagement;
Points Oppression Mismanagement
Meaning The term 'Oppression' is not defined in the The term' Mismanagement' is also not defined
Companies Act, 2013. Oppression, according in the Companies Act, 2013. Normally
to the dictionary meaning of the word, is any mismanagement means gross misconduct of
act exercised in a manner burdensome, harsh affairs of the company or misuse of powers
and wrongful. Oppression means violation of given to directors or members under the
condition of fair play. The complaining Companies Act, 2013.
member must be under a burden which is
unjust, harsh or tyrannical. It involves lack of
probity or fair dealing to a member in the
matter of rights as a shareholder.
Examples Some the acts held as oppressive are as Some the acts held as mismanagement are as
follows: follows:
♦ Continuous refusal to register shares to ♦ Not allowing director to function as
retain control over affairs of the company. director
♦ Illegal removal of director one group and ♦ Reckless sanction and disbursement of
appointing other director without notice to loans.
one group of directors. ♦ Serious violation of legal provisions
♦ Calling board meeting with 2 days notice ♦ Acting beyond authority of
so that NRI directors cannot attend and memorandum and articles.
allotting shares to one group so that it comes
♦ Directors do not take serious actions in
into majority.
case of corruption, embezzlement etc.
♦ Issuing shares to wife of directors for
♦ Diversion of funds
wholly illusive consideration.
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♦ Attempt to deprive members of his ordinary ♦ Operation of bank accounts by unauthorized
membership rights e.g. denial of voting right persons.
or denial to contest election as director
Que. No. 8] A private company was required under the Foreign Exchange Management Act, 1999 and direction
issued by RBI to reduce its foreign shareholding 60% to 40%. It made an offer of right shares to all existing
shareholder but issued shares to Indian shareholders. The foreign company, which is a shareholder, contents
that non-issue of right shares to it amounts to 'oppression'. Comment. CS (Final) - June 1997 (5 Marks)
meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful. Non-issuing right shares
to foreign shareholder to comply with Foreign Exchange Management Act, 1999 and direction issued by RBI does
not amount to 'oppression'.
Further in relief granted against Section 241 only against continuous acts of oppression. Mere isolated act do not
amount to oppression. [Shanti Prasad v. Kalinga Tubes, (1965) 35 Comp. Cas 351]
Therefore, contention of foreign shareholder that non-issue of right shares to it amounts to 'oppression' is not
correct.
Que. No. 9] 60% shares of Indo-French Ltd. are held by French Group and balance by an Indian Group. As per
Articles of Association of the company both groups had equal managerial powers. The relationship between the
two groups soured and the operations of the company reached a deadlock. The Indian Group approached the
Tribunal for action against the French Group for oppression. Based on these facts, you are required to decide,
with reference to the provisions of the Companies Act, 2013 and/or the decided case laws, the following issues:
(i) Whether the contention of oppression against the French Group by the Indian Group is tenable? (ii) What
are the powers of the Tribunal in this regard?
CA (Final) - May 2005 & May 2007 (5 Marks)
Ans.: An application seeking relief from Tribunal must make out a prima facie that the affairs of the company have
been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to
applicant or any other members in a manner prejudicial to the interests of the company.
As per facts given in the case, both the India Group and French Group are equally strong and one is unable to
oppress the other. As such there may be deadlock but not oppression. Thus, relief under Section 241 will not be
available. Thus, contention of India Group that the French Group is acting in a manner oppressive to India Group
is not tenable.
The powers of the Tribunal under the provisions of Section 242 are discretionary in character. Apart from the
general powers, the Tribunal u/s 242(2)(b), may order the purchase of the shares of one group by the other group.
In the case of Yashovardhan Saboo v. Graz Beckert Saboo Ltd. 19931 Comp. L.J. 20, the foreign group ordered to
buy the shares of the minority group at the fair price with necessary permission under the laws governing the
foreign exchange. But in case where there is a deadlock and the matters are not sorted out by any other means,
an order for winding up of the company may also be made under the just and equitable clause by the Court hearing
petition u/s 241/242. [Kishan Kumar Ahuja v. Suresh Kumar Ahuja],
Thus, if the Indian Group or the French Group fails to buy out the shares of the other group, the Tribunal may order
the winding up of the company in accordance with the provisions of the Companies Act, 2013.
Que. No. 10] Zebra Private Ltd was incorporated in the year 2014 under the Companies Act, 2013 by 3 brothers,
namely A, B & C. All the three were promoter-directors named in the AOA and subscribed for 100 shares each in
the company through MO A. Thereafter, from time to time, further shares were allotted in proportion of one
third to each of them and in due course the company started earning substantial profits. Due to greed of money,
the two brothers, namely A and B joined hands together and assumed complete control of the company leaving
their brother C in lurch. Both the brothers got further shares
allotted to themselves, thereby their joint shareholding increased from 66% to 90%, while the shareholding of C
got reduced from the erstwhile 33% to 10%. No notice of any Board Meeting was sent to C, who was sidelined
and was also removed as a Director. Aggrieved by the decisions taken by his two brothers at his back, C seeks
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your advice for taking out appropriate proceedings before the Court or Judicial authority of competent
jurisdiction. Also suggest the nature of reliefs he may claim while filing his case.
Ans.: As per Section 241, member(s) of a company as specified in Section 244 may apply to the Tribunal for relief
in cases of oppression & mismanagement.
As per Section 242, on receiving application u/s 241, the Tribunal may, with a view to bringing to an end the matters
complained of, make such order as it thinks fit.
The Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. As
per Section 244, a member holding 10% shares is entitled to file such a petition.
In the present case, C was holding 33% shares in the company which is nothing but a quasi partnership and was
participating in the management. By further allotment of shares in a clandestine manner and without the consent
of C, his shareholding was reduced to 10% while the shareholding of his brothers stood at 90%. This is a serious act
of oppression of C, a minority shareholder. On similar facts, it was held by Supreme Court in Dale & Carrington
Invt. Private Ltd. v. P.K. Prathpan, (2004) 122 Comp cases 175(SC) that assuming meetings of board of directors did
take place, the manner in which the shares were issued without informing other shareholders about it and without
offering them to any other shareholder, was totally mala fide and the sole object in this was to gain control of the
company by becoming a majority shareholder. This was clearly an act of oppression. The only relief that has to be
granted in the present case was to undo the advantage gained by majority shareholder through their manipulation
and fraud. The allotment of all the additional shares had to be set aside.
Section 241 protects the rights of shareholders and not as a director. It has been held in a number of cases that in
a family company like the present one, removal of the promoter-director is also an act of oppression.
In the facts and circumstances of this case, C is advised to file a petition under section 241. Being a 10 % shareholder
he is entitled to file the petition before the Tribunal. He may seek the following reliefs:
(i) The alleged allotment of further shares be declared null and void and set aside;
(ii) The alleged removal of the petitioner, C be declared as null and void and set aside;
(iii) The Board of directors be re-constituted with the petitioned and his two brothers and an independent person,
as the Chairman of the Board of directors to be appointed by the Tribunal with casting vote;
(tv) The petitioner may be appointed as Managing director of the company having substantial powers of
management.
Que. No. 11] The profits of MJR Ltd. for the financial year 2015-2016 fell considerably due to recession. The
Board of directors of the company, therefore, bona fide did not recommend any dividend for the year. At the
AGM, a group of shareholders objected to the Board's decision and wanted the Board to make recommendation
for dividend. On refusal by the Board, the members, who feel oppressed by the Board's decision to skip the
dividend, move to the Tribunal and complain against the Board on the ground of oppression and
mismanagement. Examining the provisions of the Companies Act, 2013 and decide:
(1) Whether the shareholders contention shall be tenable?
(2) Whether the act of Board of Directors not to recommend any dividend shall amount to oppression and
mismanagement?
Ans.: Under Section 241, members may apply to the Tribunal in cases of oppression and mismanagement.
However, bona fide decisions consistent with the company's MOA and AO A are not to be equated with
mismanagement even if they turn out to be wrong in the circumstances or these cause temporary losses. The
machinery created by the section not to be used by the minority for compelling the majority to come to terms,
where the company is honestly managed. Directors bona fide decision not to declare dividend and to accumulate
available profits into reserves is not mismanagement. [Thomas Vettom (V.J.) v. Kuttanad Rubber Co. Ltd. (1984) 56
Comp. Cases 284 (Ker)]
Furthermore, the shareholders cannot compel the Board to recommend a dividend. The Board's recommendations
are placed in the general meeting. The general meeting can reduce the dividend, but cannot even increase the
dividend as recommended by the Board.
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Therefore, the shareholders cannot compel the company to declare dividend and cannot charge the directors with
oppression or mismanagement.
In view of above:
(1) The contention of shareholders shall not be tenable.
(2) The act of the Board of directors who acted bona fide, not to recommend any dividend shall not amount to
Que. No. 12] Due to inadequacy of profits, the Board of directors of Rise Ltd. decided not to recommend any
dividend for the financial year ended 31st March, 2015. Certain shareholders of the company complained to the
Tribunal regarding mismanagement of the affairs of the company, since the Board of the company did not
recommend any dividend. Explaining the provisions of the Companies Act, 2013, examine whether the
contention of the shareholders is tenable. CS (Executive) - June 2015 (4 Marks)
Ans.: Under Sections 241, members may apply to the Tribunal in cases of oppression and mismanagement.
However, bona fide decisions consistent with the company's MO A and AO A are not to be equated with
mismanagement even if they turn out to be wrong in the circumstances or these cause temporary losses. The
machinery created by the section not to be used by the minority for compelling the majority to come to terms,
where the company is honestly managed, Qirectors bona fide decision not to declare dividend and to accumulate
available profits into reserves is not mismanagement. [Thomas Vettom (V.J.) v. Kuttanad Rubber Co. Ltd. (1984) 56
Comp. Cases 284 (Ker.)]
Furthermore, the shareholders cannot compel the Board to recommend a dividend. The Board's recommendations
are placed in the general meeting. The general meeting can reduce the dividend, but cannot even increase the
dividend as recommended by the Board.
Therefore, the shareholders cannot compel the company to declare dividend and cannot charge the directors with
In view of above:
(1) The contention of shareholders shall not be tenable.
(2) The act of the Board of directors who acted bona fide, not to recommend any dividend shall not amount to
Que. No. 13] What is meant by 'oppression'? State whether the aggrieved party would succeed in obtaining relief
from Tribunal on the ground of oppression in the following cases:
(i) The majority of the Board of directors overrides the minority directors and the minority directors apply to
Tribunal complaining oppression by majority directors.
(ii) A petition by majority shareholders complaining oppression by minority shareholders.
Give your answer according to the provisions of the Companies Act, 2013.
meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful.
(i) The oppression dealt with by Section 241 is only oppression of members in their character as such; and it is only
in that character they can involve Section 241. The harsh treatment, for instance, of a member who is a director or
other officer or employee, by the Board of directors or management does not come within Section 241. It has been
held in Re. Bellador Silk Ltd. that if the majority of the Board of directors overrides the minority directors the latter
cannot resort to Section 241 and hence the minority directors will not succeed in getting relief from CLB on the
ground of oppression.
(;ii) According to Section 241, the right to apply for relief under Section 241 read with Section 244 is given to 100
members or 10% of the total number of members of the company. There is nothing in this section which suggests
even indirectly that unless the application is made by minority shareholders it is not maintainable. The right to
apply is, therefore, not confined to oppressed minority of the shareholders alone. It was held by Calcutta High
Court in Re. Sindhri Iron Foundry (P) Ltd. that the oppressed majority also might apply for relief under Section 241.
Therefore, the petitioners are likely to succeed in getting relief provided.
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Que. No. 14] (i) ABC Private Ltd. is a company in which there are 8 shareholders. Can a member holding less than
10% share capital of the company apply to the Tribunal for relief against oppression and mismanagement?
(ii) It is alleged by said member that the directors of the company have misused their position in making
certain inter-corporate deposits which are against the interests of the company. Will the Tribunal entertain
application containing such allegation in the case of a private company?
Give your answer according to the provisions of the Companies Act, 2013.
Ans.: Keeping in view the provisions of the Companies Act, 2013, answer to given problem is as follows:
(i) As per Section 244, in the case of a company having share capital, 100 members or not less than 10% of the
total number of members, whichever is less can apply for relief under Section 241. In the given case, since there
are 8 shareholders. The condition of 10% of 8 i.e. 1 is satisfied. Therefore, a single member can present a petition
to the Tribunal, regardless of the fact that he holds less than 10% of the company's share capital.
(ii) As regards the proprietary rights in inter-corporate loans by a private company, they are not closely regulated
by Company Law as in the case of public companies. Though the Board of Directors are the best to judge and to
take a commercial decision in this regard, if it is mala fide, it should be looked into. Therefore, the Tribunal can
look into the allegation lodged by the member.
Que. No. 15] XYZ Private Ltd. has two groups of directors. A dispute arose between the two groups out of which
one group controlled the majority of shares. A very serious situation arose in the administration of the
company's affairs when the minority group ousted the lawful board of directors from the possession and control
of the management of the company's factory and workshop. Books of account and statutory records were held
by the minority group and consequently the annual accounts could not be prepared for two years. The majority
group applied to the Tribunal for relief under section 241 of the Companies Act, 2013. You are required to decide
with reference to the provisions of the Companies Act, 2013, the following issues:
(i) Can majority of shareholders apply to the Tribunal for relief against the oppression by the minority
shareholders?
(ii) Whether Tribunal can grant relief in such circumstances.
Ans.: Where the majority is prevented from protecting itself by controlling the directors at general body meetings,
the majority becomes an artificial minority entitled to claim protection under Section 241. [V. Sebastean, Dr V City
Hospital (Pvt.) ltd. (1985) 57 Comp, case 453 (Ker.)] Thus, the remedy u/s 241 is confined not to an oppressed
minority of the shareholders alone; an oppressed majority may also apply to the Tribunal against their oppression
from the side minority shareholders.
If the Tribunal finds that the company's interest is being seriously prejudiced by the activities of one or the other
group of shareholders, that two different registered offices at two different addresses have been set up, that two
rival boards are holding meetings, that the company's business property and assets have passed into hands of
unauthorized persons who have taken wrongful possession and who claim to be the shareholders and directors,
there is no reason why the Tribunal should not make appropriate orders to put an end to such matters.
The Tribunal may grant relief by passing appropriate order as per Section 242.
Que. No. 16] The issued, subscribed and paid-up capital of Supreme Chemicals Ltd. is ` 2 Crore consisting of
20,00,000 equity shares of X 10 each. The said company has 800 members. For the purpose of relief against
oppression and mismanagement, a petition was submitted before the Tribunal duly signed by 90 members
holding 1,00,000 equity shares of the said company. Subsequently, 30 members, who signed the petition,
withdrew their consent. Decide, under the provisions of the Companies Act, 2013 whether the said petition is
maintainable?
Ans.: As per Section 244, in the case of a company having a share capital, 100 members of the company or 10% of
the total number of members, whichever is less can apply for the relief u/s 241.
The shareholding pattern of the Supreme Chemicals Ltd. is ` 2 Crore equity share capital held by 800 members. The
petition alleging oppression and mismanagement has been made by the members as follows:
(a) Number of members making the petition: 90
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(b) Amount of share capital held by members making the petition: ` 10,00,000 The petition shall be valid if it has
been made by the lowest of the following:
- 100 members
- 80 members (being 10% of 800)
Members holding ` 20,00,000 share capital (being 10% of T 2,00,00,000)
As it is evident, the petition made by 90 members meets the eligibility criteria specified under Section 244;
therefore, the petition is maintainable.
The consent to be given by shareholder is reckoned at the beginning of the proceedings. The withdrawal of consent
by shareholder during the course of proceedings does not affect the maintainability of the petition.
Thus, such petition shall remain valid despite the fact that 30 members, who signed the petition, have withdrawn
their consent subsequently.
Que. No. 17] A petition signed by 100 members of a company has been moved to Tribunal for prevention of
mismanagement. Later on, half of the members (signatories) withdrew their consent after filing the petition.
Examine whether the remaining applicants (petitioners/signatories) to the petition would be successful in their
complaint to Tribunal. CS (Executive) - June 2015 (4 Marks)
Ans.: Right to apply under section 241 [Section 244]: The following members of a company shall have the right to
apply u/s 241, namely:
(a) In the case of a company having a share capital: 100 members of the company or 10% of the total number
of members, whichever is less. (The applicants must have paid all calls and other sums due on their shares. Thus,
(b) In the case of a company not having a share capital: 20% of the total number of members
However, the Tribunal may, on an application, waive all or any of the above requirements so as to enable the
members to apply u/s 241.
Once the consent has been given by the requisite number of members by signing the application, the application
may be made by one or more of them on behalf and for the benefit of all of them. It has been held by the Supreme
Court that if some of the consenting members have, subsequent to the presentation of the application, withdrawn
their consent, it would not affect the right of the applicant to proceed with the application. [Rajahmundry Electric
Supply Co. v. Nageshwara Rao, AIR 1956 SC 213]
Obtaining of consent is a condition precedent to the making of the application and hence a consent obtained
subsequent to the application is ineffective. [Makhan Lai Jain v. The Amrit Banaspati Co. Ltd., I.L.R. (1954) 1 All.
131]
A person who had disposed off his shares will not be allowed to apply. [In L. Chandramurthy v. K.L. Kapsi (2005) 48
SCL 294 CLB]
As per facts given in case, required number of applicants had applied for relief u/s 241 and even if some of the
applicant/ signatories withdraw their consent, the petition can be entertained by the Tribunal.
Que. No. 18] Certain Members of MDV Ltd. having share capital feel that the affairs of the company are being
mismanaged by Directors. Members therefore, decide to move the Tribunal, complaining the mismanagement
of company affairs by Directors of the Company. Examine the provisions of the Companies Act, 2013 and state:
(i) Whether members are entitled to complain the Tribunal.
(ii) Whether the following acts of the board of directors amount to mismanagement:
(a) Continuation of directors in their office after expiry of their tenure and infighting continues among them.
(b) Non-declaration of dividend when it does not lead to devaluation of shares.
Ans.: Section 241 provides that a requisite number of members of the company as laid down in Section 244 may
apply to Tribunal for appropriate relief on the ground of oppression and mismanagement of the company.
Continuation of directors in their office after the expiry of their term and infighting among them has been held to
be the act of mismanagement. [Ranjan Dutta v. Bhola Nath Paper House Ltd. (1983)]
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Non-declaration of dividend when it does not lead to devaluation of shares is not an act of mismanagement. [V./.
Thomas Vettom v. Kuttanad Rubber Co. Ltd. (1984)]
Que. No. 19] Mere lack of confidence between the majority shareholder and minority shareholder would not be
enough to order for relief under Section 241. CS (Executive) - Dec 2013 (4 Marks)
State some of the circumstances which must exist before filing a petition under Section 241 of the Companies
Act, 2013 for prevention of oppression.
Ans.: Some of the circumstances which must exist before filing a petition under Section 241 for prevention of
oppression are as follows:
(i) An application u/s 241 can be made only by the members. In the case of a company having share capital of
minimum 100 members or 10% or members holding 10% of the paid up capital can file such petition. In case of a
company not having share capital, 20% of the total number of members is required for the purpose.
(ii) It must be established that the affairs of the company are being conducted in a manner (a) oppressive to any
member/members of the company or (b) prejudicial to public interest.
(iii) The oppression complained of must affect a person in his capacity as a member of the company. Rights and
interests as a member of a company can only be agitated and not in relation to any commercial relation that a
member has with the company as was decided in the case of Anil Gupta v. Mirai Auto Industries Ltd. [(2003)113
Comp. Cas. 63].
(iv) The acts complained of must be continuing acts of oppression. The acts constituting oppression must
continue till the date of making the application. Mere isolated act do not amount to oppression.
(v) The applicant must make out a prima facie case that the degree of oppression is so severe that there is just
and equitable ground for winding up of the company. But at the same time, it must also be established that the
winding up of the company would unfairly prejudice the applicant.
(vi) Mere lack of confidence between majority and minority shareholder would not enough unless lack of
confidence springs from oppression of majority in the management of company's affairs.
Que. No. 20] Oppression need not be continuous. Discuss. CS (Executive) - Dec 2009 (5 Marks)
Ans.: Oppression must be a continuous process. This is suggested by the words, "are being conducted in a Manner
" used in Section 241. Hence, isolated acts of oppression or mismanagement will not give rise to an action under
Section 241 of the Act.
Thus, the acts complained of must be continuing acts of oppression. The acts constituting oppression must
continue till the date of making the application. Mere isolated act do not amount to oppression. [Shanti Prasad v.
Kalinga Tubes, (1965) 35 Comp. Cas 351]
Que. No. 21] What are the consequences of termination or modification of agreements by order passed by
Tribunal in cases of oppression and mismanagement?
Ans.: Consequence of termination or modification of certain agreements [Section 243]: Where an order made
u/s. 242 terminates, sets aside or modifies an agreement referred to in u/s 242(2):
(a) Such order shall not give rise to any claims by any person for damages or for compensation for loss of office or
in any other respect
(b) No managing director or other director or manager whose agreement is so terminated or set aside shall be
appointed for a period of 5 years from the date of the order without the leave of the Tribunal
Any person who knowingly acts as a managing director or other director or manager of a company in contravention
order of Tribunal shall be punishable with imprisonment for a term which may extend to 6 months or with fine
which may extend to ` 5,00,000 or with both.
Que. No. 22] What do you understand by 'class action suit' as introduced by the Companies Act, 2013? Explain
the objective behind introducing this provision in the Companies Act and the persons who can initiate such class
action suit. CS (Executive) - Dec 2017 (4 Marks)
389
Ans.: Meaning of Class Action: In case of large companies many investors and depositors are small and they do not
have time, money and energy to fight for their rights. In such cases, some of investors and depositors can take
action on behalf all those who are affected. This is known as class action.
Class Action [Section 245(1)]: Such number of member(s) or depositor(s) as are indicated in Section 245(3), if they
are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner
prejudicial to the interests of the company or its members or depositors, may file an application before the Tribunal
for seeking following orders, namely:
(a) To restrain the company from committing ultra vires acts and breach of any provision of the company's MOA
or AOA
(b) To declare a resolution altering the MOA or AOA as void if the resolution was passed by suppression of
material facts or obtained by mis-statement
(c) To restrain the company and its directors from acting on such resolution;
(d) To restrain the company from doing an act which is contrary to the provisions of the Act or any other law
(e) To restrain the company from taking action contrary to any resolution passed by the members (/) To claim
damages or compensation or demand any other suitable action from or against -
- The company or its directors for any fraudulent, unlawful or wrongful act or omission
- The auditor for any improper or misleading statement of particulars made in his audit report or for any
fraudulent, unlawful or wrongful act or conduct or
- Any expert or advisor or consultant or any other person for any incorrect or misleading statement or for any
fraudulent, unlawful or wrongful act or conduct
(g) To seek any other appropriate remedy.
Joint liability of auditors [Section 245(2)]: Where the members or depositors seek any damages or compensation
or demand any other suitable action against an audit firm, the liability shall be of the firm as well as of each partner
who was involved in making any improper or misleading statement.
Who can apply Tribunal for class action [Section 245(3)]: The requisite number of members provided in Section
245(1) shall be as under:
(a) In the case of a company having a share capital: 100 members or prescribed percentage of the total
members, whichever is less. (The applicants must have paid all calls and other sums due on their shares. Thus,
(b) In the case of a company not having a share capital: 20% of the total number of its members.
In case of depositors class action can be taken by 100 depositors or prescribed percentage of the total number of
depositors, whichever is less.
Matters to be considered by Tribunal [Section 245(4)]: In considering an application under Section 245(1), the
Tribunal shall take into account following -
(a) Whether the member or depositor is acting in good faith
(b) Whether there is any evidence of involvement of any person other than directors or officers of the company
(c) Whether the cause of action is one which the member or depositor could pursue in his own right rather than
through an order under class action (i.e. individual action)
(d) Views of the members or depositors who have no personal interest, direct or indirect, in the matter being
proceeded under the class action
(e) Where the act or omission could be or likely to be authorized or ratified by the company before it occurs.
Procedure to be followed by the Tribunal [Section 245(5)]: If class application is admitted by the Tribunal, then
following procedure should be followed:
(a) Public Notice: Public notice shall be served to all the members or depositors of the class in prescribed
manner.
390
(b) Clubbing of similar applications: All similar applications prevalent in any jurisdiction should be consolidated
into a single application.
(c) No parallel proceedings: Two class action applications for the same cause of action shall not be allowed.
(d) Cost or expenses connected with application: The cost or expenses connected with the application for class
action shall be defrayed by the company or any other person responsible for any oppressive act.
To whom order passed by Tribunal will bind [Section 245(6)]: Any order passed by the Tribunal shall be binding
on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor
or any other person associated with the company.
Punishment [Section 245(7)]: Any company which fails to comply with an order passed by the Tribunal shall be
punishable with fine which shall not be less than ` 5,00,000 but which may extend to ` 25,00,000 and every officer
of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years
and with fine which shall not be less than ` 25,000 but which may extend to ` 1,00,000.
Penalty for frivolous or vexatious applications [Section 245(8)]: Where any application filed before the Tribunal
is found to be frivolous or vexatious, it shall reject the application after recording reasons in writing and make an
order that the applicant shall pay to the opposite party such cost, not exceeding ` 1,00,000.
No class actions against banking company [Section 245(9)]: Nothing contained in Section 245 shall apply to a
banking company.
Reimbursement the cost of litigation [Section 125(3)(d)]: Legal expenses incurred in pursing the class action can
be reimbursed from Investor Education & Protection Fund, if sanctioned by Tribunal.
391
CHAPTER
24
OFFENCES, PENALTIES & COMPOUNDING
■ ■■ OFFICER WHO IS IN DEFAULT
Que. No. 1] Write a short note on: Officer who is in default CS (Inter) - Dec 2002 (5 Marks)
Ans.: Many provisions of the Companies Act, 2013 use the word 'officer' and 'officer in default'. Thus, it is essential
to know the meaning of these words.
Officer [Section 2(59)]: Officer includes any director, manager or KMP or any person in accordance with whose
directions or instructions the board of directors or any one or more of the directors is or are accustomed to act.
Officer who is in default [Section 2(60)]: Officer who is in default, for the purpose of any provision in the Act which
enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of
imprisonment, fine or otherwise, means any of the following officers of a company, namely:
(i) Whole-time director
(ii) Key managerial personnel (KMP)
(iii) Where there is no KMP, director(s) as specified by the board and who has or have given consent in writing, or
all the directors, if no director is so specified
(iv) Any person who is charged with any responsibility including maintenance, filing or distribution of accounts or
records, authorizes, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent,
any default;
(v) Any person in accordance with whose advice, directions or instructions the board of directors of the company
is accustomed to act (However, a person who gives advice to the board in a professional capacity will not be treated
as officer in default)
(vi) Every director, who is aware of contravention of any provisions of the Act or where such contravention had
taken place with his consent or connivance
(vii) In respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and
merchant bankers to the issue or transfer.
If any person is authorized u/s 2(60)(iv), return shall be filed in Form GNL-3. It may be noted that even if such
person is appointed and authorized, MD and KMP are still liable as officer in default.
Person can be officer in default even if he retires: It was held that director can be held liable even after he retires,
in case default during his tenure. [Anita Chadha v. ROC (1998) 18 SCL 304 (Del.)]
However, if a person had ceases as director or employee on the date of default/ omission, no offence can be taken
to have been committed by him. [Jayesh R More v. State of Gujarat (2000) 38 CLA 30 (Guj. HC)]
Que. No. 2] Abhay Ltd. committed default by failing to file balance sheet and profit and loss account. Proceedings
have been initiated against a non-executive director. However, he contended that he had resigned before the
date of default. Whether the contention of the ex-director can be taken into account? Give reasons.
Ans.: If a person had ceases as director or employee on the date of default/omission, no offence can be taken to
have been committed by him. [Jayesh R More v. State of Gujarat (2000) 38 CLA 30 (Guj. HC)]
As per facts given in case, a non-executive director had resigned before the date of default and hence he cannot
be held liable and his contention that he had resigned before the date of default can be taken into account.
SPECIAL COURTS
Que. No. 3] State the provisions relating to establishment of Special Courts under the Companies Act, 2013.
Ans.: Establishment of Special Courts [Section 435]: The Central Government may, for the purpose of providing
speedy trial of offences, by notification, establish or designate as many Special Courts as may be necessary.
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A Special Court shall consist of—
(a) A single judge holding office as Session Judge or Additional Session Judge, in case of offences punishable
under this Act with imprisonment of 2 years or more and
(b) A Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case of other offences, who shall
be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose
jurisdiction the judge to be appointed is working.
Application of Code to proceedings before Special Court [Section 438]: The provisions of the Code of Criminal
Procedure, 1973 shall apply to the proceedings before a Special Court. The Special Court shall be deemed to be
deemed to be a Court of Session or the court of Metropolitan Magistrate or a Judicial Magistrate of the First Class,
as the case may be. The person conducting a prosecution before a Special Court shall be deemed to be a Public
Prosecutor.
COGNIZANCE OF OFFENCE & COMPOUNDING OF OFFENCES
Que. No. 4] Offence under the Companies Act, 2013 are cognizable or non-cognizable? On whose complaint the
Court can take the cognizance of any offence under the Act?
Ans.: Offences to be non-cognizable [Section 439(1)]: Every offence except the offences referred to in Section
212(6) (i.e. offence relating to investigation by SFIO) shall be deemed to be non-cognizable (bailable).
Cognizance of offence [Section 439(2)]: Court shall not take cognizance of any offence except on the complaint in
writing of the Registrar, a shareholder or member of the company, or of a person authorized by the Central
Government in that behalf. The Court may take cognizance of offences relating to issue and transfer of securities
and non-payment of dividend, on a complaint by a person authorized by the SEBI.
Personal presence of ROC not required [Section 439(3)]: Where the complainant is the Registrar or a person
authorized by the Central Government, the presence of such officer before the Court shall not be necessary unless
the Court requires his personal attendance at the trial.
Que. No. 5] What is compounding of offences? Who has got such powers? State the procedure for compounding
of offences. CS (Inter) - June 2006 (8 Marks), Dec 2007 (7 Marks)
Ans.: What is compounding: Instead of going to Court, the offender may agree to pay composition amount and in
return administrator of enactment agrees not to prosecute the person who has committed an offence. This is called
as compounding. Generally offences which are of private nature and relatively not serious are made compoundable.
After payment of composition amount, prosecution will not be launched or if already launched, it will be withdrawn.
Following offences are compoundable:
♦ Offences punishable with fine only
♦ Offences punishable with fine or imprisonment
♦ Offences punishable with fine or imprisonment or both.
Following offences are not compoundable:
♦ Offences punishable with imprisonment only
♦ Offences punishable with fine and imprisonment
Compounding of certain offences [Section 441(1)]: Any offence punishable under the Act with fine only can be
compounded by the Tribunal if amount of fine exceeds ` 5,00,000.
If the amount of fine does not exceeds ` 5,00,000 compounding can be done by Regional Director or the officer
authorized by the Central Government.
If the offence is punishable with imprisonment or fine or both, compounding can be done with the permission of
Special Court.
The sum specified for compounding shall not exceed the maximum amount of the fine which may be imposed for
the offence so compounded.
393
In specifying the amount payable for compounding, additional fee paid u/s 403(2) for late filing of documents shall
be taken into account.
If the investigation against company has been initiated or is pending under the Act, such offence shall not be
compounded.
No compounding if similar offence is committed within period of 3 years [Section 442(2)]: Once an offence is
compounded, similar offence committed within period of 3 years cannot be compounded. Thus, similar offence
can be compounded only once in 3 years.
Procedure for compounding [Section 442(3)]: Every application for the compounding of an offence shall be made
to the Registrar who shall forward the same, together with his comments, to the Tribunal or Regional Director or
officer authorized by the Central Government.
Application for compounding shall be submitted electronically in e-From No. 61. This form will be forwarded by
ROC to Tribunal/Regional Director as applicable.
If any offence is compounded, intimation shall be given by the company to the Registrar within 7 days from the
date on which the offence is so compounded.
If offence is compounded, no prosecution shall be instituted either by the Registrar or by any shareholder or by
any person authorized by the Central Government against the offender whose offence is so compounded.
If compounding is made after the institution of any prosecution, such compounding shall be brought by the ROC
to the notice of the Special Court in which the prosecution is pending and on such, company or its officer shall be
discharged.
Return etc. to be filed if compounding was for offence for not filing the same [Section 441(4) & (5)]:
If compounding of offence relates to not filing of any return, account or other document, then compounding
authority may require the offender to file same with fee or additional fee.
Any officer or other employee of the company who fails to comply with above order shall be punishable with
imprisonment for a term which may extend to 6 months, or with fine not exceeding ` 1,00,000 or with both.
(This offence is also compoundable)
■ ■■ MEDIATION & CONCILIATION PANEL
Que. No. 6] Write a short note on: Mediation and Conciliation Panel
Ans.: Constitution of Mediation and Conciliation Panel [Section 442(1)]: The Central Government shall maintain
a panel of experts to be called as the Mediation & Conciliation Panel.
Mediation & Conciliation Panel shall consist of prescribed number of experts having prescribed qualifications. Any
proceedings may be refereed to Mediation & Conciliation Panel, if such proceedings are pending before:
- Central Government or *
- Tribunal or
- Appellate Tribunal
Application for mediation [Section 442(2)]: Any of the parties to the proceedings may at any time during the
proceedings may apply in prescribed form along with prescribed fees to the Central Government or Tribunal or
Appellate Tribunal or mediation. On receiving such application the Central Government or Tribunal or Appellate
Tribunal shall appoint one or more expert form the Mediation & Conciliation Panel.
Suo motn reference [Section 442(3)]: The Central Government or Tribunal or Appellate Tribunal may, suo motu,
refer any matter to experts from the Mediation & Conciliation Panel.
Fees and other terms and conditions [Section 442(4)]: The fee and other terms and conditions of experts of the
Mediation and Conciliation Panel shall be such as may be prescribed.
Procedure to be followed by Mediation & Conciliation Panel [Section 442(5)]: The Mediation & Conciliation Panel
shall follow prescribed procedure and dispose of the matter referred to it within a period of 3 months and forward
its recommendations to the Central Government or Tribunal or Appellate Tribunal, as the case may be.
394
Right of aggrieved party to file objection [Section 442(6)]: Any party aggrieved by the recommendation of the
Mediation & Conciliation Panel may file objections to the Central Government or Tribunal or Appellate Tribunal,
as the case may be.
■■■ COMPANY PROSECUTOR
Que. No. 7] Write a short note on: Mediation and Conciliation Panel
Ans.: Power of Central Government to appoint company prosecutors [Section 443]: The Central Government may
appoint one or more persons, as company prosecutors for the conduct of prosecutions arising out of the Act. The
persons appointed as company prosecutors shall have all the powers and privileges u/s 24 of the Code of Criminal
Procedure, 1973.
Appeal against acquittal [Section 444]: The Central Government may direct company prosecutor or authorize any
other person, to present an appeal from an order of acquittal passed by any court, other than a High Court.
PUNISHMENTS
Que. No. 8] Write a short note on: Punishment for fraud
Ans.: Punishment for fraud [Section 447]: Any person who is found to be guilty of fraud, shall be punishable
- with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years
and
- with fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the
amount involved in the fraud-
However, where the fraud in question involves public interest, the term of imprisonment shall not be less than 3
years.
Que. No. 9] Write a short note on: Punishment for false statement
Ans.: Punishment for false statement [Section 448]: If in any return, report, certificate, financial statement,
prospectus, statement or other document required by, or for, the purposes of any of the provisions of the Act or
the rules made thereunder, any person makes a statement, -
(a) which is false in any material particulars, knowing it to be false or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.

Que. No. 10] Write a short note on: Residual penalty under the Companies Act, 2013
Ans.: Punishment where no specific penalty or punishment is provided [Section 450]: Normally most of the
Sections prescribe the penalty for contravention of that section or offence under that particular section. However,
if no specific penalty is has been prescribed, general punishment is ` 10,000. In addition, in case of continuing
default fine up to ` 1,000 can be levied for every day till offence continues.
Que. No. 10A] Sweet (Pvt.) Ltd. has committed a default which is in violation of the provisions of the Companies
Act, 2013. No specific penalty or punishment is provided in the Act for the said default. Decide the quantum of
punishment for contravention where no specific penalty or punishment is provided under the Companies Act,
2013. CS (Executive) - June 2016 (4 Marks)
Ans.: As per Section 450, if no specific penalty has been prescribed, general punishment is ` 10,000. In addition, in
case of continuing default fine up to ` 1,000 can be levied for every day till offence continues.
Thus, Sweet (Pvt.) Ltd. is liable to residual penalty as stated above.
Que. No. 11] Write a short note on: Punishment in case of repeated default
Ans.: Punishment in case of repeated default [Section 451]: If a company or an officer of a company commit the
same offence for the second or subsequent occasions within a period of 3 years, then, that company and every
officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to
any imprisonment provided for that offence.
■ ■■ WRONGFUL WITHHOLDING OF PROPERTY
395
Que. No. 12] What are the powers of the Court in case the property of the Company is wrongfully withheld by
an officer or employee of the company?
Ans.: Punishment for wrongful withholding of property [Section 452]: Any officer or employee of a company is
liable for punishment for -
(a) Wrongfully obtaining possession of any property, including cash of the company or
(b) Having in possession such property, wrongfully withholds it or knowingly applies it for the purposes other
than those expressed or directed in the articles and authorized by the Act.
Such officer or employee shall be punishable with fine which shall not be less than ` 1,00,000 but which may extend
to ` 5,00,000.
Complaint under this section can also be made by any member or creditor or contributory of the company.
Maximum cases under this section are where the employee or officer has notvacated the accommodation after his
retirement/resignation.
The Court has consistently held that an employee cannot continue occupation and he is punishable u/s 452 of the
2013 Act.
Judicial Views:
♦ Ex-employees are liable: The Supreme Court has held that the term officer or employee of a company applied
not only to existing officers or employees of a company but also to past officers or employees of the company.
Hence, even ex-employees are liable under this section. [Baldev Krishna Sahi v. Shipping Corporation of India (1987)
AIR 1987 SC 2245]
♦ Employee is not sub-tenant: Employee cannot claim sub-tenancy of premises, in absence of formal
resolution of board of directors. [Automobiles Products of India Ltd. v. Cedric Allosins Santos, (1990) 3 CLA 154
Bom]
♦ Heirs & legal representatives are covered: Section 452 applies to heirs & legal representatives of deceased
officer or employee of a company. [Gopika Chandrabhushan Saran & Am. v. XLO India Ltd. & Am. (2009) 148 Com
Cases
♦ 130 (SC)]
♦ Offence is continuing offence: Offence u/s 452 is continuing offence. Thus, complaint can be lodged at any
time. [Beguram v. Jaipur Udyog Ltd. (1987) 61 comp Cas 900 Guj HC DB]
♦ Prosecution even if civil litigation pending: Prosecution can be launched even if civil litigation is pending.
The Criminal Court need not to wait till decision of Civil Court. [Atul Matur v. Atul Kabra 1989 (4) SCC 541]
♦ Property covers mortgage, leasehold rights also: It was held that, the term property used in Section 452
does not signify only ownership, but also covers mortgage, leasehold rights. Thus, company can make the
complaint even if it not the owner of the property but has mortgage, leasehold rights. [Textile Labour Association
v. Official Liquidator ofAmruta Mills (2005) 58 SCL 452 (Guj HC)]
♦ It was held that the retirement benefits of an employee cannot be withheld by a company on the employee's
failure to surrender possession of the flat allotted to him. The Court observed that pension being the incidence of
service which an employee earns after a lifelong service rendered by the employee, this right cannot be frittered
as the very livelihood of the employee depends upon receiving his retirement benefits. [Dr. S.K. Ghosh Alias Dr.
S.N. Gupta v. Siemens India Ltd.]
Que. No. 13] Mountbay company Ltd. decided to terminate the services of Mr. Gopal who was employed as
Sales Manager. The Company, however, feels that the Sales Manager may not vacate the company's flat at Delhi.
What action can be taken by the company under the Companies Act, 2013 to regain possession of the flat? Is it
necessary to take such action before terminating the services of Mr. Gopal? Will it make any difference, if the
flat is not owned by the company, but taken on lease?
Ans.: The Company can take action u/s 452 if the sales manager refuses to vacate the premises provided by the
company.
According to Section 452, any officer or employee of a company is liable for punishment for —
396
(a) Wrongfully obtaining possession of any property, including cash of the company or
(b) Having in possession such property, wrongfully withholds it or knowingly applies it for the purposes other
than those expressed or directed in the articles and authorized by the Act.
Such officer or employee shall be punishable with fine which shall not be less than ` 1,00,000 but which may extend
to ` 5,00,000.
Further the Court may also order such officer or employee to deliver to the company any such property wrongly
obtained or wrongfully withheld within a time fixed by the Court.
So the company can file a complaint under Section 452 as it provides speedy relief.
Section 452 covers either existing as well as past officers or employees. Thus, action may also be initiated after
termination of the services of Mr. Gopal.
It is not necessary that the property in question should be owned by the company. Even if the company exercises
only a leasehold right, the provisions of Section 452 can be invoked.
Que. No. 14] What is the punishment under the Companies Act, 2013 for misusing the words "Ltd." or "Private
Ltd."?
Ans.: Punishment for improper use of "Ltd." or "Private Ltd." [Section 453]: The words "Ltd." or "Private Ltd." can
be used by only incorporated company under the Act. Any person misusing the these words is punishable with fine
which shall not be less than ` 500 per day but which may extend to ` 2,000 per day for every day for which that
name or title has been used.
ADJUDICATION OF PENALTIES
Que. No. 15] State the provisions relating to adjudication of penalties under the Companies Act, 2013.
Ans.: Adjudication of penalties [Section 454]: The Central Government may appoint officers as adjudicating
officers for adjudging penalty under the Act. Registrar of Companies (ROC) has been appointed as 'adjudicating
authority' by issuing notification.
The adjudicating officer may impose the penalty on the company and the officer who is in default stating any non-
compliance or default under the relevant provision of the Act.
The adjudicating officer shall give a reasonable opportunity of being heard to the company and the officer who is
in default.
Any person aggrieved by an order of the adjudicating may prefer an appeal to the Regional Director.
Every appeal shall be filed in prescribed form along with prescribed form fees within 60 days from the date on
which the copy of the order made by the adjudicating officer is received by the aggrieved person.
The Regional Director may, after giving the parties to the appeal an opportunity of being heard, pass such order as
he thinks fit, confirming, modifying or setting aside the order appealed against.
If the company does not pay the penalty imposed within a period of 90 days from the date of the receipt of the
copy of the order, the company shall be punishable with fine of ` 25,000 but which may extend to ` 5,00,000.
If an officer of a company who is in default does not pay the penalty within a period of 90 days, such officer shall
be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than ` 25,000
but which may extend to ` 5,00,000, or with both.
Que. No. 16] Can company take any legal action against the person appointed by the Central Government for
excising any act as directed by the Central Government?
Ans.: Protection of action taken in good faith [Section 456]: No suit, prosecution or other legal proceeding shall
lie against the Government or any officer of the Government in respect of anything which is in good faith done or
intended to be done in pursuance of the Act or of any rules or orders made thereunder.
■ ■■ POWER OF COURT TO GRANT RELIEF IN CERTAIN CASES
Que. No. 17] Explain the power of Court to grant relief where an officer of the company is liable in respect of
negligence or breach of duty?
397
Ans.: Section 463 gives the Court the power to relieve a director of any liability which he may incur under the law.
The object of the section is to provide protection against undue hardship in deserving cases. For getting the relief,
the section provides that the Court must be satisfied that the defaulting director acted honestly and reasonably
and that having regard to all the circumstances of the case he ought fairly to be excused.
Power of Court to grant relief in certain cases [Section 463]:
Relief where proceedings are pending: In any proceeding for negligence, default, breach of duty, misfeasance or
breach of trust against an officer of a company, the Court may relieve from liability wholly or partly, if it appears
to the Court hearing the case that
- He is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust,
- He has ac,ted honestly and reasonably and
- Having regard to all the circumstances of the case, including those connected with his appointment.
Relief by way of preventive action: Where any officer has reason to apprehend that any proceeding will or might
be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he
may apply to the High Court for relief and the High Court on such application shall have the same power to relieve
him as it would have had if it had been a Court before which a proceedings had been brought.
No Relief: The Court may grant relief from any civil liability only. The Court cannot grant relief form criminal liability.
In criminal proceeding, the Court cannot grant relief from even civil liability.
Relief subject to condition: The Court may grant relief on such terms and condition as it may think fit. Such relief
may be complete or partial.
Notice to Registrar: Court shall not grant any relief to any officer unless it serves notice in specified manner to the
Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted.
Judicial Views:
The Supreme Court has held that the relief u/ s 463 cannot be extended in respect of any liability under any Act
other than the Companies Act, 2013. [Rabindra Chamaria v. Registrar of Companies, C. A. No. 3012 of 1990 decided
on 19.11.1991]
Que. No. 18] Gulmohar Ltd., a registered company owns a factory at Kolkata, wherein it manufactures jute
products. By notification of the State Government, issued during October, 2014 due strike and lock out it was
declared as relief undertaking. After four months in February 2015 the lockout was lifted. However, during the
said period the company's director defaulted in payment of provident fund and other ancillary dues. During the
month of December, 2015, the Regional PF Commissioner initiated proceedings against the company and its
directors under the Employees Provident Fund & Miscellaneous Provisions Act, 1952, for default and delay in
payment of PF dues.
Immediately the directors of the company applied the High Court for relief under the Companies Act, 2013,
praying relief from liability under the PF Law. The petition is now pending before single Judge. The company and
its directors desires to know from you, as the tenability of their claim for relief at the High Court, and as to
whether they would be excused and exonerated by the High Court, in respect of the Contravention committed
under the PF Law. CA (Final) - Nov 1998 (4 Marks)
However, the Supreme Court in Rabindra Chamaria v. Registrar of Companies has held that the relief u/s 463
cannot be extended in respect of any liability under any Act other than the Companies Act, 2013. Further, relief
under Section 463 is available to the officer or director and not the company.
Therefore, Gulmohar Ltd. cannot claim any relief from High Court under Section 463.
Que. No. 19] One of the directors of the company has been prosecuted for non-payment of sales tax by the
company. He intends to obtain relief under the Companies Act, 2013. Will he succeed?
398
However, the Supreme Court in Rabindra Chamaria v. Registrar of Companies has held that the relief u/s 463
cannot be extended in respect of any liability under any Act other than the Companies Act, 2013.
In given case a director of the company has been prosecuted under Sales Tax Act. Since the relief u/s 463 is available
only against Companies Act, 2013, the Court cannot grant any relief to the director.
399
CHAPTER
25
AMALGAMATION & MERGER -OVERVIEW
Que. No. 1] What do you understand by 'Compromise' and 'Arrangement'?
Ans.: Sections 230 to 240 of the Companies Act, 2013 deals with the various provisions relating to merger,
takeover, amalgamation and demerger. But most of the time these sections as well as other applicable provisions
of the Companies Act, 2013 do not contain the words exactly "merger, takeover, amalgamation and demerger". In
fact all these words are covered by the words 'Compromise' and 'Arrangement' and hence it is necessary to
understand the meaning these two words.
Compromise: Compromise means an amicable settlement of a dispute by mutual adjustment and concessions.
Thus, in 'compromise' each party has to yield and give some concessions. Compromise presupposes a dispute.
Arrangement: In 'arrangement' there is no dispute, but it modifies rights. Such readjustment of rights may be with
members or creditors. The term 'arrangement' is very wide and includes a reorganization of capital.
Arrangement includes a reorganization of the company's share capital by the consolidation of shares of different
classes or by the division of shares into shares of different classes, or by both of those methods. [Explanation to
Section 230(1)]
Parties to compromise or arrangement [Section 230(1)]: The compromise or arrangement may be proposed —
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them.
The 'arrangement' or 'compromise' may be with creditors or members. This can take variety of forms e.g. creditors
agreeing to waive part of their due, converting part or all dues of creditors into shares, extending time for
repayment, reduction in capital by members, amalgamation, full or part transfer of undertaking, property or
liabilities of the company to another company etc.
Que. No. 2] Distinguish between: 'Compromise' and 'Arrangement'
Ans.: Following are the main points of difference between compromise and arrangement:
Points Compromise Arrangement •
Meaning Compromise means an amicable settlement of In' arrangement' there is no dispute, but it
a dispute by mutual adjustment and modifies rights. Such readjustment of rights
concessions. may be with members or creditors.
Definition in The term 'compromise' has not been defined in As per Explanation to Section 230(1)
statute the Companies Act, 2013. arrangement includes a reorganization of the
company's share capital by the consolidation
of shares of different classes or by the division
of shares into shares of different classes, or by
both of those methods.
Dispute Compromise presupposes a dispute. In 'arrangement' there is no dispute.
Scope The term 'compromise' has limited scope. The term 'arrangement' is very wide as
compared to 'compromise' and includes a
reorganization of capital.
Que. No. 3] State the regulatory framework of mergers and amalgamations.
400
As a Company Secretary, one should advice the Board regarding compliances under various legislations.
Referring to the cases of mergers and amalgamations, state the circumstances that warrant compliances under
any or all such legislations. CS (Professional) - Dec 2017 (5 Marks)
Ans.: The Regulatory Framework of Mergers and Amalgamations covers:
1. Companies Act, 2013
2. Companies (Compromise, Arrangements and Amalgamations) Rules, 2016
3. National Company Law Tribunal Rules, 2016.
4. Income-tax Act, 1961
5. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
6. Indian Stamp Act, 1899
7. Competition Act, 2002
Compliances to be made under different Act, Rules & Regulations are discussed below:
1. Companies Act, 2013: Chapter XV of Companies Act, 2013 comprising Sections 230 to 240 containing
provisions on 'Compromises, Arrahgements and Amalgamations' need to be complied by the companies.
2. Companies (Compromise, Arrangements & Amalgamations) Rules, 2016: Companies should also comply
with the Rules 3 to 29 containing provisions dealing with the procedure for carrying out a scheme of compromise
or arrangement including amalgamation or reconstruction.
3. National Company Law Tribunal Rules, 2016: Whenever making any application to the Tribunal, procedure
as specified in these rules need to complied .with.
4. Income-tax Act, 1961: The Income-tax Act, 1961 covers aspects such as tax reliefs to amalgamating/
amalgamated companies, carry forward of losses, exemptions from capital gains tax etc. For example, when a
scheme of merger or demerger involves the merger of a loss making company or a hiving off of a loss making
division, it is necessary to check the relevant provisions for the purpose availing the benefit of carrying forward of
accumulated losses and setting of such losses against the profits of the Transferor Company.
5. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: Listed companies involved in a
scheme of compromise or arrangement including amalgamation or reconstruction should also comply with the
relevant provisions these regulations.
6. Indian Stamp Act, 1899: It is necessary to refer to the Stamp Act to check the stamp duty payable on transfer
of undertaking through a merger or demerger.
7. Competition Act, 2002: The provisions of Section 5 of the Competition Act, 2002 and the Competition
Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations,
2011 are to be complied with.
Que. No. 4] List out the various provisions of the Companies Act, 2013 affecting corporate restructuring process.
Ans.: The Companies Act, 2013 has brought many enabling provisions with regard to mergers, compromise or
arrangements, especially with respect to cross border mergers, time bound and single window clearances,
enhanced disclosures, disclosures to various regulators, simplified procedure for smaller companies etc.
Some of Sections under the Companies Act, 2013 are as under:
Section 66 Reduction of share capital
Section 67 Restriction on purchase by company of its own shares
Section 230 Power to compromise or make arrangements with creditors and members
Section 231 Power of Tribunal to enforce compromise or arrangement
Section 232 Merger and amalgamation of companies
401
Section 233 Merger or amalgamation of certain companies
Section 234 Merger or amalgamation of company with foreign company
Section 235 Power to acquire shares of shareholders dissenting from scheme or contract approved by majority
Section 236 Purchase of minority shareholding
Section 237 Power of Central Government to provide for amalgamation of companies in public interest
Section 238 Registration of offer of schemes involving transfer of shares
Section 239 Preservation of books and papers of amalgamated companies
Section 240 Liability of officers in respect of offences committed prior to merger, amalgamation, etc.
Que. No. 5] "Section 230 is a boon to the corporate restructuring." Critically examine the statement and discuss
the relevant provisions relating to corporate restructuring.
Ans.: Section 230 of the Companies Act, 2013 is a boon to corporate restructuring. This Section along with Sections
231 & 232, has proved to be a major legislative blessing for corporate restructuring in a variety of ways, such as
amalgamation/merger of two or more companies, demerger, division or partition of a company into two or more
companies, hiving off a unit, as well as a compromise with the members or creditors of a company or an
arrangement with respect to the share capital, assets or liabilities of the company etc.
It has been held in several cases that Section 230 is a 'complete code' or 'single window clearance system', and
that the Tribunal has been given wide powers, to frame a scheme for the revival of a company. Being a complete
code, the Tribunal can sanction a scheme containing all the alterations required in the structure of the company
for the purpose of carrying out of the scheme.
Section 230 contemplates a compromise or arrangement between a company and its creditors or any class of them,
or its members or any class of them, and provides machinery whereby such a compromise or arrangement may be
binding on dissentient persons by an order of the Court. [Oceanic Steam Navigation Co. In re. (1939) 9 Comp. Cas.
229 (Ch. D)J
Various provisions of Section 230 are discussed below:
Parties to compromise or arrangement [Section 230(1)]: The compromise or arrangement may be proposed —
(a) between a company and its creditors or any class of them; or
(b) between a company and. its members or any class of them.
Application for compromise or arrangement [Section 230(1)]: An application to NCLT for compromise or
arrangement can be made by—
♦ Company itself
♦ Any creditor of the company
♦ Any member of the company
♦ In the case of a company which is being wound up, the liquidator (such liquidator may be appointed under
the Act or under the Insolvency & Bankruptcy Code, 2016)
Meeting on order of Tribunal: The Tribunal may on the application of any person who is entitled to apply, order a
meeting of the creditors or class of creditors, or of the members or class of members, to be called, held and
conducted in' such manner as the Tribunal directs.
Since the word used is 'may', Tribunal does not have to necessarily call a meeting. The Tribunal may, in discretion,
dismiss the application at that stage itself.
402
Application for order of a meeting [Rule 3]:
(1) An application u/ s may be submitted in Form NCLT-1 along with:
- A notice of admissiorrin Form NCLT-2;
- An affidavit in Form NCLT-6;
- A copy of scheme of compromise or arrangement, which should include disclosures as per Section 230(2);
and
- Fee as prescribed in the Schedule of Fees.
(2) Joint-application can be filed if more than one company is involved in a scheme in relation to which an
application.
(3) Where the company is not the applicant, a copy of the notice of admission and of the affidavit shall be served
on the company, or, where the company is being wound up, on its liquidator, not less than 14 days before the date
fixed for the hearing of the notice of admission.
(4) The applicant shall also disclose to the Tribunal, the basis on which each class of members or creditors has
been identified for the purposes of approval of the scheme.
Directions at hearing of the application [Rule 5]: Upon hearing the application u/s 230(1), the Tribunal shall, unless
it thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect of
the following matters:-
(a) Determining the class or classes of creditors or of members whose meeting or meetings have to be held for
considering the proposed compromise or arrangement; or dispensing with the meeting or meetings for any class
or classes of creditors in terms Section 230(9).
(b) Fixing the time and place of the meeting or meetings.
(c) Appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and
fixing the terms of his appointment including remuneration.
(d) Fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person
or by proxy or by postal ballot or by voting through electronic means.
Disclosure to Tribunal by Affidavit [Section 230(2)]: The Company or any other person who makes an application
to the Tribunal shall disclose the following by way of affidavit —
(a) All material facts relating to the company, such as the latest financial position of the company, the latest
auditor's report on the accounts of the company and the pendency of any investigation or proceedings against the
company.
(b) Reduction of share capital of the company included in the compromise or arrangement.
(c) Any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in
value, including —
(i) A creditor's responsibility statement in the Form CAA-1.
(ii) Safeguards for the protection of other secured and unsecured creditors
(iii) Report by the auditor that the fund requirements of the company after the corporate debt restructuring as
approved shall conform to the liquidity test based upon the estimates provided to them by the Board.
(iv) Where the company proposes to adopt the corporate debt restructuring guidelines specified by the RBI, a
statement to that effect; and
(v) A valuation report in respect of the shares and the property and all assets, tangible and intangible, movable
and immovable, of the company by a registered valuer.
Notice and conduct of meeting [Section 230(3)]: Where a meeting is proposed to be called in pursuance of an
order of the Tribunal, a notice of such meeting shall be sent to the following—
♦ All the creditors or class of creditors
♦ All the members or class of members
♦ Debenture-holders of the company
403
Such notice has to be send individually at the address registered with the company.
Content of notice: Notice shall be accompanied by the following -
♦ A statement disclosing the details of the compromise or arrangement,
♦ A copy of the valuation report,
♦ Effect of compromise or arrangement on creditors, key managerial personnel, promoters and nonpromoter
members and the debenture-holders,
♦ Material interests of the directors of the company or the debenture trustees,
♦ Other prescribed matters.
Publication of notice on the website: Such notice and other documents shall also be placed on the website of the
company. In case of a listed company, these documents shall be sent to the SEBI and stock exchange where the
securities of the companies are listed, for placing on their website and shall also be published in newspapers in
prescribed manner.
Notice by way of advertisement: Where the notice for the meeting is also issued by way of an advertisement, it
shall indicate the time within which copies of the compromise or arrangement shall be made available to the
concerned persons free of charge from the registered office of the company.
Notice of meeting [Rule 6]:
(1) Where a meeting of any class or classes of creditors or members has been directed to be convened, the
notice of the meeting pursuant to the order of the Tribunal to be given shall be in Form CAA-2 and shall be sent
individually to each of the creditors or members.
(2) The notice shall be sent by the Chairperson appointed for the meeting, or, if the Tribunal so directs, by the
company (or its liquidator), or any other person as the Tribunal may direct, by registered post or speed post or by
courier or by email or by hand delivery or any other mode as directed by the Tribunal to their last known address
at leas` 1 month before the date fixed for the meeting.
(3) The notice of the meeting to the creditors and members shall be accompanied by a copy of the scheme of
compromise or arrangement and a statement disclosing the following details of the compromise or arrangement,
if such details are not already included in the said scheme:
(i) Details of the order of the Tribunal directing the calling, convening and conducting of the meeting—
- Date of the Order;
- Date, time and venue of the meeting.
(ii) Details of the company including —
- Corporate Identification Number (CIN) or Global Location Number (GLN) of the company
- Permanent Account Number (PAN)
- Name of the company
- Date of incorporation
- Type of the company (whether public or private or OPC)
- Registered office address and e-mail address
- Summary of main object as per MOA and main business carried on by the company
- Details of change of name, registered office and objects of the company during the las` 5 years
- Name of the stock exchanges where securities of the company are listed
- Details of the capital structure of the company including authorized, issued, subscribed and paid up share
capital
- Names of the promoters and directors along with their addresses.
(iii) If the scheme of compromise or arrangement relates to more than one company, the fact and details of any
relationship subsisting between such companies who are parties to such scheme of compromise or arrangement,
including holding, subsidiary or of associate companies.
404
(iv) The date of the board meeting at which the scheme was approved by the board of directors including the
name of the directors who voted in favour of the resolution, who voted against the resolution and who did not
vote or participate on such resolution.
(v) Explanatory statement disclosing —
- Details of the scheme of compromise or arrangement.
- Parties involved in such compromise or arrangement.
- In case of amalgamation or merger, appointed date, effective date, share exchange ratio and other
considerations.
- Summary of valuation report including basis of valuation and fairness opinion of the registered valuer and
the declaration that the valuation report is available for inspection at the registered office of the company.
- Details of capital or debt restructuring.
- Rationale for the compromise or arrangement.
- Benefits of the compromise or arrangement as perceived by the Board of directors to the company,
members, creditors and others.
• - Amount due to unsecured creditors.
(vi) Disclosure about the effect of the compromise or arrangement on—
- KMP
- Directors
- Promoters
- Non-promoter members
- Depositors
- Creditors
- Debenture holders
- Deposit trustee and debenture trustee
- Employees of the company
(vii) Disclosure about effect of compromise or arrangement on material interests of directors, KMP and
debenture trustee.
Explanation: It is clarified that—
(a) The term 'interest' extends beyond an interest in the shares of the company, and is with reference to the
proposed scheme of compromise or arrangement.
(b) The valuation report shall be made by a registered valuer, and till the registration of persons as valuers is
prescribed u/s 247, the valuation report shall be made by an independent merchant banker who is registered with
the SEBI or an independent practicing CA having a minimum experience of 10 years.
(viii) Investigation or proceedings pending against the company.
(ix) Details of the availability of the following documents for obtaining extract from or for making or obtaining
copies of or for inspection by the members and creditors, namely:
(a) Latest audited financial statements of the company including consolidated financial statements;
(b) Copy of the order of Tribunal in pursuance of which the meeting is to be convened or has been dispensed
with;
(c) Copy of scheme of compromise or arrangement;
(d) Contracts or agreements material to the compromise or arrangement;
(e) The certificate issued by Auditor of the company to the effect that the accounting treatment, if any, proposed
in the scheme of compromise or arrangement is in conformity with the Accounting Standards prescribed and
(f) Such other information or documents as the Board or Management believes necessary and relevant for
making decision for or against the scheme.
405
(x) Details of approvals, sanctions or no-objections, from regulatory or any other governmental authorities
required, received or pending for the proposed scheme of compromise or arrangement.
(xi) A statement to the effect that the persons to whom the notice is sent may vote in the meeting either in
person or by proxies, or where applicable, by voting through electronic means.
Advertisement of the notice of the meeting [Rule 7]: The notice of the meeting as per Section 230(3) shall be
advertised in Form CAA-2 in at least one English newspaper and in at least one vernacular newspaper having wide
circulation in the State in which the registered office of the company is situated, or such newspapers as may be
directed by the Tribunal and shall also be placed, not less than thirty days before the date fixed for the meeting,
on the website of the company and in case of listed companies also on the website of the SEBI and the recognized
stock exchange where the securities of the company are listed. However, where separate meetings of classes of
creditors or members are to be held, a joint advertisement for such meetings may be given.
Discloser of voting in notice [Section 230(4)]: A notice shall provide that the persons to whom the notice is sent
may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the
compromise or arrangement within one month from the date of receipt of such notice.
However, any objection to the compromise or arrangement shall be made only by persons holding not less than
10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt
as per the latest audited financial statement.
Notice to Regulatory Authorities [Section 230(5)]: A notice along with all the prescribed documents shall also be
sent to the Central Government, the income-tax authorities, the RBI, SEBI, ROC, stock exchanges, the Official
Liquidator, the Competition Commission of India, if necessary, and such other sectoral regulators or authorities
which are likely to be affected by the compromise or arrangement.
Such notice shall state that representations, if any, to be made by them shall be made within a period of 30 days
from the date of receipt of notice, failing which, it shall be presumed that they have no representations to make
on the proposals.
Notice to statutory authorities [Rule 8]:
(1) For the purposes of Section 230(5), the notice shall be in Form CAA-3 and shall be accompanied with a copy
of the scheme of compromise or arrangement, the explanatory statement and the disclosures mentioned under
Rule 6, and shall be sent to - (i) the Central Government, the ROC, the Income-tax authorities, in all cases; (ii) the
RBI, SEBI, CCI, and the stock exchanges (iii) other sectoral regulators or authorities, as required by Tribunal.
(2) The notice to the authorities shall be sent forthwith, after the notice is sent to the members or creditors of
the company, by registered post or by speed post or by courier or by hand delivery at the office of the authority.
(3) If the authorities desire to make any representation, the same shall be sent to the Tribunal within a period
of 30 days from the date of receipt of such notice and copy of such representation shall simultaneously be sent to
the concerned companies and in case no representation is received within the stated period of thirty days by the
Tribunal, it shall be presumed that the authorities have no representation to make on the proposed scheme of
compromise or arrangement.
Approval of the scheme at the meeting [Section 230(6)]: The scheme shall be approved by majority of person
representing 3/4th in value of the creditors, or class of creditors or members or class of members, voting in person
or by proxy or by postal ballot.
Scheme to be approved by special majority;
The Scheme must be approved by a resolution passed with the special majority stipulated in Section 230(6), namely
a majority (51% in number) representing 3/4th in value (75%) of the creditors, or class of creditors, or members,
or class of members, as the case may be, present and voting either in person or, by proxy. Thus, 51% majority in
number, and 75% in value present and voting at the meeting must approve the scheme. For example, if at the
meeting 100 persons (members in person and proxies) are present, at least 51 of them must vote in favour the
resolution and they must be holding at least 75% of the paid-up share capital carrying voting rights. In the case of
creditors, those voting in favour must have the claim not less than 75% of the total amount of claim of all the
creditors present and voting.
406
Voting [Rule 9]: The person who receives the notice may within one month from the date of receipt of the notice
vote in the meeting either in person or through proxy or through postal ballot or through electronic means to the
adoption of the scheme of compromise and arrangement.
Proxies [Rule 10]:
(1) Voting by proxy shall be permitted, provided a proxy in the prescribed form duly signed by the person
entitled to attend and vote at the meeting is filed with the company at its registered office not later than 48 hours
before the meeting.
(2) Where a body corporate which is a member or creditor (including holder of debentures) of a company
authorizes any person to act as its representative at the meeting, of the members or creditors of the company, or
of any class of them, as the case may be, a copy of the resolution of the Board of Directors or other governing body
of such body corporate authorizing such person to act as its representative at the meeting, and certified to be a
true copy by a director, the manager, the secretary, or other authorized officer of such body corporate shall be
lodged with the company at its registered office not later than 48 hours before the meeting.
(3) No person shall be appointed as a proxy who is a minor.
(4) The proxy of a member or creditor blind or incapable of writing may be accepted if such member or creditor
has attached his signature or mark thereto in the presence of a witness who shall add to his signature his
description and address. However, all insertions in the proxy are in the handwriting of the witness and such witness
shall have certified at the foot of the proxy that all such insertions have been made by him at the request and in
the presence of the member or creditor before he attached his signature or mark.
(5) The proxy of a member or creditor who does not know English may be accepted if it is executed in the manner
prescribed in the preceding sub-rule and the witness certifies that it was explained to the member or creditor in
the language known to him, and gives the member's or creditor's name in English below the signature.
Report of the result of the meeting by Chairperson [Rule 14]: The Chairperson of the meeting (or where there are
separate meetings, the Chairperson of each meeting) shall, within the time fixed by the Tribunal, or where no time
has been fixed, within 3 days after the conclusion of the meeting, submit a report to the Tribunal on the result of
the meeting in Form CAA-4.
Order by NCLT [Section 230(6)]: Mere approval by majority does not validate the compromise or arrangement.
The scheme has to be sanctioned by the Tribunal.
An order made by the Tribunal shall provide for all or any of the following matters, namely: —
(a) Where the compromise or arrangement provides for conversion of preference shares into equity shares,
such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity
shares equal to the value of the dividend payable;
(b) The protection of any class of creditors;
(c) If the compromise or arrangement results in the variation of the shareholders' rights, it shall be given effect
to under the provisions of Section 48;
(d) If the compromise or arrangement is agreed to by the creditors, any proceedings pending before the Board for
Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special
Provisions) Act, 1985 shall abate;
(e) Such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal
necessary to effectively implement the terms of the compromise or arrangement.
However, no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's
auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme
of compromise or arrangement is in conformity with the accounting standards prescribed u/ s 133.
Petition for confirming compromise or arrangement [Rule 15]:
(1) Where the proposed compromise or arrangement is agreed to by the members or creditors or both as the
case may be, with or without modification, the company (or its liquidator), shall, within 7 days of the filing of the
report by the Chairperson, present a petition to the Tribunal in Form CAA-5 for sanction of the scheme of
compromise or arrangement.
407
(2) Where a compromise or arrangement is proposed for the purposes of or in connection with' scheme for the
reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition
shall pray for appropriate orders and directions u/s 230 and/or 232.
(3) Where the company fails to present the petition for confirmation of the compromise or arrangement as
aforesaid, it shall be open to any creditor or member as the case may be, with the leave of the Tribunal, to present
the petition and the company shall be liable for the cost thereof.
Date and notice of hearing [Rule 16]: The Tribunal shall fix a date for the hearing of the petition, and notice of the
hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised, or in such
other newspaper as the Tribunal may direct, not less than ten days before the date fixed for the hearing.
The notice of the hearing of the petition shall also be served by the Tribunal to the objectors or to their
representatives and to the Central Government and other authorities who have made representation and have
desired to be heard in their representation.
Order on petition [Rule 17]:
(1) Where the Tribunal sanctions the compromise or arrangement, the order shall include such directions in
regard to any matter or such modifications in the compromise or arrangement as the Tribunal may think fit to
make for the proper working of the compromise or arrangement.
(2) The order shall direct that a certified copy of the same shall be filed with the ROC within 30 days from the
date of the receipt of copy of the order, or such other time as may be fixed by the Tribunal.
(3) The order shall be in Form CAA-6, with such variations as may be necessary.
Filing of order with ROC [Section 230(8)]: The order of the Tribunal shall be filed with the Registrar by the company
within a period of 30 days of the receipt of the order.
Power of the Tribunal to dispense with the meeting [Section 230(9)]: The Tribunal may dispense with calling of a
meeting of creditor or class of creditors where such creditors or class of creditors, having at least 90% value, agree
and confirm, by way of affidavit, to the scheme of compromise or arrangement.
Conditions for buyback of securities [Section 230(10)]: No compromise or arrangement in respect of any buyback
of securities under section 230 shall be sanctioned by the Tribunal unless such buy-back is in accordance with the
provisions of Section 68.
Compliance of SEBI Regulations in case of takeover offer [Section 230(11)]: Any compromise or arrangement may
include takeover offer made in such manner as may be prescribed. However, in case of listed companies, takeover
offer shall be as per the regulations framed by the SEBI.
Grievances to Tribunal with respect to the takeover offer [Section 230(12)]: An aggrieved party may make an
application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other
than listed companies in prescribed such manner and the Tribunal may, on application, pass such order as it may
deem fit.
Explanation: For the removal of doubts, it is hereby declared that the provisions of Section 66 shall not apply to
the reduction of share capital effected in pursuance of the order of the Tribunal under this section.
Jurisdiction in case of government companies: In case of Government Company - In Section 230 for the word
"Tribunal" the words "Central Government" shall be substituted. [Notification Dated 13th ]une, 2017]
Que. No. 6] Whether in a scheme of arrangement the meeting of shareholders and creditors can be dispensed
with? Supplement your answer with the help of case law.
CS (Professional) - Dec 2009 (4 Marks), Dec 2011 (5 Marks)
Ans.: Power of the Tribunal to dispense with the meeting [Section 230(9)]: The Tribunal may dispense with calling
of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least 90% value,
agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.
Where the written consent to the proposed scheme is granted by all the members and secured and unsecured
creditors, separate meeting of members and secured and unsecured creditors can be dispensed with. [Re.
408
Feedback Reach Consultancy Services (P) Ltd. (2003) 52 CLA 260: (2003) CLC 498: (2003) 42 SCL 82: (2003) 115
Comp Cas 897 (Del)]
Que. No. 7] A company has filed its application for amalgamation and arrangement under sections 230 to 231.
After scrutinizing the fairness of this scheme, the Tribunal ordered for calling class meetings and approved the
notice. However, the Tribunal also ordered publication of the notice in an English newspaper as well as in the
Official Gazette. State whether the Tribunal Order to publish the notice in the English newspaper as well as in
the Official Gazette is tenable as per law. Also discuss relevant provisions of the Companies Act, 2013 and
relevant rules made thereunder. CS (Professional) - June 2013 (4 Marks)
Ans.: As per Rule 7 of the Companies (Compromises, Arrangements & Amalgamations) Rules, 2016, the notice of
the meeting as per Section 230(3) shall be advertised in Form No. CAA-2 in at least one English newspaper and in
at least one vernacular newspaper having wide circulation in the State in which the registered office of the
company is situated, or such newspapers as may be directed by the Tribunal.
Such notice shall be also be placed, not less than 30 days before the date fixed for the meeting, on the website of
the company and in case of listed companies also on the website of the SEBI and the recognized stock exchange
where the securities of the company are listed.
Thus, order of Tribunal is as per the provisions of the Companies Act, 2013.
Que. No. 8] Discuss briefly power of Tribunal to enforce scheme of compromise or arrangement.
Ans.: Power of Tribunal to enforce compromise or arrangement [Section 231(1)]: Where the Tribunal makes an
order u/s 230 sanctioning a compromise or an arrangement in respect of a company, it shall have following powers
—
(a) Power to supervise the implementation of the scheme of compromise or arrangement; and
(b) Power to give directions in regard to any matter or make such modifications in the scheme of compromise
or arrangement for the proper implementation of the scheme of compromise or arrangement.
Power of Tribunal to order winding up [Section 231(2)]: If the Tribunal is satisfied that the compromise or
arrangement sanctioned cannot be implemented satisfactorily with or without modifications, and the company is
unable to pay its debts as per the scheme, it may make an order for winding up the company and such an order
shall be deemed to be an order made u/s 273.
Que. No. 9] Discuss the briefly the special provisions of the Section 232 under the Companies Act, 2013 relating
to merger and amalgamation of companies.
"Section 232 contains reference to reconstruction of any company or companies or amalgamation of any two or
more companies." Comment on the relevant provisions for facilitating reconstruction and amalgamation of
companies. CS (Professional) - Dec 2012 (8 Marks)
Ans.: Merger and amalgamation of companies [Section 232(1)]: Where an application is made to the Tribunal u/s
230 for the sanctioning of a compromise or an arrangement the Tribunal may on such application, order a meeting
of the creditors or class of creditors or the members or class of members, to be called, held and conducted in such
manner as the Tribunal may direct. To get such order it must be shown to the Tribunal that —
(a) The compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme
for the reconstruction of the company or companies involving merger or the amalgamation of any two or more
companies.
(b) Under the scheme, the whole or any part of the undertaking, property or liabilities of Transferor Company is
required to be transferred to Transferee Company, or is proposed to be divided among and transferred to two or
more companies.
The provisions of Section 230(3) to (6) shall apply to such meeting mutatis mutandis.
Circulation of certain documents by the companies [Section 232(2)]: Where an order has been made by the
Tribunal, merging companies or the companies in respect of which a division is proposed, shall also be required to
circulate the following for the meeting so ordered by the Tribunal, namely:
(a) The draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging
company.
409
(b) Confirmation that a copy of the draft scheme has been filed with the ROC.
(c) A report adopted by the directors of the merging companies explaining effect of compromise on each class
of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the
share exchange ratio, specifying any special valuation difficulties.
(d) The report of the expert with regard to valuation, if any.
(e) A supplementary accounting statement if the last annual accounts of any of the merging company relate to
a financial year ending more than 6 months before the first meeting of the company summoned for the purposes
of approving the scheme.
Order of the Tribunal and content of order [Section 232(3)]: The Tribunal, after satisfying itself that the specified
procedure has been complied with, may, by order in Form CAA-7, sanction the compromise or arrangement or by
a subsequent order, make provision for the following matters —
(a) The transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of
the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded
by it in writing, decides otherwise.
(b) The allotment or appropriation by the transferee company of any shares, debentures, policies or other like
instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by
that company to or for any person. However, a transferee company shall not, as a result of the compromise or
arrangement, hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of
any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished.
(c) The continuation by or against the transferee company of any legal proceedings pending by or against any
transferor company on the date of transfer.
(d) Dissolution, without winding-up, of any transferor company.
(e) The provision to be made for any persons who, within such time and in such manner as the Tribunal directs,
dissent from the compromise or arrangement.
{f) Where share capital is held by any non-resident shareholder under the foreign direct investment norms or
guidelines specified by the Central Government or in accordance with any law for the time being in force, the
allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order.
(g) The transfer of the employees of the transferor company to the transferee company.
(h) Where the transferor company is a listed company and the transferee company is an unlisted company —
(A) The transferee company shall remain an unlisted company until it becomes a listed company;
(B) If shareholders of the transferor company decide to opt out of the transferee company, provision shall be
made for payment of the value of shares held by them and other benefits in accordance with a pre-determined
price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal.
However, the amount of payment or valuation under this clause for any share shall not be less than what has been
specified by the SEBI under any regulations framed by it.
(i) Where the transferor company is dissolved, the fee, paid by the transferor company on its authorized capital
shall be set-off against any fees payable by the transferee company on its authorized capital subsequent to the
amalgamation.
(j) Such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger
or amalgamation is fully and effectively carried out.
No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's auditor
has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of
compromise or arrangement is in conformity with the accounting standards prescribed u/ s 133.
Power of Tribunal to transfer property or liabilities [Section 232(4)]: Where an order of Tribunal provides for the
transfer of any property or liabilities, then, that property or liabilities shall be transferred to the transferee
company. The Tribunal, at its discretion, order that any property of the transferor company shall vest in the
transferee company free from any charge and consequently any such charge shall cease to have effect.
410
Filing the copy of order with ROC [Section 232(5)]: Every company in relation to which the order is made shall
cause a certified copy of the order to be filed with the ROC for registration within 30 days of the receipt of certified
copy of the order.
Effective date of the scheme [Section 232(6)]: The scheme shall clearly indicate an appointed date from which it
shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to
the appointed date.
Filing of certified statements before completion of the scheme [Section 232(7)]: Every company in relation to
which the order is made shall, until the completion of the scheme, file a statement in such form and within such
time as may be prescribed with the ROC every year duly certified by CA/ CMA/CS in practice indicating whether
the scheme is being complied with in accordance with the orders of the Tribunal or not.
Penalty for contravention [Section 232(8)]:—
♦ Fine to company: If a transferor company or a transferee company contravenes the provisions of this section,
then such company shall be punishable with fine which shall not be less than ` 1 lakh but which may extend to ` 25
lakh.
♦ Fine to officers: Every officer of such transferor or transferee company who is in default, shall be
punishable—
- with fine which shall not be less than 11 lakh but which may extend to ` 3 lakh, or
- with both.
Explanation: For the purposes of this section—
(i) In a scheme involving a merger, where under the scheme the undertaking, property and liabilities of one or
more companies, including the company in respect of which the compromise or arrangement is proposed, are to
be transferred to another existing company, it is a merger by absorption, or where the undertaking, property and
liabilities of two or more companies, including the company in respect of which the compromise or arrangement
is proposed, are to be transferred to a new company, whether or not a public company, it is a merger by formation
of a new company;
(ii) References to merging companies are in relation to a merger by absorption, to the transferor and transferee
companies, and, in relation to a merger by formation of a new company, to the transferor companies;
(iii) A scheme involves a division, where under the scheme the undertaking, property and liabilities of the company
in respect of which the compromise or arrangement is proposed are to be divided among and transferred to two
or more companies each of which is either an existing company or a new company; and
(iv) Property includes assets, rights and interests of every description and liabilities include debts and obligations
of every description.
Jurisdiction in case of government companies: In case of Government Company - In Section 232 for the word
"Tribunal" the words "Central Government" shall be substituted. [Notification Dated 13th June, 2017]
Que. No. 10] Discuss briefly special provisions applicable for merger or amalgamation between two or more
small companies or between a holding company and its wholly owned subsidiary company.
Ans.: Section 233 provides that a scheme of merger or amalgamation may be entered into between:
♦ Two or more small companies or
♦ A holding company and its wholly-owned subsidiary company or
♦ Such other class or classes of companies as may be prescribed.
Conditions [Section 233(1)]:
(a) A notice of the proposed scheme inviting objections or suggestions from the ROC and Official Liquidators
where registered office of the respective companies are situated or persons affected by the scheme within 30 days
is issued by the transferor and the transferee company.
411
(b) The objections and suggestions received are considered by the companies in their respective general
meetings and the scheme is approved by the respective members or class of members at a general meeting holding
at least 90% of the total number of shares.
(c) Each of the companies involved in the merger files a declaration of solvency in Form No. CAA-10 with ROC
where the registered office of the company is situated.
(d) The scheme is approved by majority representing 9/10th in value of the creditors or class of creditors of
respective companies indicated in a meeting convened by the company by giving a notice of 21 days along with
the scheme to its creditors for the purpose or otherwise approved in writing.
Filing of copy of the scheme [Section 233(2)]: The transferee company shall file a copy of the scheme in Form CAA-
11 with the Central Government, ROC and the Official Liquidator where the registered office of the company is
situated.
Confirmation order by the Central Government [Section 233(3)]: On the receipt of the scheme, if the Registrar or
the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the
same and issue a confirmation thereof to the companies.
Communication of obj ection to the Central Government [Section 233(4)]: If the Registrar or Official Liquidator
has any objections or suggestions, he may communicate the same in writing to the Central Government within a
period of 30 days. However, if no such communication is made, it shall be presumed that they have no objection
to the scheme.
Application by Central Government to the Tribunal [Section 233(5)]: If the Central Government after receiving
the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or
in the interest of the creditors, it may file an application before the Tribunal within a period of 60 days of the
receipt of the scheme stating its objections and requesting that the Tribunal may consider the scheme u/s 232.
Tribunal's action [Section 233(6)]: On receipt of an application from the Central Government or from any person,
if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per
Section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems
fit.
Registrar to be communicated [Section 233(7)]: A copy of the order confirming the scheme shall be communicated
in Form INC-28 to the ROC having jurisdiction over the transferee company and the persons concerned and the
Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall
be communicated to the Registrars where transferor company or companies were situated.
Effect of registration of the scheme [Section 233(8) & (9)]: The registration of the scheme shall be deemed to have
the effect of dissolution of the transferor company without process of winding-up.
The registration of the scheme shall have the following effects:
(a) T ransf er of property or liabilities of the transferor company to the transferee company so that the property
becomes the property of the transferee company and the liabilities become the liabilities of the transferee
company.
(b) The charges on the property of the transferor company shall be applicable and enforceable as if the charges
were on the property of the transferee company.
(c) Legal proceedings by or against the transferor company pending before any court of law shall be continued
by or against the transferee company.
(d) Where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt
due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee
company.
Cancellation of shares held by transferee company [Section 233(10)]: A transferee company shall not on merger
or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of
any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or
amalgamation.
412
Filing of copy registered scheme with ROC [Section 233(11)]: The transferee company shall file an application with
the ROC along with the scheme registered, indicating the revised authorized capital and pay the prescribed fees
due on revised capital.
However, the fee paid by the transferor company on its authorized capital prior to its merger or amalgamation
with the transferee company shall be set-off against the fees payable by the transferee company.
Merger or Amalgamation of certain companies [Rule 25]:
(1) The notice of the proposed scheme, u/s 233(l)(a), to invite objections or suggestions from the ROC and
Official Liquidator or persons affected by the scheme shall be in Form CAA-9.
(2) For the purposes of Section 233(l)(a) the declaration of solvency shall be filed by each of the companies
involved in the scheme of merger or amalgamation in Form CAA-10 along with the fee as provided in the
Companies (Registration Offices & Fees) Rules, 2014, before convening the meeting of members and creditors for
approval of the scheme.
(3) The notice of the meeting to the members and creditors shall be accompanied by—
(a) A statement, as far as applicable, referred to in Section 230(3)
(b) The declaration of solvency in Form CAA-10;
(c) A copy of the scheme.
(4) The transferee company shall, within 7 days after the conclusion of the meeting of members or class of
members or creditors or class of creditors, file a copy of the scheme as agreed to by the members and creditors,
along with a report of the result of each of the meetings in Form CAA-11 with the Central Government along with
prescribed fees as provided under the Companies (Registration Offices & Fees) Rules, 2014.
Copy of the scheme shall also be filed, along with Form CAA-11 with
- ROC in Form GNL-1 along with prescribed fees and
- Official Liquidator through hand delivery or by registered post or speed post.
(5) Where no objection or suggestion is received to the scheme from the ROC and Official Liquidator or where
the objection or suggestion of ROC and Official Liquidator is deemed to be not sustainable and the Central
Government is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central
Government shall issue a confirmation order of such scheme of merger or amalgamation in Form CAA-12.
(6) Where objections or suggestions are received from the Registrar of Companies or Official Liquidator and the
Central Government is of the opinion, whether on the basis of such objections or otherwise, that the scheme is not
in the public interest or in the interest of creditors, it may file an application before the Tribunal in Form CAA-13
within 60 days of the receipt of the scheme stating its objections or opinion and requesting that Tribunal may
consider the scheme u/s 232.
(7) The confirmation order of the scheme issued by the Central Government or Tribunal shall be filed, within 30
days of the receipt of the order of confirmation, in Form INC-28 along with prescribed fees with the ROC having
jurisdiction over the transferee and transferor companies respectively.
(8) It is hereby clarified that with respect to schemes of arrangement or compromise falling within the purview
of Section 233, the concerned companies may, at their discretion, opt to undertake such schemes u/ss 230 to 232,
including where the condition prescribed in Section 233(l)(d) has not been met.
Que. No. 11] Discuss briefly special provisions applicable for merger or amalgamation of company with Foreign
Company.
Ans.:
Merger or amalgamation of company with foreign company [Section 234]:
(1) The provisions of Chapter XV (Sections 230 to 240) shall apply mutatis mutandis to schemes of mergers and
amalgamations between companies registered under the Companies Act, 2013 and companies incorporated in the
jurisdictions of such countries as may be notified from time to time by the Central Government. However, the
Central Government may make rules, in consultation with the RBI, in connection with mergers and amalgamations
provided under this section.
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(2) A foreign company, may with the prior approval of the RBI, merge into a company registered under the
Companies Act, 2013 or vice versa. The terms and conditions of the scheme of merger may provide, among other
things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository
Receipts, or partly in cash and partly in Depository Receipts, as per the scheme to be drawn up for the purpose.
Explanation: The expression "foreign company" means any company or body corporate incorporated outside
India whether having a place of business in India or not.
Rule 25 A of the Companies (Compromises, Arrangements & Amalgamations) Rules, 2017 makes the following
provisions for merger or amalgamation of a foreign company with a company and vice versa.
(1) A foreign company incorporated outside India may merge with an Indian company after obtaining prior
approval of RBI and after complying with the provisions of Sections 230 to 232 of the Companies Act, 2013 and
these rules.
(2) A company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure
B after obtaining prior approval of the RBI and after complying with provisions of Sections 230 to 232 of the Act
and these rules.
(3) The transferee company shall ensure that valuation is conducted by valuers who are members of a
recognized professional body in the jurisdiction of the transferee company and further that such valuation is in
accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall
be attached with the application made to RBI for obtaining its approval.
(4) The concerned company shall file an application before the Tribunal as per provisions of Section 230 to
section 232 after obtaining specified approvals.
Que. No. 12] Briefly discuss provisions relating to compulsory acquisition of shares of minority shareholders.
DEJYAS Ltd. has made an offer to acquire all the equity shares of ABC Ltd. at certain price. Members of the
company who hold 90% of the shares of ABC Ltd. has accepted the offer. The remaining shares are held by 2
persons who do not agree to deal. Explaining the procedure to finalize the deal, state the steps to be taken by
the offeror company to acquire the shares of dissenting shareholders. Decide also whether DEJYAS Ltd. can
acquire all the shares in ABC Ltd. under the provisions of the Companies Act, 2013.
Ans.: The scheme may contain proposal for transfer of shares from Transferor Company to Transferee Company. If
the proposal from the Transferee Company is approved by holders of 90% of shares of Transferor Company, the
Transferee Company can compulsorily acquire shares of Transferor Company (who will be less than 10%). This
provision has been made to ensure that minority shareholder do not block the sale when substantially majority has
accepted the scheme. While calculating 90% shares, the shares already held by Transferee Company or its nominee
on the date of offer will be excluded.
Power to acquire shares of shareholders dissenting from scheme or contract approved by majority [Section
235(1)]: Where a scheme or contract involving the transfer of shares or any class of shares in transferor company
to transferee company approved by the holders of not less than 9/10th in value of the shares then transferee
company may give notice to any dissenting shareholder that it desires to acquire his shares. While calculating
9/10th in value of the shares already held at the date of the offer by; or by a nominee of the transferee company
or its subsidiary companies will be excluded.
Students should note that the approval of shareholders holding 90% of the value of shares is required and not 90%
of value of shareholders those attending the meeting.
The offer shall remain open for a period of 4 months. Thus, any shareholder of the transferor company may agree
to transfer his shares to the transferee company within period of 4 months from the date of offer.
Notice to any dissenting shareholder may be given by the transferee company within 2 months of the expiry of
period of 4 months during which the offer was open. Such notice has to be given in Form CAA-14.
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Explanation: "Dissenting shareholder" includes a shareholder who has not assented to the scheme or contract and
any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the
scheme or contract.
Right of dissenting shareholder to make an application to the Tribunal [Section 235(2)]: A dissenting shareholder
may make an application within 1 month of receipt of notice to the Tribunal praying that acquisition of his shares
should not be permitted.
However, if no such application is made by dissenting shareholder or application is rejected by the Tribunal then
transferee company shall be entitled to and bound to acquire those shares on the same terms on which shares of
approving shareholders were transferred to the transferee company.
Procedure for acquiring shares by transferee company [Section 235(3)]: The transferee company shall on the
expiry of 1 month from the date on which the notice has been given, send a copy of the notice to the transferor
company together with an instrument of transfer.
The instrument of transfer shall be executed —
(a) on behalf of the dissenting shareholder, by some person appointed by the transferor company and
(b) on behalf of the transferee company, by a person authorized by the transferee company.
The transferee company shall pay the consideration to the transferor company for acquiring shares of dissenting
shareholders.
The transferor company shall —
(a) thereupon register the transferee company as the holder of those shares; and
(b) within 1 month of the date of such registration, inform the dissenting shareholders of the fact of such
registration and of the receipt of the amount or other consideration representing the price payable to them by the
transferee company.
Amount or consideration must be paid within 60 days to dissenting shareholders [Section 235(4)]: Any sum
received by the transferor company shall be paid into a separate bank account, and any such sum and any
other consideration so received shall be held by transferor company in trust for dissenting shareholders and shall
be disbursed the consideration to the dissenting shareholders within 60 days.
Reconstruction by sale of shares: Reconstruction or amalgamation without NCLT procedure is possible u/s 235 by
take-over by sale of shares. Selling shareholders get either compensation or shares of acquiring company. This
procedure is rarely followed, as sanction of shareholders holding 90% of the value of shares is required. This is
difficult to obtain. Further, route provided in Section 235 can be followed when creditors are not involved in
reconstruction and their interests are not affected. Thus, these provisions is useful to acquire small company or
closely held company or where holding company already hold 90% or more and wants to convert subsidiary
company into wholly owned subsidiary. In case of listed company SEBI Takeover Code will also have to be complied
with.
Registration of Offer of Schemes involving transfer of shares [Section 238]: In relation to every offer of a scheme
or contract involving the transfer of shares or any class of shares in the transferor company to the transferee
company u/ s 235 —
(a) Every circular containing such offer and recommendation to the members of the transferor company by its
directors to accept such offer shall be accompanied by such information as set out in Form CAA-15;
(b) Every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it
has taken to ensure that necessary cash will be available; and
(c) Every such circular shall be presented to the ROC for registration and no such circular shall be issued until it
is so registered:
However, the ROC may refuse, for reasons to be recorded in writing, to register any such circular which does not
contain the required information or which sets out such information in a manner likely to give a false impression,
and communicate such refusal to the parties within 30 days of the application.
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An appeal shall lie to the Tribunal against an order of the ROC refusing to register any such circular and the said
appeal shall be in the Form NCLT-9 supported with an affidavit in the Form NCLT-6.
The director who issues a circular which has not been presented for registration and registered, shall be punishable
with fine which shall not be less than ` 25,000 but which may extend to ` 5 lakh.
Que. No. 13] Discuss the special provisions made under Section 236 of the Companies Act, 2013 relating to
purchase of minority shareholding by the majority.
Ans.: Purchase of Minority Shareholding [Section 236]:
Applicability [Section 236(1)]: Provisions of this section applies where —
(1) An acquirer, or a person acting in concert with such acquirer, becoming registered holder of 90% or more of
the issued equity share capital of a company, or
(2) Any person or group of persons becoming 90 % majority or holding 90 % of the issued equity share capital
of a company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason.
Duty of acquirer to notify the company: An acquirer, or a person acting in concert with such acquirer, as the case
may be, shall notify the company of their intention to buy the remaining equity shares.
Duty of acquirer to make offer to the minority shareholders [Section 236(2)]: An acquirer, or a person acting in
concert with such acquirer, shall offer to the minority shareholders of the company for buying the equity shares
held by such shareholders at a price determined on the basis of valuation by a registered valuer.
Determination of price for purchase of minority shareholding [Rule 27]: For the purposes of Section 236(2), the
registered valuer shall determine the offer price for purchase of equity shares of the minority shareholders of the
company, in accordance with the following rules:
(1) In case of a listed company:
(a) The offer price shall be determined as specified by the SEBI and
(b) The registered valuer shall also provide a valuation report giving justification for such valuation.
(2) In the case of an unlisted company and a private company:
(a) The offer price shall be determined after taking into account the following factors - - The highest price paid by
the acquirer, person or group of persons for acquisition during last 12 months;
- The fair price of shares of the company to be determined by the registered valuer after taking into account
valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple
vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such
companies; and
(b) The registered valuer shall also provide a valuation report giving justification for such valuation.
Option of minority shareholder to sell their shares [Section 236(3)]: The minority shareholders of the company
may offer to the majority shareholders to purchase the minority equity shareholding at the price determined in
accordance with Rule 27.
Deposit of money [Section 236(4)]: The majority shareholders shall deposit an amount equal to the value of shares
to be acquired by them in a separate bank account to be operated by company whose shares are being transferred
for at leas` 1 year for payment to the minority shareholders and such amount shall be disbursed to the entitled
shareholders within 60 days.
Such disbursement shall continue to be made to the entitled shareholders for a period of 1 year, who for any
reason had not been made disbursement within the said period of 60 days or if the disbursement have been made
within the aforesaid period of 60 days, fail to receive or claim payment arising out of such disbursement.
(Thus, normally payment will be made in 60 days but due some reason if payment is not made in 60 days then
payment can be made beyond 60 days up to 1 year)
Transferor company to act as transfer agent [Section 236(5)]: In the event of a purchase, company whose shares
are being transferred shall act as a transfer agent for -
(a) receiving and paying the price to the minority shareholders and
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(b) taking delivery of the shares and delivering such shares to the majority.
Transferor company to issue share in lieu of cancelled shares [Section 236(6)]: Incase any minority shareholders
fails to make physical delivery of shares by the shareholders within the time specified by the company —
(a) his share certificates shall be deemed to be cancelled, and
(b) transferor company shall be authorized to —
- issue shares in lieu of the cancelled shares and complete the transfer in accordance with law and
- make payment of the price out of deposit by the majority in advance to the minority by dispatch of such
payment.
If shareholder has died or ceased to exist etc. [Section 236(6)]: If majority shareholders are making full purchase
and also deposit the price with the company then legal heirs, successors, administrators or assignees who have not
been brought on record by transmission can exercise the right to sell shares for a period of 3 years from the date
of acquisition of majority shareholding.
Transfer at higher price [Section 236(8)]: Where the shares of minority shareholders have been acquired in
pursuance of this section and as on or prior to the date of transfer following such acquisition, the shareholders
holding 75% or more minority equity shareholding negotiate or reach an understanding on a higher price for any
transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer
taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share
the additional compensation so received by them with such minority shareholders on a pro rata basis.
Explanation: The expressions "acquirer" and "person acting in concert" shall have the meanings respectively
assigned to them in Regulation 2 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
Continued application of Section 236 [Section 236(9)]: When a shareholder or the majority equity shareholder
fails to acquire full purchase of the shares of the minority equity shareholders, then, the provisions of this section
shall continue to apply to the residual minority equity shareholders, even though —
(a) the shares of the company of the residual minority equity shareholder had been delisted;
(b) the period of 1 year or the period specified in the regulations made by the SEBI under the SEBI Act, 1992,
had elapsed.
Que. No. 14] State the power of Central Government to provide for amalgamation of companies in public
interest under the Companies Act, 2013.
With a view to boost the share value, the Central Government wants to amalgamate two public limited
companies into a single company. The Government and Public Financial Institutions have substantial interest in
both companies. The two companies are in the business of tourism and running several hotels which are not
making good profits and consequently the share prices are depressed. Examine the powers of the Central
Government to amalgamate the two companies in public interest.
For a merger, it is the shareholders who decide whether the company will merge with another company or not.
There is no hostile process/method to force merger by the other company. However, the Companies Act, 2013
empowers someone who can force amalgamation of more than one company in public interest. You are required
to answer the following:
(i) Which authority can force the merger?
(ii) What is the underlying situation for that?
(iii) What is the remedy in the hands of the affected persons?
(iv) How is it implemented?
(v) What are the pre-conditions in case of amalgamation of banks?
CS (Professional) - Dec 2013 (5*1 = 5 Marks)
Ans.: Power of Central Government to provide for amalgamation of companies in public interest [Section 237]:
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Situation [Section 237(1)]: The Central Government is empowered to order amalgamation of 2 or more companies,
if it satisfied that such amalgamation is essential in public interest.
Order of amalgamation: The Central Government may, by order notified in the Official Gazette, provide for the
amalgamation of those companies into a single company with such constitution, with such property, powers,
rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in
the order.
Contents of order [Section 237(2)]: The order may also provide for —
(a) the continuation by or against the transferee company of any legal proceedings pending by or against any
transferor company and
(b) such consequential, incidental and supplemental provisions as may, in the opinion of the Central
Government, be necessary to give effect to the amalgamation.
Rights of members and creditors and assessment of compensation [Section 237(3)]: Interest of members,
creditors and debenture holders of the transferor company will remain same in transferee company as they have
against transferor company. However, if in any case his interest is less in transferee company than his interest in
transferor company then he shall be entitled to receive compensation by such authority as may be prescribed.
Right of aggrieved person to make appeal if he is not satisfied with compensation [Section 237(4)]: Any
person aggrieved by any assessment of compensation made by the prescribed authority may, within a period of
30 days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal
and thereupon the assessment of the compensation shall be made by the Tribunal.
Conditions for making order of amalgamation [Section 237(5)]: No order shall be made under this section unless
—
(a) A copy of the proposed order has been sent in draft to each of the companies concerned;
(b) The time for preferring an appeal has expired, or where any such appeal has been preferred, the appeal has
been finally disposed off; and
(c) The Central Government has considered, and made such modifications, if any, in the draft order as it may
deem fit in the light of suggestions and objections which may be received by it from any such company within such
period as the Central Government may fix in that behalf, not being less than 2 months from the date on which the
copy aforesaid is received by that company, or from any class of shareholders therein, or from any creditors or any
class of creditors thereof.
Laying of copy of order in Parliament [Section 237(6)]: The copies of every order made under this section shall, as
soon as may be after it has been made, be laid before each House of Parliament.
Consultation with RBI amalgamation of banking companies: In case of amalgamation of two or more banking
companies, the Central Government must consult with RBI before passing order u/s 237 of the Companies Act,
2013.
Que. No. 15] Write a short note on: Preservation of books and papers of amalgamated companies
Ans.: Preservation of books and papers of amalgamated companies [Section 239]: The books and papers of a
company which has been amalgamated with, or whose shares have been acquired by, another company under
Chapter XV shall not be disposed of without the prior permission of the Central Government.
Before granting such permission, that Government may appoint a person to examine the books and papers or any
of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in
connection with the promotion or formation, or the management of the affairs, of the transferor company or its
amalgamation or the acquisition of its shares.
Que. No. 16] What is effect on offences committed by the officers in default of the transferor company prior to
its merger, amalgamation or acquisition?
Ans.: Liability of officers in respect of offences committed prior to merger, amalgamation, etc. [Section 240]:
Notwithstanding anything in any other law for the time being in force, the liability in respect of offences committed
418
under the Companies Act, 2013 by the officers in default, of the transferor company prior to its merger,
amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.
Que. No. 17] Briefly explain with relevant provisions of the Companies Act, 2013 as to when the scheme of
amalgamation would become effective. CS (Professional) - June 2009 (4 Marks)
Ans.: Filing the copy of order with ROC [Section 232(5)]: Every company in relation to which the order is made
shall cause a certified copy of the order to be filed with the ROC for registration within 30 days of the receipt of
certified copy of the order.
Effective date is the date on which the transfer and vesting of the undertaking of the transferor company shall take
effect i.e., all the requisite approvals would have been obtained, i.e., date of filing of Tribunal order with ROC.
Thus, when all the necessary approvals are obtained and Tribunal's order is filled with ROC the scheme of
amalgamation would become effective.
Que. No. 18] Happy Exports Ltd. was merged with Smart Exports Ltd. The order passed by Tribunal was filed with
the Registrar of Companies (ROC). But the same was not taken on record by ROC. Will the scheme still be
effective? CS (Professional) - June 2017 (3 Marks)
Ans.: Filing of order with ROC [Section 230(8)]: The order of the Tribunal shall be filed with the Registrar by the
company within a period of 30 days of the receipt of the order.
As per Rule 25(7) of the Companies (Compromises, Arrangements & Amalgamations) Rules, 2016, a certified copy
of the order passed by the Tribunal is required to be filed with the concerned ROCs. This is required to be filed in
Form No. INC-28.
The law does not specifically mention the requirement of taking on record by the ROC the certified copy of the
order passed by the Tribunal.
Que. No. 19] A meeting of members of XYZ Ltd. was convened under the orders of the Tribunal to consider a
scheme of compromise and arrangement. The meeting was attended by 200 members holding 5,00,000 shares
in aggregate. 75 members holding 4,00,000 shares voted for the scheme. The remaining members voted against
the scheme. Is the scheme approved in the eyes of law?
Examine with reference to the relevant provisions of the Companies Act, 2013 whether the scheme is approved
by the required majority. CA (Final) - May 2006 (7 Marks)
Explain the twin conditions for a valid resolution to be passed for a 'compromise or arrangement' under the
Companies Act, 2013. CS (Professional) - Dec 2014 (5 Marks)
Ans.: Approval of the scheme at the meeting [Section 230(6)]: The scheme of compromise or arrangement shall
be approved by majority of person representing 3/4th in value of the creditors, or class of creditors or members
or class of members, voting in person or by proxy or by postal ballot. Thus, 51 % majority in number, and 75% in
value present and voting at the meeting must approve the scheme.
The majority is dual, in number and in value. A simple majority of those voting is sufficient, whereas the '3/4th'
requirement relates to value. The 3/4th value is to be computed with reference to paid-up capital held by members
(or to total amount owed by company to creditors) present and voting at the meeting. [Re. Maknam Investments
Ltd. (1995) 6 SCL 93 Cal; Re Mafatlal Industries Ltd. (1995) 84 Comp Cas 230 (Guj)]
The language of Section 230(6) is totally unambiguous and a plain reading of this provision clearly shows that the
majority in number by which a compromise or arrangement is approved should represen` 3/4th in value of the
creditors/shareholders who are 'present and voting' and not of the total value of the shareholders or creditors of
the company. [Hind Lever Chemicals Ltd. and Another [2005] 58 SCL 211(Punj. & Har.)]
As per facts given in case, the scheme should be approved by 101 or more shareholders (51 % in number) holding
3,75,000 shares or more (75% in value).
However, out of shareholders holding 5,00,000 shares only 75 shareholder (37.5% in number) holding 4,00,000
shares (80% in value) voted in favour which is not in accordance with the provisions of Section 230 (6) and thus,
the scheme shall not be sanctioned by the Tribunal.
419
Broad Principles evolved in Sanctioning the Scheme:
(a) The resolutions should be passed by the statutory majority in accordance with 230(6) of Companies Act,
2013 at a meeting(s) duly convened and held. The Tribunal should not usurp the right of the members or creditors.
(b) Those who took part in the meetings are fair representative of the class and the meetings should not coerce
the minority in order to promote the adverse interest of those of the class whom they purport to represent.
(c) The scheme as a whole, having regard to the general conditions and background and object of the scheme,
is a reasonable one; it is not for Tribunal to interfere with the collective wisdom of the shareholders of the
company. If the scheme as a whole is fair and reasonable, it is the duty of the Tribunal not to launch an investigation
upon the commercial merits or demerits of the scheme which is the function of those who are interested in the
arrangement.
(d) There is no lack of good faith on the part of the majority.
(e) The scheme is not contrary to public interest.
(f) The scheme should not be a device to evade law.
Que. No. 20] ABC Ltd. has 700 creditors (in number) representing total value of ` 100 Crore as per its balance
sheet. In a creditors meeting called under sections 230 to 232 for considering proposed scheme of amalgamation
with XYZ Ltd., out of total 700 creditors, only 150 creditors representing value of ` 45 Crore were present. Out of
said 150 creditors present at the said meeting, only 140 creditors representing value of ` 40 Crore voted in favour
of the resolution, while 10 creditors representing value of ` 5 Crore cast their dissenting vote against the scheme.
Whether the motion proposing the scheme of amalgamation should be treated as approved or not? Explain with
reference to relevant provisions of law and case law, if any.
Ans.: Approval of the scheme at the meeting [Section 230(6)]: The scheme of compromise or arrangement shall
be approved by majority of person representing 3/4th in value of the creditors, or class of creditors or members
or class of members, voting in person or by proxy or by postal ballot. Thus, 51 % majority in number, and 75% in
value present and voting at the meeting must approve the scheme.
The majority is dual, in number and in value. A simple majority of those voting is sufficient, whereas the '3/4th'
requirement relates to value. The 3/4th value is to be computed with reference to paid-up capital held by members
(or to total amount owed by company to creditors) present and voting at the meeting. [Re. Maknam Investments
Ltd. (1995) 6 SCL 93 Cal; Re Mafatlal Industries Ltd. (1995) 84 Comp Cas 230 (Guj)]
The language of Section 230(6) is totally unambiguous and a plain reading of this provision clearly shows that the
majority in number by which a compromise or arrangement is approved should represen` 3/4th in value of the
creditors/shareholders who are 'present and voting' and not of the total value of the shareholders or creditors of
the company. [Hind Lever Chemicals Ltd. and Another [2005] 58 SCL 211(Punj. & Har.)[
In the given case, out of 150 creditors who were present and voting, 140 have voted in favour which means that
the first of the twin criteria has been satisfactorily met. In terms of value, those who voted in favour were
commanding a value of ` 40 Crores as against the value of those who voted against who commanded a value of ` 5
Crores. In other words, more than three-fourths in value of the votes of the creditors present and voting have
voted in favour indicating clearly that the second of the twin criteria has also been satisfactorily met. Thus the
resolution approving the amalgamation has been duly passed in accordance with the requirements of Section
230(6) of the Companies Act, 2013.
Que. No. 21] "The resolution according approval of shareholders under Section 230(6) is neither an ordinary
resolution nor a special resolution." Comment in the light of judicial precedent and also discuss whether filing
of such resolution with the Registrar of Companies is mandatory.
Ans.: The resolution according approval of shareholders under Section 230(6) is neither an ordinary resolution nor
a special resolution within the purview of Section 114 of the Companies Act, 2013. This is an extraordinary
resolution. A copy of this resolution need not be filed With the Registrar of Companies.
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Que. No. 22] A scheme of amalgamation of Rani Ltd. with Minakshi Machine Tools Ltd. was presented to the
Tribunal for sanction after the scheme was approved by an overwhelming majority of shareholders and secured
as well as unsecured creditors of both the companies at their respective meetings. While the scheme was
pending before the Tribunal, some of the members requisitioned an extraordinary general meeting for the
purpose of requesting Rani Ltd. to negotiate with Minakshi Machine Tools Ltd., as according to the
requisitionists, the exchange ratio was not fair and reasonable. Can the directors refuse to call the extraordinary
general meeting? Discuss. CS (Professional) - June 2008 (4 Marks)
"In valuation of shares and fixation of exchange ratio, the Tribunal cannot abdicate its duty to scrutinize the
scheme with vigilance." Do you agree? Support your answer with relevant case law.
The members of both Sugam Synthetix Ltd. and Gaurav Textiles Ltd. approved the schemes of amalgamation by
overwhelming majority. A reputed firm of Chartered Accountants fixed the exchange ratio. The scheme of
amalgamation was submitted, as per procedure, for the sanction of the Tribunal. During pendency of the matter
a small group of members of one of the merging companies objected to the amalgamation on the ground that
the exchange ratio was unfair.
Decide whether the said objection is likely to be sustained. Would you answer be different if similar objection
was raised by the Central Government? CA (Final) - May 2011 (8 Marks), May 2016 (4 Marks)
Ans.: In Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 (SC), it was held that, if Share
Exchange Ratio is fixed by Chartered Accountant upon consideration of various factors and approved by majority
of shareholders in meeting, the Tribunal will not disturb ratio.
It was also held that, unless the person who challenges the valuation satisfies the Tribunal that the valuation is
grossly unfair, the Tribunal will not disturb the scheme of amalgamation. [Piramal Spg. v. Weaving Mills Ltd.]
If the valuation is confirmed to be fair by reputed firm of Chartered Accountants and is also confirmed by majority
of members. The objection raised by some shareholders of a small group cannot be sustained. [Hindustan Lever
Employees Union v. Hindustan Lever Ltd.]
Section 230(5) provides that a notice under Section 230(3) along with all the documents in such form as may be
prescribed shall also be sent to the Central Government.
The Tribunal should take into consideration the representations, if any, made to it by the government before
passing any order. The role played by the Central Government is that of impartial observer who acts in public
interest and advises the Tribunal whether it is or it is not feasible for the two companies to amalgamate.
Considering the above judicial views, answer to given case is as follows:
(a) The objection raised by dissenting shareholder will be refused by the Tribunal unless it is shown that
valuation is grossly unfair.
(b) In case of objection by the Central Government, the Tribunal will refuse to interfere unless the Central
Government establishes that the exchange ratio was unfair and not in public interest.
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CHAPTER
26
WINDING-UP OF COMPANIES - OVERVIEW
■■■ WINDING-UP AND DISSOLUTION & MODES OF WINDING-UP
Que. No. 1] What do you understand by winding-up of companies?
Ans.: Winding-up of a company is the last stage of putting an end to the life of a company when other revival
strategies do not work. It is a proceeding by means of which a company is dissolved and in the course of such
dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by
its members. If surplus is still left, it is distributed among the members in accordance with their rights.
A liquidator is appointed for administration of properties and he takes control of the company, collects its debts
and finally distributes any surplus among the members in accordance with their rights. Thus, winding- up is the
process by which management of a company's affairs is taken out of its directors hands, its assets are realized by
a liquidator and its debts are discharged out of proceeds of realization. Any surplus of assets which remains after
such discharge is returned to its members or shareholders.
The main purpose of winding up of a company is to realize the assets and pay the debts of the company
expeditiously and fairly in accordance with the law.
Que. No. 2] Distinguish between: Winding-up and Insolvency CS (Executive) - June 2010 (4 Marks) Ans.: Following
are the main points of distinction between winding-up and insolvency:
Points Winding-up Insolvency
Meaning Winding-up is a proceeding by means of which Insolvency is inability of a debtor to pay debts
a company is dissolved and in the course of as they fall due. A person is said to be insolvent
such dissolution its assets are collected, its when his liabilities exceeds his assets and
debts are paid off out of the assets or from against whom Tribunal makes an order of
contributions by its members. If surplus is still adjudication.
left, it is distributed among the members.
Law The law relating to winding-up is contained in The law relating to insolvency in India is
Companies Act, 2013. contained in the Insolvency & Bankruptcy
Code, 2016.
When A company can be wound-up even if is A person can be adjudged insolvent only when
financially sound e.g. voluntary winding-up. he is unable to pay his liabilities.
Effect of After completion of winding-up proceedings, After completion of insolvency proceedings,

proceedings the company is dissolved. the insolvent person is discharged from all his
liabilities.
Que. No. 3] Distinguish between: Winding-up and Dissolution

Ans.: The entire procedure for bringing about a lawful end to the life of a company is divided into two stages -
'winding-up' and 'dissolution'. Winding up is the first stage in the process whereby assets are realized, liabilities
are paid off and the surplus, if any, distributed among its members. Dissolution is the final stage whereby the
existence of the company is withdrawn by the law. Following are the main points of distinction between winding-
up and dissolution:
Points Winding-up Dissolution
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Meaning Winding-up is a proceeding by means of which Dissolution brings an end to the company's
a company is dissolved and in the course of legal existence.
such dissolution its assets are collected, its
debts are paid off out of the assets or from
contributions by its members. If surplus is still
left, it is distributed among the members.
Stage Winding-up precedes the dissolution. In other Dissolution is the final stage which leads to
words first winding-up of state of affairs occurs corporate death of the company.
and after winding-up and all other proceeding
company is dissolved.
Effect In winding-up, the assets are realized and After dissolution the corporate status of the
liabilities are paid but, the corporate status of company does not continue.
the company continues.
Liquidator The liquidator can present the company in Once the order of dissolution is made, the
winding- up proceedings. liquidator cannot represent the company
Proceedings Any person can proceed against the company No proceedings can be started against the
which is being wound-up. company which has been dissolved.
Order of Court Winding-up proceedings can be started Order of Court is essential for the dissolution of
without the intervention of Court. the company.
Que. No. 4] Write a short note on: Modes of winding-up CS (Executive) - June 2009 (4 Marks)
Ans.: Under the Companies Act, 2013, the company may be wound up by any of the following modes:
1. By the NCLT i.e. compulsory winding-up
2. Voluntary winding-up
3. Winding-up by the Central Government under summary procedure.
WINDING UP BY THE NCLT
Que. No. 5] Explain the cases in which a company is compulsory wound-up by the Tribunal.
Write a short note: Winding-up on the ground of inability to pay debt.
Ans.: Circumstances in which company may be wound up by the Tribunal [Section 271(1)]: A company may, on a
petition, be wound up by the Tribunal —
(a) If the company is unable to pay its debts.
(b) If the company has, by special resolution, resolved that the company be wound up by the Tribunal.
(c) If the company has acted against the interests of the sovereignty and integrity of India, the security of the
State, friendly relations with foreign States, public order, decency or morality.
(d) If the Tribunal has ordered the winding up of the company.
(e) If on an application made by the Registrar or any other person authorized by the Central Government by
notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a
fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in
the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection
therewith and that it is proper that the company be wound up.
(f) If the company has made a default in filing with the Registrar its financial statements or annual returns for
immediately preceding five consecutive financial years.
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(g) If the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
Judicial Views:
♦ Where a company having many business, discontinue one of them, it cannot be said to have suspended its
business. For invoking Section 271(1) it must be shown that the entire business of the company has been
suspended. [Paratnjit Lai Badwar v. Prern Spg. & Wog. Mills Ltd. (1986) 60 Comp Cas 420]
♦ If the delay for non-commencement of business is sufficiently explained and it is shown that the company
intends to carry on business, an order for winding-up will not be made. [Malbar Iron & Steel Works Ltd. v. ROC
(1963) 33 Comp Cas 886 (Ker)]
♦ Where in spite of repeated demands by a creditor, the company neglects to pay the debt, is prima facie
evidence of its inability to pay debts. [Re, Gold Hill Mines (1883) 23 Ch. D 210]
♦ Where a debt is bona fide disputed by the company and Tribunal is satisfied with the company's defence,
there is no 'neglect to pay’ and therefore winding-up order cannot be made. [Piara Singh v. S.H.R. Properties Ltd.
(1993) 10 CLA 83]
Que. No. 6] State the reasons where Tribunal have ordered winding-up under Section 271(1) i.e. the 'just &
equitable clause'
Ans.: Some reasons where Tribunal has ordered winding-up under Section 271(1) i.e. the 'just & equitable clause'
are as follows:
♦ When substratum of the company has disappeared, i.e. original object become impossible to attain.
♦ It is impossible to carry on business except at a loss and there is no reasonable hope of making profits.
♦ If the object for which it is formed is illegal or becomes illegal by change in law.
♦ Deadlock in management due to serious difference among rival groups and disagreement cannot be resolved
in general meeting or board meetings.
♦ If the company is 'bubble' i.e. it does not have any real business.
♦ Oppression of members which cannot be resolved by any other means.
♦ It is in public interest that company be wound-up.
Que. No. 7] When company is deemed to unable to pay its debts under Section 271(2) of the Companies Act,
2013?
Ans.: Unable to pay its debts [Section 271(2)]: A company shall be deemed to be unable to pay its debts —
(a) if a creditor, by assignment or otherwise, for an amount exceeding ` 1 lakh, has served demand at its
registered office, by registered post or otherwise, requiring the company to pay the amount and the company has
failed to pay the sum within 21 days after the receipt of demand or to provide adequate security or re-structure
dr compound the debt to the reasonable satisfaction of the creditor;
(b) if any execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor
of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts.
In determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent
and prospective liabilities of the company.
Que. No. 8] State with reasons, whether the following are debts for the purpose of Section 271(1) (a) of the
Companies Act, 2013:
(j) Contingent or conditional liability (ii) Non-payment of dividend declared (iii) Non-payment of salary of an
employee
(iv) Non-payment to creditor of a disputed liability CS (Final) - June 2001 (4 Marks)
Ans.: Under Section 271(l)(a), a company can be wound up by the Tribunal if it is unable to pay its debts. Section
271(2) prescribes the circumstances in which the company shall be deemed to be unable to pay its debts.
(i) Contingent or conditional liability: A debt must be a definite sum of money payable immediately or at a future
date. A contingent or conditional liability is not debt, unless the contingency or condition has already happened.
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Since, contingent or conditional liability is not debt, winding-up petition on the ground that company is unable to
pay debt cannot be entertained by the Tribunal.
(ii) Non-payment of dividend declared: A dividend when declared becomes a debt. Thus, if company fails to pay
declared dividend and the amount of dividend exceeds ` 1,00,000 winding-up petition on the ground that company
is unable to pay debt can be entertained by the Tribunal.
(tit) Non-payment of salary of an employee: Non-payment of salary of an employee is debt for the purpose of
Section 271(1). The word debt includes the sum which is to be recovered from a person who is obliged to make
the payment and accordingly unpaid salary is a debt. Thus, winding-up petition on the ground that company is
unable to pay debt can be entertained by the Tribunal.
(iv) Non-payment to creditor of a disputed liability: Where a debt is bona fide disputed by the company and
Tribunal is satisfied with the company's defence, there is no 'neglect to pay' and therefore winding-up order cannot
be made.
Que. No. 9] The ROC, Mumbai filed a petition in Tribunal for compulsory winding-up of Constant Overtrading
Ltd. on the ground that a perusal of the Balance Sheet of the company revealed that its liabilities far exceeded
the assets and consequently the company is unable to pay its debts. Examine with reference to the provisions
of the Companies Act, 2013, the various factors the Tribunal will take into account before the company is ordered
to be wound up compulsorily and whether there is any justification in the present case for the Tribunal to order
winding up of the company. CA (Final) - May 2011 (5 Marks)
Ans.: In the case law ROC Punjab v. Ajanta Lucky Scheme & Investment Co. Private Ltd., the ROC filed a petition for
the winding up of the respondent company on the ground that the company was unable to pay its debts and that
its liabilities exceeded its assets. In the said case it was held by the Tribunal that for determining the company's
ability or otherwise to pay its debts, it was to be considered whether the company was able to meet its liability as
and when they accrued due.
The mere fact that the company's liabilities being in excess of its assets could not ipso facto be a ground for putting
the company into liquidation. The test would be that the company should be commercially solvent i.e., the
company ought to be in a position to meet its liabilities as and when they arose.
Thus, in the present case, the Tribunal may not order the winding-up of the company, merely because its liabilities
far exceeded the assets of the company.
Que. No. 10] ZYZ Ltd. owes a sum of ` 5,00,000 to Mr. S, who assigns this debt to his two creditors viz. Mr. R: to
extent of ` 4,60,000 and Mr. M: to the extent of ` 40,000.
Mr. M makes a demand for his money from the company by giving legal notice. The company could not meet
his demand or otherwise satisfy him till the expiry of 4 weeks from the date of notice. Mr. M therefore moves
to the Tribunal a petition for winding-up of the company. Referring to the provisions of the Companies Act, 2013
decide whether Mr. M's petition can be accepted by the Tribunal and can company be wound up.
Ans.: Under Section 271(l)(a), a company can be wound up by the Tribunal if it is unable to pay its debts. Section
271(2) prescribes the circumstances in which the company shall be deemed to be unable to pay its debts.
A company shall be deemed to be unable to pay its debts if a creditor for more than ` 1,00,000 has served a notice
demanding his debt at the registered office and the company fails to pay or secure or compound the sum to the
satisfaction of the creditor within 21 days.
In given case the company is indebted to the Mr. M only to the extent of t 40,000 less than ` 1,00,000. Since, the
requirement of Section 271(2) could not be satisfied, the non-payment by the company cannot be said to be the
inability of the company to pay debts. Thus, Mr. M's petition for winding-up of the company cannot be accepted
by the Tribunal.
Que. No. 11] Write a short note on: Jurisdiction of Tribunal for entertaining winding-up petition
Ans.: In GTC Industries Ltd. v. Parasrampuria Trading (1999) 34 CLA 380 (All HC), it was held that only Court
(Tribunal) has jurisdiction in winding-up, even if there was agreement between parties that dispute between
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parties will be resolved before Court where registered office is situated. Regardless of where agreement is
executed, Tribunal has the jurisdiction to entertain a petition for winding-up.
Que. No. 12] Who can present the petition for winding-up? CS (Executive) - Dec 2011 (6 Marks)
Ans.: Petition for winding-up [Section 272(1)]: An application for the winding up of a company can be presented
by following:
♦ Company itself
♦ Any creditor or creditors, including any contingent or prospective creditor or creditors
♦ Any contributory or contributories
♦ Any combination of company, creditors or contributories
♦ Registrar of companies
♦ Any person authorized by the Central Government
♦ Central or State Government.
Que. No. 13] A company passed a special resolution for winding-up of the company to the Tribunal and made
the necessary petition to the Tribunal. In spite of the opposition of the workers, the company was ordered to be
wound-up. The workers filed an appeal against the winding-up order. It is contended by the company that
workers have no right to appeal as they have neither any right to present a petition for the winding-up, nor to
be heard in winding-up proceedings. Is the contention of the company correct? Cite case law.CS (Final) - June
1996 (8 Marks)
Ans.: The right to file petition for winding-up of the company is given by Section 272. The said section does not
authorize the workers to file winding-up petition. [National Textile Workers v. P. R. Ramakrishnan (1983) Comp Cas
184]
However, there is nothing in Companies Act, 2013 which expressly prohibits workers from being heard in a winding-
up petition. Accordingly the workers will be entitled to be heard as interveners and not as parties. Also, after
winding-up order is made, the workers may appeal against it. But, once the order becomes final, the workers shall
not participate in any further proceeding. [National Textile Workers v. P. R. Ramakrishnan (1983) Comp Cas 184]
The Tribunal shall take into account not only the interest of the shareholders and creditors but also public interest
and the interest of workers and employees of the company.
Thus, contention of the company that workers have no right to appeal nor to be heard in winding-up proceedings
is not correct.
■ ■■ VOLUNTARY WINDING-UP
Que. No. 14] Under what circumstances a company may be wound up voluntarily? When does such a winding-
up commence? What is the effect of voluntary winding-up upon the status of the company?
Ans.: The companies are usually wound up voluntarily as it is an easier process of winding-up than compulsory
winding-up by the Tribunal. In voluntary winding up the company and its creditors are left to settle their affairs
without going to Tribunal, although they may apply to the Tribunal for directions or orders, as and when necessary.
Circumstances in which company may be wound up voluntarily [Section 304]: A company may be wound up
voluntarily if the company in general meeting passes a resolution requiring the company to be wound up
voluntarily:
- as a result of the expiry of the period for its duration fixed by its articles or
- on the occurrence of any event in respect of which the articles provide that the company should be dissolved
or
- the company passes a special resolution that the company be wound up voluntarily.
Declaration of Solvency [Section 305]: Discussed in next question.
Meeting of Creditors [Section 306]: The company shall along with the calling of meeting of the company at which
the resolution for the voluntary winding up is to be proposed, cause a meetings of its creditors either on same day
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or on the next day. The company shall cause a notice of the meeting to be sent by registered post to the creditors
with the notice of the meeting of the company.
The Board of Directors of the company shall —
(a) cause to be presented a full statement of the position of the affairs of the company together with a list of
creditors, copy of declaration u/s 305 and the estimated amount of the claims before such meeting; and
(b) appoint one of the directors to preside at the meeting.
Where two-thirds in value of creditors of the company are of the opinion that—
(a) it is in the interest of all parties that the company be wound up voluntarily, the company shall be wound up
voluntarily; or
(b) the company may not be able to pay for its debts in full from the proceeds of assets sold in voluntary winding
up and pass a resolution that it shall be in the interest of all parties if the company is wound up by the Tribunal,
the company shall within 14 days thereafter file an application before the Tribunal.
The notice of any resolution passed at the meeting of creditors shall be given by the company to the Registrar
within 10 days of the passing thereof.
Publication of resolution to wind-up voluntarily [Section 307]: Where a company has passed a resolution for
voluntary winding up and a resolution by creditors is passed, it shall within 14 days of the passing of the resolution
give notice of the resolution by advertisement in the Official Gazette and also in a newspaper which is in circulation
in the district where the registered office or the principal office of the company is situate.
Commencement of voluntary winding up [Section 308]: A voluntary winding up shall be deemed to commence on
the date of passing of the resolution for voluntary winding up.
Effect of voluntary winding up [Section 309]: In the case of a voluntary winding up, the company shall from the
commencement of the winding up cease to carry on its business except as far as required for the beneficial winding
up of its business. The corporate state and corporate powers of the company shall continue until it is dissolved.
Que. No. 15] Explain the provisions of the Companies Act, 2013 in regard to preparation and filing of 'declaration
of solvency' in case of member's voluntary winding-up.
Ans.: Declaration of Solvency [Section 305(1)]: In case of a proposed voluntary winding up, majority of directors
(not less than two), shall make a declaration at a Board meeting verified by an affidavit that they have made full
inquiry into the affairs of the company and they have formed an opinion that the company has no debt or whether
it will be able to pay its debts in full from the proceeds of assets sold in voluntary winding up.
Conditions for Declaration of Solvency [Section 305(2)]: This declaration shall have effect only if:
(a) it is made within 5 weeks immediately preceding the date of the passing of the resolution for winding up the
company and it is delivered to the Registrar for registration before that date;
(b) it contains a declaration that the company is not being wound up to defraud any person or persons;
(c) it is accompanied by a copy of the report of the auditors of the company on the profit and loss account of
the company for the period commencing from the date up to which the last such account was prepared and ending
with the latest practicable date immediately before the making of the declaration and the balance sheet of the
company made out as on that date which would also contain a statement of the assets and liabilities of the
company on that date; and
(d) where there are any assets of the company, it is accompanied by a report of the valuation of the assets of the
company prepared by a registered valuer.
Unreasonable Declaration [Section 305(3)]: Where the company is wound up in pursuance of a resolution passed
within a period of 5 weeks after the making of the declaration, but its debts are not paid or provided for in full, it
shall be presumed, until the contrary is shown, that the director or directors did not have reasonable grounds for
their opinion while making declaration of solvency.
Punishment for wrong declaration [Section 305(4)]: Any director of a company making a declaration without
having reasonable grounds for the opinion that the company will be able to pay its debts in full from the proceeds
of assets sold in voluntary winding up shall be punishable
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- with imprisonment for a term which shall not be less than 3 years but which may extend to 5 years or
- with both.
Judicial View:
It was held that where the declaration of solvency is not made in accordance with the law, the resolution for
winding
up and all subsequent proceedings will be null and void. [Shri Raja Mohan Manucha v. Lakshminath Saigal (1963)
33 Comp. Cas. 719]
Que. No. 16] Write a short note on: Creditors voluntary winding-up
Ans.: Where a company is solvent, the declaration of solvency is not made by the directors and therefore the
voluntary winding-up is called as creditors winding-up. In creditors voluntary winding-up, the dominant control
over the winding-up proceedings remain in control of creditors of the company. There is no provision relating to
'creditors voluntary winding-up' under the Companies Act, 2013. Hence, question is not relevant for June 2017
and onward examinations.
Que. No. 17] Distinction between: Member's voluntary winding-up and Creditor's voluntary winding-up
Ans.: There is no provision relating to 'creditors voluntary winding-up' under the Companies Act, 2013. Hence,
question is not relevant for June 2017 and onward examinations.
■ ■■ COMMENCEMENT OF WINDING UP
Que. No. 18] Write a short note on: Commencement of winding-up
Ans.: Section 441 provides for the provisions relevant to commencement of winding up.
The winding-up of a company by the Court is deemed to commence at the time of the presentation of the petition
for winding up. But where, before the presentation of the petition a resolution has been passed by the company,
for voluntary winding up, the winding up shall be deemed to have commenced at the time of the passing of the
resolution.
Where an order is made by the Court on more than one petition the commencement of the winding up dates from
the earliest petition. [Kent v. Freehold Land Co. (1868) 3 Ch. App. 493]
It may be noted here that voluntary winding up shall be deemed to commence at the time when resolution for
voluntary winding up is passed.
It was held that the words "shall be deemed to have commenced" clearly show the intention of legislature that
although the winding-up of a company does not in fact commence at the time of presentation itself, but it shall be
presumed to commence from that stage. [Rishabh Agro Industries Ltd. v. PNB Capital Services Ltd. (2000) AIR SCW
1753]
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CHAPTER
27
AN INTRODUCTION TO E-GOVERNANCE & KBRL
Que. No. 1] Write a short note on: MCA-21 Project
Write a short note on: SMART Governance CS (Executive) - Dec 2008 (4 Marks)
Ans.: MCA-21 stands for e-governance initiative of Ministry of Corporate Affairs (MCA) of the 21st Century. The
project, is named MCA-21 as it aims at repositioning MCA as an organization capable of fulfilling the aspirations of
its stakeholders in the 21st Century. It is based on the Government's vision of National e-governance in the country.
E-governance or Electronic Governance is the application of Information Technology to the Government
functioning in order to bring about Simple, Moral, Accountable, Responsive & Transparent (SMART) Governance.
This project of MCA aims at moving from paper based to nearly paperless environment.
The project serves the interest of all the key stakeholders and the public at large. Also professionals need no longer
to visit the officers of ROC and are able to interact with the Ministry using MCA-21 portal from their offices or
home. The services of the Ministry of Company Affairs with the introduction of MCA-21 will be e-form driven. Form
filing will be done using freely downloadable software and it can be done offline. The prerequisite for using the
MCA-21 portal will be P-4 computer with printer, windows 2000/ XP /Vista / 7, internet explorer 6.0 version, Adobe
Acrobat Reader from version in 9.4 to version 7.5 and digital signature certificate.
To know better about how MCA-21 will function, one needs to know about the set up of the Ministry of Corporate
Affairs.
Set Up of MCA: Ministry of Corporate Affairs has a three tier organizational set-up:
♦ Headquarters at New Delhi
♦ Regional Directors (RD) at Mumbai, Kolkata, Chennai, Noida, Ahmedabad and Hyderabad
♦ Registrar of Companies (RoC) in States and Union Territories
MCA Headquarters handles cases that require approval of the Government of India (GOI) for citizen related
functions. RD supervises the functioning of ROCs and handles the matters delegated by GOI while the ROC offices
handle the bulk of citizen facing functions.
The Official Liquidators (OL) attached to various High Courts functioning in the country are also under the overall
administrative control of the MCA. Its headquarters at Delhi also includes two Directors of Inspection and
Investigation and Director of Research and Statistics.
Que. No. 2] What is general structure of e-filing process under MCA-21?
CS (Executive) - June 2011, June 2013 (4 Marks)
Ans.: An e-Form contains certain standardized features. Each e-Form contains the form reference and the
description as well as the particular section of the Companies Act or the relevant rules or regulations under which
it is required to be submitted. It starts with the Corporate Identity Number (CIN), which works as a unique identifier
of an Indian Company and the Foreign Company Registration Number in the case of a Foreign Company that is
required to be filled up. By entering the CIN, the company details to the extent these are available in static form in
the database, are automatically filled in by using the pre-fill functionality.
Features of e-form and e-filing process has been given as below:
♦ The e-Form contains a number of mandatory fields which are required to be filled-in. Certain other fields are
non-mandatory in nature which may be filled-in as may be relevant in any particular case.
♦ An instruction kit is available for each e-Form, which contains details of the instructions for properly filling
the e-Form.
♦ An e-Form may be filled in either online or offline. Online filling implies that the e-Form is filled while being
still connected to My MCA portal through the Internet. Offline filling denotes that the e-Form is downloaded into
the user's computer and filled later without being connected to the Internet.
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♦ An e-Form may require certain mandatory attachments to be filed along with it. Optional attachments may
also be filed with an e-Form. The list of such attachments is displayed in the e-Form.
♦ Next to attachment, there is a declaration that is sought from the person filing the e-Form to the effect that
the information given in the e-Form and the attachments is correct and complete.
♦ Most of the e-Forms require the digital signature of the Managing Director or Director, Manager or Secretary
of the company for successful filing/submission.
♦ Further, the digital signature of a third party may also be required in certain cases. In the case of an e-Form
for creation or modification of charges, such digital signature is also required from the Bank or Financial Institution.
♦ In certain cases, certification from the CS or CA or CWA in practice is also required to authenticate the
particulars contained in the e-Form. For example, this requirement is mandatory in the case of an e-Form for
creation or modification of charges.
♦ There are built-in facilities to check the filled-in e-Form for requisite validations, to do pre-scrutiny and to
modify the e-Form when the same is required to be re-submitted.
♦ When the "Submitted" button is pressed, the e-Form gets uploaded into the MCA central document
repository.
♦ Thereafter, the requisite fees as applicable for the e-Form should be paid either on-line or off-line.
♦ Once the e-Form has been accepted and payment of fees has been acknowledged, a work item is created
and assigned to the appropriate MCA employee based on pre-defined assignment rules as part of MCA back office
workflow automation.
♦ In the case of an e-Form, the authorized officer affixes his/her digital signature for registering/approving/
rejecting the same.
♦ After the processing of the e-Form is completed, an acknowledgement email is sent to the user regarding its
approval/rejection.
Que. No. 3] Write a short note on: Organization of ROC offices under MCA-21
Front Office represents the interface of the corporate and public users with the MCA-21 system.
Ans.: The major components involved in this comprehensive e-governance project are front office and back office.
Front Office (FO): The implementation of FO is done in two ways. These can be called as Virtual Front Office (VFO)
and Physical Front Office (PFO).
The VFO is what the citizen has in front while accessing the MCA-21 portal. The PFO will be a replacement to the
existing ROC counters. The PFO will also accept paper documents. However, these will be converted into electronic
documents by customer service agents manning PFO. Also, the authorized person(s) will have to sign these
documents digitally. Consequently the authorized signatories for a given document will need to appear in person
at the PFO for the purpose of digitally signing the document.
The user can avail the following services on MCA-21 portal
♦ e-Filing
♦ Viewing public document
♦ Requesting certified copies
♦ Registering investor complaint
♦ Tracking transaction status
Back Office: The back office process relates to:
♦ Dynamic routing of documents that have been electronically filed to the concerned official within MCA based
on the type of service request.
♦ Electronic workflow systems to support speed and certainty in service delivery
♦ Supporting all routine tasks such as registrations and approvals
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♦ Storing of all approved documents of companies as part of electronic records, including provision of access
to electronic records for the stakeholders
♦ Enhancing identification of defaulters
♦ Increasing efficiency of Technical Scrutiny
♦ Ensuring close follow-up on matters related to compliance management including prosecutions
♦ Enabling quicker responses to investor grievances
♦ Providing alerts when the tasks are not carried out within stipulated period Que. No. 4] Write a short note
on: Key benefits of MCA-21 Project
Ans.: The key benefits of MCA-21 project are:
♦ Expeditious incorporation of companies
♦ Simplified and ease of convenience in filing of Forms/Returns
♦ Better compliance management
♦ Total transparency through e-Governance
♦ Customer centric approach
♦ Increased usage of professional certificate for ensuring authenticity and reliability of the Forms/ Returns
♦ Building up a centralized database repository of corporate operating
♦ Enhanced service level fulfilment
♦ Inspection of public documents of companies anytime from anywhere
♦ Registration as well as verification of charges anytime from anywhere
♦ Timely redressal of investor grievances
♦ Availability of more time for MCA employees for monitoring and supervision Que. No. 5] What is an e-Form?
Ans.: An e-form is the electronic equivalent of the paper form. The Ministry of Corporate Affairs has recently
launched a major e-governance initiative MCA-21. In the new system, it is envisaged that all company related
documents would be filed electronically. The new e-Forms have been devised and notified by the Ministry for this
purpose.
Que. No. 6] How to sign an e-Form?
Ans.: e-Form can be signed by the authorized signatory/representative using the Digital Signature Certificate (DSC).
Click the red colour signature box in the e-Form to affix the digital signature. To avoid increase in size of the e-Form
beyond permissible limit of 2.5 MB, always affix the DSC using the 'Sign and Save As' option.
Que. No. 7] How are payments made electronically? What to do if someone do not have a credit card or access
to banking?
Ans.: Payments can be made electronically through credit card or Internet Banking. During the e-Filing process, the
system will prompt you to make payment. You can choose the mode of payment and make the payment
accordingly.
If you are not having a credit card or Internet banking facility, you can make payment at the counter of an
authorized bank through the pre-filled challan generated by the system after e-Filing.
Que. No. 8] Can the form once submitted, be rectified by the company user?
Ans.: Once filed, the e-Form cannot be rectified. You may, however, re-submit the e-Form, if the concerned MCA
office has marked the status of your SRN as 'Required Re-submission'.
Que. No. 9] Write a short note on: Director Identification Number (DIN)
Ans.: All existing and any person intending to be appointed as a director are required to obtain the Director
Identification Number (DIN). DIN is also mandatory for directors of Indian Companies who are not citizens of India.
However, DIN is not mandatory for directors of foreign company having branch offices in India. Only a single DIN
is required for an Individual irrespective of number of directorships held by him.
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"Director Identification Number" means an identification number which the Central Government may allot to any
individual, intending to be appointed as director or to any existing directors of a company, for the purpose of his
identification as such and includes Designated Partnership Identification Number (DPIN) issued u/s 7 of the Limited
Liability Partnership Act, 2008 and rules made thereunder."
DIN is a unique identification number and once obtained is valid for life time of a director.
Que. No. 10] Write a short note on: Corporate Identity Number (CIN) based search of companies
Ans.: Every company has been allocated a Corporate Identity Number (CIN). CIN can be found from the MCA-21
portal through search based on:
- ROC Registration No.
- Existing Company Name
- Old Name of Company (in case of change of name, user is required to enter old name and the system displays
corresponding current name).
- Inactive CIN [In case of change of CIN, the user is required to enter previous (inactive) CIN Number]. Every
foreign company has been allocated a Foreign Company Registration Number (FCRN).
CIN is a 21 digit number assigned to every company incorporated on or after November 1,2000. The Corporate
Identity Number allotted to a company indicates listing status, economic activity (industry), state, year of
incorporation, ownership and sequential number assigned by ROC (Registration Number).
1st Digit Listing Status
Nex` 5 digits Economic Activity (industry)
Nex` 2 digits State
Nex` 4 digits Year of Incorporation
Nex` 3 digits Ownership. Status of the company [Private (PTC)/Public (PLCj/Govemment companies (GOT) etc.
Las` 6 digits Sequential number assigned by ROC (Registration Number)
Corporate Identity Number (CIN), works as a unique identifier of an Indian company. Foreign Company Registration
Number (FCRN) is a unique identifier in the case of a Foreign Company.
Que. No. 11] Write a short note on: Digital Signature Certificate CS (Executive) - Dec 2010 (4 Marks)
Under MCA-21, four types of users identified as users of digital signature. Comment.
Ans.: The e-Forms are required to be authenticated by the authorized signatories using digital signatures as defined
under the Information Technology Act, 2000. A digital signature is the electronic signature duly issued by a
certifying authority that shows the authority of the person signing the same. It is an electronic analogue of a written
signature. Every user who is required to sign an e-form for submission with MCA is required to obtain a Digital
Signature Certificate. Under the MCA-21 system the following four types of users are identified as users of Digital
Signatures and are required to obtain digital signature certificate:
1. MCA (Government) Employees.
2. Professionals (CS, CA, CWA & Lawyers) who interact with MCA and companies in the context of Companies
Act.
3. Authorized signatories of the company including Managing Director, Directors, Manager or Secretary.
4. Representatives of Banks and Financial Institutions.
A person requiring a Digital Signature Certificate can approach any of the Certifying authorities identified by the
MCA for issuance of Digital Signature Certificate.
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Que. No. 12] Briefly discuss any five services that are offered by MCA-21.
Ans.:
(1) LLP services: A user can check LLP name, find LLPIN (Limited Liability Partnership Identification Number),
avail services related to incorporation of an LLP, services related to annual e-Filing for an LLP, services related to
change in LLP information and services related to closure of an LLP.
(2) LLP services for business user: A business user can enter or update partner details of an LLP, enter Form 3
or Forms 3 & 4 details for LLP filing and verify partner details for filing Annual Return.
(3) E-Filing: A user can download LLP Forms or Company Forms from the Portal, submit application for PAN and
TAN, upload e-forms, download Submitted Form for resubmission, check annual filing status of the company,
upload details of security holders or debenture holders or depositors.
(4) Company services: A user can check company name, find CIN (Corporate Identity Number), services related
to incorporation of a company, avail services related to compliance filing of a company, services related to change
in company information, services related to charge management, informational services and services related to
closure of a company.
(5) Complaints: A user can raise service related complaints, track the complaints created, create investor/
serious complaint, track the status of complaints created as 'investor/serious complaint', give feedback or
suggestions to MCA-21 and raise employee grievances.
(6) Document related services: A user can get certified copies of Forms and documents of a company, view
forms and documents online etc.
(7) Fee & payment services: A user can avail services through Enquire Fees, pay later, link NEFT payment, pay
miscellaneous fee, pay stamp duty and track the payment status.
(8) Public search of trademark: A user can search whether trademark has been registered or applied for a
particular name by a company.
(9) Investor services: A user can search amount unclaimed/unpaid amount due to be transferred to the Investor
Education and Protection Fund (IEPF), upload investor details, confirm uploaded files.
(10) Track SRN/Transaction status: A user can track the transaction status of the uploaded forms i.e., whether
they are approved or pending for approval or required for resubmission or are rejected.
Que. No. 13] Write a short note on: Certified Filing Centre (CFC)
Ans.: Certified Filing Centre (CFC) is an extended arm of the Ministry which is manned by professionals from three
core areas i.e., Company Secretaries, Chartered Accountants and Cost Accountants. It is one of the various channels
available to the stakeholders to enable them to do the statutory filing with ROC Offices across the country. These
are managed and operated by professionals on user charge basis.
Que. No. 14] Write a short note on: Service Request Number (SRN)
Ans.: Each transaction under e-filing is uniquely identified by a Service Request Number (SRN). On filing of an e-
form, the system will generate and provide a Service Request Number (SRN). A user can check the status of the
document/transaction, by entering the SRN.
Ans.: Apart from authentication of e-forms by authorized signatories using digital signatures, some e-forms are
also required to be pre-certified by practicing professionals. Pre-certification means certification of correctness of
any document by a professional before the same is filed with the Registrar. This pre-certification is to be carried
out by in ter alia, Company Secretaries, Chartered Accountants, Cost Accountants, in whole-time practice.
Que. No. 16] Briefly explain the following terms used under e-filing:
(i) Pre-fill
(ii) Attachment
(iii) Check Form
(iv) Pre-scrutiny CS (Executive) - June 2009 (8 Marks)
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Ans.: Pre-fill: Pre-fill is functionality in an e-Form that is used for filling automatically, the requisite data from the
system without repeatedly entering the same. For example, by entering the CIN of the company, the name and
registered office address of the company shall automatically be pre-filled by the system without any fresh entry.
Attachment: An attachment refers to a document that is sent as an enclosure with an e-Form by means of an
attached file. The objective of the attachment is to provide details relevant to the e-Form for processing. While
some attachments are optional some are mandatory in nature.
The attachments to an e-Form will be only in Adobe PDF format. MCA portal shall not accept attachment file of
more than 2.5 MB and the user is advised to keep the attachment size to minimum.
Check Form: By clicking "Check Form", the user will be in a position to find out whether the mandatory fields in an
e-Form are duly filled-in. For example, if the user enters alphabets in "Date of Appointment of Director" field,
he/she will be asked to correct the entered information. If the size of attachment is much bigger than the details
may be submitted in a floppy or compact disc at the ROC office. For example, In the case of Annual Return filed by
the companies having large shareholders base, the list of shareholders may be submitted separately in a CD at the
concerned ROC office indicating SRN No. of e-form filed
Modify: Once the user has done "Check Form", the form gets locked and it cannot be edited. If the user wishes to
make any alterations, the form can be overwritten by clicking "Modify" button.
Pre-Scrutiny: Pre-scrutiny is a functionality that is used for checking whether certain core aspects are properly
filled in the e-Form. The user has to login on MCA portal to perform the pre-scrutiny of e-From. The necessary
attachments and digital signatures should be affixed before submitting the e-Form for pre-scrutiny.
Addendum to e-Form: The user may have to submit some additional supporting documents that are not submitted
during the e-Form (application) filing but are required for the processing of the e-Form. MCA may also ask the
applicant to provide some additional documents in support of the e-Form already filed so as to expedite the
processing of the same. The user can initiate this on their own by checking the track transaction status on My MCA
portal or on being notified by MCA through email. Payment of fees is not required for filing an addendum. The
supporting documents that the applicant uploads, as an addendum, gets duly associated with the e-Form that was
submitted earlier with the given SRN.
Que. No. 17] Distinguish between: Pre-scrutiny & Check Form CS (Executive) - June 2013 (4 Marks)
Ans.: The difference between check form and pre-scrutiny is that the Check Form is done by internal features of
the form which ensure that all the mandatory and required field are filled up and attachment are made to the e-
from, while Pre-Scrutiny is a complete legal and technical scrutiny of an e-form done by the MCA portal before
accepting the form.
Que. No. 18] Write a short note on: Online Inspection of Documents
Ans.: The documents filed online, once taken on record by ROC Offices shall be available for public viewing on
payment of requisite fees. These documents, which shall be in the domain of public documents, include
documents relating to incorporation, charges, annual returns and balance sheets and change in directors. A
certified copy of the documents can also be obtained by anyone so interested.
Que. No. 19] Write a short note on: Approval Services
Ans.: Approval from MCA (Headquarters): It is required in the following cases:
(a) Exemption from attaching annual accounts of subsidiary(s)
(b) Exemption or extension time for repayment of deposits
(c) Recognition as a Nidhi company
(d) Appointment of sole selling agent
(e) Appointment of sole buying agent
(f) Declaration of dividend out of reserves
(g) Exemption from providing depreciation
(h) Consent for holding office or place of profit
(i) Providing loan or guarantee or security in connection with the loan to or by specified category of persons
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(j) Modification of the form and content of Balance Sheet and Profit and Loss Account
(k) Appointment of Cost Auditor Forms
Approval Services - Regional Director: The approval of the Regional Director is required in respect of the following
matters:
(a) Issue of licence under Section 8 to an existing company
(b) Issue of licence under Section 8 to a new association
(c) Approval for entering into contract under Section 188
(d) Rectification of name of company
(e) Appointment/Removal of auditor
(f) Shifting of registered office of the company from the jurisdiction of one ROC to another within the same State
(g) Opening of new branches by a Nidhi Company Forms
Approval Services - ROCs: ROCs are empowered to accord approval, or to give any direction in relation to the
matters pertaining to the change of name of an existing company and the conversion of a public company to private
company. In addition, ROC approval is required in following cases:
(a) Extension of time period for holding AGM
(b) Holding AGM at place other than registered address
(c) Declaring of company as defunct
(d) Extension of the period of annual accounts
(e) Amalgamation of companies
(f) Compounding of offences
Que. No. 20] Write a short note on: Informational Services
Ans.: Informational services cover those forms, which are to be filed with ROC for informational purposes, in
compliance with the provisions of the Companies Act, 2013. In following cases, forms relating to following
informational services are required to be filed:
(a) Consent and withdrawal of consent of persons charged as officers in default
(b) Reporting of Corporate Social Responsibility (CSR)
(c) Resolutions and agreements
(d) Notice of address of place where books of account are kept
(e) Information in relation to any offer of scheme or contract involving the transfer of shares or any class of
shares in the transferor company to the transferee company
(f) Order received from Court or Tribunal
Que. No. 21] Distinguish between: 'Informational Services' and 'Approval Services'
Ans.: Following are the main points of distinction between informational services and approval services:
Points . Informational Services Approval Services
Meaning Informational services cover those forms, MCA, Regional Directors & ROCs are
which are to be filed with ROC for empowered to accord approval, or to give any
informational purposes, in compliance with direction in relation to the certain matters.
the provisions of the Companies Act, 2013. Such services are known as approval services.
Example Forms relating to following informational ROC approval is required in following cases:
services are required to be filed: (a) Extension of time period for holding
AGM
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(a) Consent and withdrawal of consent of (b) Holding AGM at place other than
persons charged as officers in default registered address
(b) Voluntary Reporting of Corporate Social (c) Declaring of company as defunct
Responsibility (CSR) (d) Extension of the period of annual
(c) Resolutions and agreements accounts
(d) Notice of address of place where books of (e) Amalgamation of companies (/)
account are kept Compounding of offences
(e) Information in relation to any offer of
scheme or contract involving the transfer of
shares or any class of shares in the transferor
company to the transferee company
(f) Order received from Court or Tribunal
Que. No. 22] Write a short note on: Resubmission of Form/documents

Ans.: Where the Registrar, on examining any application or e-Form or document finds it necessary to call for further
information or finds such application or e-form or document to be defective or incomplete in any respect, he shall
give intimation of such information called for or defects or incompleteness, by e-mail on the last intimated e-mail
address of the person or the company, which has filed such application or e-form or document, directing him or it
to furnish such information or to rectify such defects or incompleteness or to re-submit such application or e-Form
or document.
In case the e-mail address of the person or the company in question is not available, the intimation shall be given
by the Registrar by post at the last intimated registered office address of the company or the last intimated address
of the person, as the case may be and the Registrar shall preserve the facts of the intimation in the electronic
record.
The Registrar shall allow 15 days time to the person or company which has filed the application or e-Form or
document for furnishing further information or for rectification of the defects or incompleteness or for
resubmission of such application or e-form or document.
However, no re-submission of the application is allowed in the case of reservation of a name through web service
_ RUN.
In case where such further information called for has not been provided or has been furnished partially or defects
or incompleteness has not been rectified or has been rectified partially or has not been rectified as required within
the period allowed, the Registrar shall either reject or treat the application or e-form or document, as the case may
be, as invalid in the electronic record, and shall inform the person or company, as the case may be.
Where any document has been recorded as invalid by the Registrar, the document may be rectified by the person
or company only by fresh filing along with payment of fee and additional fee, as applicable at the time of fresh
filing, without prejudice to any other liability under the Act.
In case the Registrar finds any e-form or document filed under Straight Through Process as defective or incomplete,
at any time suomotu or on receipt of information or compliant from any source at any time, he shall treat the e-
form or document as defective in the electronic registry and shall also issue a notice pointing out the defects or
incompleteness in the e-Form or document at the last intimated e-mail address of the person or the company
which has filed the document, calling upon the person or company to file the e-Form or document afresh along
with fee and additional fee, as applicable at the time of actual re-filing, after rectifying the defects or
incompleteness within a period of 30 days from the date of the notice:
In case the e-mail address of the person or the company in question is not available, the intimation shall be given
by the Registrar by post at the last intimated registered office address of the company or the last intimated address
of the person, as the case may be and the Registrar shall preserve the facts of the intimation in the electronic
record.
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Any further information or documents called for, in respect of application or e-form or document, filed
electronically with the Ministry of corporate Affairs shall be furnished in Form GNL-4 as an addendum.
Que. No. 23] State the circumstances in which refund of payments is possible when excess or incorrect payment
is made while availing MCA-21 services.
Ans.: The user is required to make various payments to avail MCA-21 services. A number of instances have been
observed where the users make multiple payments or incorrect payment or excess payment while using these
services. In order to allow the stakeholders to claim refund of such payments, refund process has been introduced
by MCA.
The Person is to file the 'Refund Form' available on MCA-21 portal for claiming refund.
The refund of MCA-21 fees is available in the following cases:
(a) Multiple Payments: This includes cases where service seeker does multiple filings of e-Form or makes
payments more than once (multiple times) for the same service. However, refund shall not be allowed in respect
of approved e-Forms.
(b) Incorrect Payments: This includes cases where the service seeker has made payment in respect of an e Form
or Stamp duty through an incorrect option under Pay miscellaneous fee facility.
(c) Excess Payment: This includes cases where any excess fee has been paid by the service seeker due to some
incorrect data entered in the e-Form or incorrect data in MCA 21 system due to migration of data from legacy
system.
No refund is permitted of the stamp duty, the person is required to approach the concerned state/ union territory.
Refund process is not applicable for the following services/e-Forms:
♦ Public Inspection of documents
♦ Request for Certified Copies
♦ Payment for transfer deeds
♦ Stamp duty fee (D series SRN)
♦ IEPF Payment
♦ STP Forms i.e, Form 14-LLP (even for cases when the same were non STP earlier)
♦ Form No. DIR-3
There is no fee for filing the refund form. There fund form is to be filed within the stipulated time period. Also,
there shall be deduction in the amount to be refunded based on time period within which refund e-Form is filed.
The mode of payment of refund shall be through cheque only. Later, provision for payment of refund through ECS
will also be made available.
Ans.: Inspection of documents [Rule 15 of Companies (Registration offices and fees) Rules, 2014]:
Any person may —
(a) Inspect any document kept by the Registrar, being documents filed or registered by him in pursuance of
Companies Act, 2013 or making a record of any fact required or authorized to be recorded or registered in
pursuance of Companies Act, 2013, on payment for each inspection of fee.
(b) Require a certificate of incorporation of any company, or a copy or extract of any other document or any
part of any other document to be certified by the Registrar, on payment of fee.
However, no person shall be entitled u/s 399 to inspector obtain copies of resolutions referred to in Section
117(3)(g) of the Companies Act, 2013 [i.e. resolutions passed in pursuance Section 179(3)].
XBRL
Que. No. 25] Write a short note on: XBRL
Ans.: XBRL is a language for the electronic communication of business and financial data which is revolutionizing
business reporting around the world. It provides major benefits in the preparation, analysis and communication of
business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those
involved in supplying or using financial data. It is an open standard, free of licence fees, being developed by a non-
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profit making international consortium. Other pages on this web site provide detailed information on XBRL, its
technical features and its business opportunities.
XBRL is a data-rich dialect of XML (Extensible Markup Language), the universally preferred language for
transmitting information via the Internet. It was developed specifically to communicate information between
businesses and other users of financial information, such as analysts, investors and regulators. XBRL provides a
common, electronic format for business reporting. It does not change what is being reported. It only changes how
it is reported.
XBRL is a world-wide standard, developed by an international, non-profit-making consortium, XBRL International
Inc. (XII). XII is made up of many hundred members, including government agencies, accounting firms, software
companies, large and small corporations, academics and business reporting experts. XII has agreed the basic
specifications which define how XBRL works.
Que. No. 26] Write a short note on: Benefits of XBRL
XBRL offers major benefits at all stages of business reporting and analysis. Comment.
Ans.: XBRL offers major benefits at all stages of business reporting and analysis. The benefits are seen in
automation, cost saving, faster, more reliable and more accurate handling of data, improved analysis and in better
quality of information and decision-making. All types of organizations can use XBRL to save costs and improve
efficiency in handling business and financial information. Because XBRL is extensible and flexible, it can be adapted
to a wide variety of different requirements. All participants in the financial information supply chain can benefit,
whether they are preparers, transmitters or users of business data. XBRL enables producers and consumers of
financial data to switch resources away from costly manual processes, typically involving time-consuming
comparison, assembly and re-entry of data. They are able to concentrate effort on analysis, aided by software
which can validate and manipulate XBRL information.
Data Collection and Reporting: By using XBRL, companies and other producers of financial data and business
reports can automate the processes of data collection. For example, data from different company divisions with
different accounting systems can be assembled quickly, cheaply and efficiently if the sources of information have
been upgraded to using XBRL. Once data is gathered in XBRL, different types of reports using varying subsets of
the data can be produced with minimum effort. A company finance division, for example, could quickly and reliably
generate internal management reports, financial statements for publication, tax and other regulatory filings, as
well as credit reports for lenders. Not only can data handling be automated, removing time-consuming, error-
prone processes, but the data can be checked by software for accuracy.
Data Consumption and Analysis: Users of data which is received electronically in XBRL can automate its handling,
cutting out time-consuming and costly collation and re-entry of information. Software can also immediately
validate the data, highlighting errors and gaps which can immediately be addressed. It can also help in analyzing,
selecting, and processing the data for re-use. Human effort can switch to higher, more value- added aspects of
analysis, review, reporting and decision-making. In this way, investment analysts can save effort, greatly simplify
the selection and comparison of data, and deepen their company analysis. Lenders can save costs and speed up
their dealings with borrowers. Regulators and government departments can assemble, validate and review data
much more efficiently and usefully than they have hitherto been able to do.
Que. No. 27] Prudent General Insurance Company Ltd. is engaged in the general insurance business. The
company is not listed in any stock exchange in India but is a subsidiary of Reliable General Insurance Company
Ltd., listed at Bombay Stock Exchange. The turnover of Prudent General Insurance Company Ltd. is ` 330 Crore.
Examining the provisions of the Companies Act, 2013, state whether the company is required to file XBRL
enabled balance sheet. CS (Executive) - June 2016 (4 Marks)
Ans.: Filing of financial statements with Registrar in XBRL Format [Rule 3 of the Companies (Filing of Documents
and Forms in Extensible Business Reporting Language) Rules, 2015]: The following class of companies has to file
their Balance Sheet, Profit & Loss A/c and other documents with the Registrar using the Extensible Business
Reporting Language (XBRL) namely:
(1) All Companies listed with any Stock Exchange in India and their Indian subsidiaries.
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(2) All Companies having paid-up capital of ` 5 Crore or above.
(3) All companies having turnover of ` 100 Crore or above.
(4) All companies which are required to prepare their financial statements in accordance with Companies
(Indian Accounting Standards) Rules, 2015.
The. companies which have filed their financial statements shall continue to file their financial statements and
other documents though they may not fall under the class of companies specified therein in succeeding years
Companies in Banking, Insurance, Power Sectors and Non-Banking Financial companies are exempted for
Extensible Business Reporting Language (XBRL) filing.
Thus, Prudent General Insurance Company Ltd. being an insurance company is not required to file their Balance
Sheet and Profit & Loss A/c in XBRL.
Que. No. 28] Write a short note on: Filing of Cost Audit Report
Ans.: Filing of Cost Audit Report [Rule 4]: A company required to furnish cost audit report and other documents
to the Central Government u/s 148(6) and rules made thereunder, shall file such report and other documents using
the XBRL taxonomy given in Annexure III for the financial years commencing on or after 1st April, 2014 in e-Form
CRA-4 specified under the Companies (Cost Records and Audit) Rules, 2014.
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CHAPTER
28
DRAFTING OF RESOLUTIONS, NOTICES AND MINUTES
■ ■■ BOARD RESOLUTIONS
Que. No. 1] Draft a resolution for charging person with the responsibility of 'officer who is in default'. Ans.:
Officer who is in default: [Section 2(60)]
Passing Authority — Board of Directors
Nature of the Resolution — Resolution with simple majority
"RESOLVED THAT pursuant to Section 2 (60) of the Companies Act, 2013, Mr. X, ................ (designation to be
specified) of the Company, who has given his consent dated ................ , and placed before the Board, initialled
by the Chairman for purposes of identification, be and is hereby charged with the responsibility of compliance with
the provisions of sections of the Companies Act, 2013."
"RESOLVED FURTHER THAT the Company Secretary of the Company be and is hereby authorized to file return
electronically in prescribed e-Form with the Registrar of Companies, ................ in respect of the aforesaid
resolution."
Que. No. 2] Draft a resolution for adopting common seal of the company.
Ans.:
Adoption of Common Seal: [Section 9]
Passing Authority —Board of Directors
Nature of the Resolution —Resolution with simple majority
"RESOLVED THAT the common seal of the Company as placed by the Chairman and approved by this meeting and
an impression of which has been taken at the margin of the minutes be and is hereby adopted as the common seal
of the Company."
"RESOLVED FURTHER THAT the common seal be kept under the safe custody of the Company Secretary. The seal
shall not be affixed to any document/instrument except, in presence of the two directors and Company Secretary,
who shall sign every document/instrument to which seal is affixed in their presence."
Que. No. 3] Draft a resolution for change of Registered Office of the company within the city.
Ans.:
Change of registered office of the company within [Section 12(2)] the city/local limit:
Nature of the Resolution —Resolution with simple majority
"RESOLVED THAT the Registered Office of the company be shifted from ..............., Satara 415002 to
..................., Satara-415002 with effect from ..............................."
"RESOLVED FURTHER THAT the Company Secretary be and is hereby authorized to file e-Form INC 22 with the
Registrar of Companies, Pune."
Que. No. 4] Draft a resolution for writing of certain expenses/losses from securities premium account. Ans.:
Writing of certain expenses/losses from securities [Section 52]
premium account:
Nature of the Resolution
—Resolution with simple majority
"RESOLVED THAT pursuant to the provisions of Section 52 (2) (d) read with Section 55 of the Companies Act, 2013,
a sum of ` 85,00,000 out of the "Securities Premium Account", of the Company in which sum of ` 90,00,000 is lying
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unutilized, be and is hereby utilized in providing for the premium payable on the redemption of redeemable
preference shares to be made on dt. ................ and also on the redemption of debentures to be made by the
Company on dt. ................ "
Que. No. 5] Draft a resolution for appointment of Secretary in whole-time practice for signing annual return.
Ans.:
Appointment of Secretary in whole-time practice [Section 92 (2)]
for signing annual return
Nature of the Resolution —Resolution with simplemajority
"RESOLVED THAT Shri N. S. Zad, a Secretary in whole-time practice, of ................ , Satara 415002, be and is hereby
appointed, at a remuneration of ` 1,00,000 to sign the annual return of the Company to be made up to the date of
the ensuing Annual General Meeting of the Company, i.e., ................ "
Que. No. 6] Draft a resolution for convening of extraordinary general meeting by the board of directors of your
company.
Ans.:
Convening of extraordinary general meeting: [Section 101]
Nature of the resolution — Resolution with simple majority
"RESOLVED THAT an Extraordinary General Meeting of the members of the company be convened on ................
at 12.00a.m. at ................ on a shorter notice."
"RESOLVED FURTHER THAT the draft of the notice convening the Extraordinary General Meeting as stated above
together with the relevant explanatory statement annexed thereto be considered, approved and be issued to the
members under the signatures of Mr. ................ Company Secretary of the Company."
"RESOLVED FURTHER THAT approval of the members be obtained for holding the meeting at less than 21 days'
notice as required by Section 101 (1) of the Companies Act, 2013."
Que. No. 7] Draft a resolution for recommending payment of dividend to shareholders.
Ans.:
Payment of dividend: — [Section 123]
Passing Authority - Board Meeting
"RESOLVED.THAT a dividend @ ` 10 per share (i.e. 10%) out of the profits of the financial year ending on 31st
March, 2016 on 40,00,000 of ` 100 each fully paid up be recommended to the shareholders for declaration in the
ensuing Annual General Meeting of the Company."
Que. No. 8] Draft a resolution for recommending payment of interim dividend to shareholders.
Ans.:
Payment of interim dividend: — [Section 123]
Passing Authority — Board Meeting
RESOLVED THAT an interim dividend of ?,2 only on each fully paid ................ No. of equity shares of ` 10 each of
the company amounting to ` ................ be paid out of the profits of the company for the half year ended ................
2019 to those members of the company whose names would appear on the register of members of the company
on the ................ day of ................ , 2019.
RESOLVED FURTHER THAT a bank account to be designated as "Interim Equity Dividend (2019) Account of
................ Limited" be opened in the name of the company with Bank at its Branch at ................ and a sum of `
................ , being the total interim dividend amount, be deposited in the said account within 5 days.
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RESOLVED FURTHER THAT Mr. ................ , Managing Director and Mr. ................ , the Company Secretary be and
are hereby authorized to open the bank account and to do all the necessary things in relation to payment of interim
dividend.
Que. No. 9] Draft specimen board resolution for preparation of annual report in abridged form for mailing to the
members.
Ans.:
Appointment of internal auditor: — [Section 136]
"RESOLVED THAT pursuant to the provisions of First proviso of Section 136(1) of the Companies Act, 2013 and Rule
10 of the Companies (Accounts) Rules 2014, the Annual Reports comprising of the Balance Sheet, Profit and Loss
Account of the company for the financial year ended 31st March, 2019 be also prepared, finalized and audited in
the prescribed Form No. AOC-3 for sending to the members of the company.
RESOLVED FURTHER THAT the draft audited statement containing salient features of financial statements for the
year ended 31st March, 2019, prepared in the prescribed Form No. AOC-3 in accordance with First proviso of
Section 136(1) of the Companies Act, 2013 and Rule 10 of the Companies (Accounts) Rules, 2014 as submitted to
the meeting, be and are hereby approved and the same be authenticated by the directors of the company as
required under Section 136 of the Companies Act, 2013 and be sent to the statutory auditors of the company for
their report thereon and thereafter be sent to the members of the company for adoption at the ensuing annual
general meeting of the company."
Que. No. 10] Draft a board resolution for approval of the board's report.
Ans.:
"RESOLVED THAT the draft Boards' Report to the Shareholders of the company for the year ended 31st March,
2015 prepared in accordance with the provisions of Section 134 of the Companies Act, 2013 together with its
Annexure and also containing suitable explanation and fullest information on every reservation, qualification or
adverse remarks contained in Auditor's reports, as submitted to the meeting, be and is hereby approved
and the same be signed by Mr. Chairman of the company, by Mr. ................ Managing Director and Mr.
................ Director for and on behalf of the Board of Directors of the company."
Que. No. 11] Draft a resolution to be passed at a meeting of the board of directors for approval of the board's
report containing board's response to auditors' comments and qualifications.
Ans.:
"RESOLVED THAT, pursuant to Section 134 of the Companies Act, 2013 the draft of the Board's Report for the year
ended 31.3.2019 as circulated earlier and as modified by incorporating the information and explanation given by
the Board on every reservation, qualification or adverse remark contained in the Auditors' Report under Section
143 (2), and as laid on the table, be and is hereby approved and that the Board's Report be signed by the Chairman
on behalf of the Board and that the Secretary of the company be directed to issue the same to the members of the
company together with the printed copies of the audited accounts, and the Auditors' Report."
Que. No. 12] Draft a resolution for appointment of internal auditors.
Ans.:
Appointment of internal auditor: — [Section 138(1)]
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"RESOLVED THAT Mr. Rahul Zad, Chartered Accountant, (Reg. No ................ ) Satara, be and are hereby appointed
as an Internal Auditor of the Company for conducting internal audit of financial year ended 31st March, 2017."
"RESOLVED FURTHER THAT the Internal Audit Report received from the Auditor shall be placed before the Audit
Committee of the Board for its consideration and adoption."
"RESOLVED FURTHER THAT Mr. Prathamesh Jambale, Director - Finance of the Company be and is hereby
authorized to fix the remuneration of Internal Auditor."
Que. No. 13] Draft a resolution for appointment of Additional Director.
Ans.:
Appointment of Additional Director [Section 161]
"RESOLVED THAT Mr. ................ ................ (DIN ................ ) who has complied with the provisions of Section 161
(1) of the Companies Act, 2013 be and is hereby appointed as an Additional Director of the Company in terms of
Article 125 of the Company's Articles of Association pursuant to the provisions of Section 161 of the Companies
Act, 2013."
"FURTHER RESOLVED THAT Mr. N. S. Zad, Company Secretary be and is hereby authorized to file e-Form DIR-12
with the Registrar of Companies and to make necessary entries in the statutory registers to that effect."
Que. No. 14] Draft a resolution for appointment of Alternate Director.
Ans.:
Appointment of Alternate Director — [Section 161(2)]
"RESOLVED THAT Mr. ................ (DIN ................ ), who has complied with the provisions of Section 161 (2) of the
Companies Act, 2013 be and is hereby appointed the Alternate Director to Mr. ................ (DIN ................ ) with
effect from ................ pursuant to the provisions of Section 161 (2) of the Companies Act, 2013 during the latter's
absence from India."
"RESOLVED FURTHER THAT Mr. ................ , Company Secretary of the Company be and is hereby authorized
to file e-Form DIR-12 with the Registrar of Companies and communicate the above said status to the Bank, stock
exchange and all the concerned authorities and make necessary entries in the statutory registers as per
requirement of the Companies Act, 2013."
Que. No. 15] Draft a resolution for "vacation of office by director on account of unsound mind".
Ans.:
Vacation of office by director on account of [Section 164 (1) (a)]
unsound mind
"RESOLVED THAT Mr. X, (DIN……………) Director being found to be of unsound mind by the Calcutta High Court in
its Order dated ................ and a copy of the same as placed before the Board, pursuant to Section 164 (1) (a) of
the Companies Act, 2013 be and is hereby deemed to have vacated his office as director of the company w.e.f.
"RESOLVED FURTHER THAT Mr. ................ , Company Secretary of the Company be and is hereby instructed to file
e-Form DIR-12 with the Registrar of Companies to that effect."
Que. No. 16] Draft a resolution for appointment of Company Secretary Ans.:
Appointment of KMP - Company Secretary: — [Section 203]
443
Passing Authority — Board of Director
"RESOLVED THAT pursuant to Section 203 and other applicable provision of the Companies Act, 2013 Board
of directors be and hereby approve the appointment of Mr. ................ as Company Secretary of the Company
as per recommendation of Nomination and Remuneration Committee on the terms and conditions set out in
the Letter of Appointment dated ................ (a copy of which tabled at meeting being authenticated under the
signature of the Chairman thereof for the purpose of identification) w.e.f. ................ " "RESOLVED FURTHER THAT
Mr. ................ be and is hereby appointed as Compliance Officer of the Company for
all matters pertaining to BSE, SEBI, Secretarial, Legal and correspondence with Government as well as other not
statutory authorities."
Que. No. 17] Draft a resolution for appointment of Secretarial Auditor.
Ans.:
Appointment of Secretarial Auditor [Section 204]
Appointing authority — Board of directors
Nature of Resolution — Resolution with simple majority
" RESOLVED THAT M/ s ................ & Co., Practicing Company Secretaries, be and is hereby appointed as the
Secretarial
Auditors of the Company in terms of the provisions of Section 204 of the Companies Act, 2013 and to hold the
office until the conclusion of the next annual general meeting on remuneration of ` 1,00,000 plus out of pocket
expense as may be determined by the Board."
Que. No. 18] Draft a specimen of the board resolution approving the registration of transfer of shares. Ans.:
"RESOLVED THAT Registration of transfer of fully paid equity shares of the company as per details in the register
of share transfers of the company entered on page ................ to ................ , entries No ................ to ................
(both inclusive), which was placed before the meeting and each page was initialed by the chairman of the meeting
as a mark of identification, be and is hereby approved.
RESOLVED FURTHER THAT Shri ................ , Company Secretary be and is hereby authorized to endorse the
relevant share certificates under his signature, arrange for their dispatch to the transferees of the shares and make
appropriate entries in the register of members and other records of the company."
Que. No. 19] Draft specimen of board resolution approving registration of transmission of shares
Ans.:
" RESOLVED THAT Transmission of ................ number of fully paid equity shares of the company bearing distinctive
numbers ................ to ................ both numbers inclusive) presently registered in the name of ................ who has
been reported as deceased onin the district of ................ which is situated in the state of ................ , in the name
of ................ son of Shree ................ resident of ................ be and is hereby approved.
RESOLVED FURTHER THAT since the company has received a letter from the said ................ , intimating to the
company that he has decided to have the said shares registered in his name, the said shares be registered in his
name.
RESOLVED FURTHER THAT ................ , Company Secretary, be and is hereby authorized to enter the name of the
said ................ ,in the register of members of the company and send the relevant share certificates to him after
appropriately endorsing them in his name.
■ ■■ ORDINARY & SPECIAL RESOLUTIONS
Que. No. 20] Draft a resolution along with explanatory statement to change of Registered Office within a State
from the jurisdiction of one Registrar to another Registrar.
444
Ans.:
Change of Registered Office within a State from the [Section 12 (5)]
jurisdiction of one Registrar to another Registrar
Passing Authority — General Meeting
Nature of the Resolution — Special Resolution
"RESOLVED THAT pursuant to the provisions of Section 12 (5) of the Companies Act, 2013 read with Rule 28 of the
Companies (Incorporation) Rules, 2014, and subject to the confirmation by the Regional Director concerned in the
Ministry of Corporate Affairs, the place of Registered office of the Company presently situate at Mumbai, be and
is hereby changed to be situate at Pune."
Explanatory Statement
Presently, the Company's Registered Office is located at ................ in the city of Mumbai. The Board of directors
of your company at their meeting held on ................ have decided to change the location of the Registered Office
from Mumbai to the city of Pune, for better operational convenience, in view of the location of the Company's
Corporate Office at Pune. According to Section 12 (5) of the Companies Act, 2013 read with Rule 28 of the
Companies (Incorporation) Rules, 2014, such a change should be confirmed by the Regional Director concerned in
the Ministry of Corporate Affairs. Necessary application in the e-Form INC 23 as prescribed in this behalf shall be
made to the Regional Director, along with the copy of the aforesaid resolution for seeking the confirmation.
Further, under the proviso to Section 12 (5) of the Companies Act, 2013, special resolution
is required to be passed for shifting the Registered Office outside the local limits of any city, town, etc. Hence the
special resolution is proposed for your approval.
None of the directors and KMP and their relatives are interested in this resolution, except as shareholders of the
Company.
Que. No. 21] Draft a resolution along with explanatory statement to change name of the company.
Ans.:
For change in the name of company [Section 13]
"RESOLVED THAT pursuant to the provisions of Section 4 read with Section 13 of the Companies Act, 2013 and other
applicable provisions of the Companies Act, 2013 if any and subject to the approval of the RBI, the name of the
Company be changed from ................ Leasing & Investments Ltd. to ................ Finance Ltd."
"RESOLVED FURTHER THAT the name ................ Leasing and Investments Ltd. wherever it occurs in the
Memorandum
and Articles of Association of the Company be substituted by the name ................ Finance Ltd."
"RESOLVED FURTHER THAT the Board of directors be and is hereby authorized to do all such acts, deeds and things
as may be deemed expedient and necessary to give effect to this resolution."
The present activities of the Company include leasing, hire purchase, investments, bill discounting, loan
syndication, portfolio management, etc. The present name does not convey the magnitude of operations of the
Company and expresses only part of its activities.
For some time the directors have been giving thought to changing the name of the Company. The new name
proposed contain " ................ " which reflects our group identity and the full name " ................ Finance Limited"
reflects the operations of the Company.
The ROC ................ has confirmed that the new name is available upon the application of the Company for change
of the name of the Company and subject to the resolution the Board of directors of the Company proposes to make
an application to the ROC for confirmation to the change of name. Since the Company is doing its business of
financial activities in the name of ................ Financial Services, which is well recognized by adopting the new name,
445
the Company will be well recognized in the field in which it operates. In view of the RBI guidelines applicable for
the NBFC companies, your directors will also take necessary approval from the RBI.
None of the Director and KMP and their relatives have any interest in this Resolution except as a member of the
Company.
Que. No. 22] Draft a resolution along with explanatory statement for alteration of articles of association of the
company to include an article authorizing the company to have its securities dematerialized.
Ans.:
Alteration of Article of Association [Section 14]
"RESOLVED THAT pursuant to Section 14 of the Companies Act, 2013, the articles of association of the company
be and are hereby altered in the following manner:
After article No. ................ , the following be inserted as article ................ :
Article ................ Dematerialization of Securities A. Dematerialization of Securities
Notwithstanding anything contained in these articles, the company shall be entitled to dematerialize its securities
and to offer securities in a dematerialized form pursuant to the Depositories Act, 1996 or any other law for the
time being in force.
B. Options for investors
Every person subscribing to securities offered by the company shall have the option to receive security certificates
or to hold the securities with a depository. Such a person who is the beneficial owner of the securities can at any
time opt out of a depository, if permitted by the applicable law in respect of any security in the manner provided
by the Depositories Act, 1996 and the company shall, in the manner and within the time prescribed, issue to the
beneficial owner the required certificates of securities.
If a person opts to hold his security with a depository, the company shall intimate such depository the details of
allotment of the security and/or transfer of securities in his name and on receipt of the information, the depository
shall enter in its record the name of the allottee and/or transferee as the beneficial owner of the security.
With the enactment of the Depositories Act, 1996, and coming into operation of the depository system, some of
the provisions of the Companies Act, 2013, relating to the issue, holding, transfer, transmission of equity shares
and other securities of companies have been amended to facilitate the implementation of the depository system.
The depository system of holding securities in an electronic mode is a far safer and more convenient method of
securing, holding and trading in the securities of company.
Under the depository system, the securities can be dematerialized. The company intends joining a depository. It
is, therefore, proposed that the company's articles of association be suitably altered, as set out in the proposed
resolution to enable it to dematerialize its securities.
None of the directors of the company is concerned or interested in the proposed resolution except to the extent
of the share holdings of the directors.
Que. No. 23] Draft a resolution along with explanatory statement for variation in shareholders right. Make
suitable assumptions.
Ans.:
Variation of shareholders right [Section 48]
"RESOLVED THAT the consent of Preference Shareholders be and is hereby accorded pursuant to the provisions of
Section 48 and other applicable provisions, if any, of the Companies Act, 2013 and the Rules made there under, to
the Board of Directors of the Company for early redemption of 4,54,50010% Redeemable Cumulative Preference
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Shares of ` 100 each at a discounted rate of 8% p.a. compounded annually which are due for redemption during
the period ................ to ................ "
"RESOLVED FURTHER THAT the Board of Directors be and is hereby authorized to do all such acts, deeds and things
and to sign all such documents as may be necessary, expedient and incidental thereto to give effect to this
resolution."
In the context of improved cash flow it is proposed to redeem the preference shares before its due date of
redemption i.e. during the period ................ to ................ at the discounted rate of 8% p.a. compounded annually,
other terms and conditions would be same as stipulated at the time of issue of preference shares or changed from
time to time.
Mr. Ram, Chairman and Managing Director of the Company is also a Director in XYZ Ltd., Preference Shareholder
of the Company and hence may be deemed to be concerned or interested in the said resolution as set out above.
Save and except as above, none of the Directors and KMP of the Company and their relatives is, in any way,
concerned or interested in this resolution.
The Board of Directors according recommends the resolution set out above for your approval.
Que. No. 24] Draft a resolution along with explanatory statement for inviting deposits from the public. Ans.:
Invitation of deposits [Sections 73 & 76]
Passing Authority — Member
Nature of the Resolution - Special Resolution
"RESOLVED THAT pursuant to the provisions of Section 73 and Section 76 of the Companies Act, 2013 read with
the Companies (Acceptance of Deposits) Rules, 2014 and other applicable provisions, if any, and subject to such
conditions, approvals, permissions, as may be necessary, consent of the members of the Company be and is hereby
accorded to invite/accept/renew from time to time unsecured/secured deposits from public and/or members of
the Company up to permissible limits as prescribed under Rule 3 (4) of the Companies (Acceptance of Deposits)
Rules, 2014,"
" RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, the Board of Directors be and is
hereby authorized to do such acts, deeds, things and matters as the Board of Directors may in its absolute
discretion consider necessary or appropriate for such invitation/acceptance/ renewal of Deposits by the
Company."
Explanatory statement
The members are hereby apprised that the Company had been accepting deposits from its shareholders,
employees and other sections of public as permissible under the provisions of Companies Act, 2013 read with the
corresponding Companies (Acceptance of Deposits) Rules, 2014.
Approval of shareholders is required for inviting/ accepting renewing deposits under Section 73 and Section 76
read with Companies (Acceptance of Deposits) Rules, 2014. Under Rule 3(4) of the Companies (Acceptance of
Deposits) Rules, 2014, an eligible Company shall accept or renew deposits (a) From its members not exceeding 10%
of the aggregate of the paid up share capital and free reserves of the Company (b) Other deposits not exceeding
25% of the aggregate of the paid up share capital and free reserves of the Company.
The members may kindly note that under the provisions of the 2013 Act, any Company inviting/accepting/
renewing deposits is required to obtain credit rating from a recognized credit rating agency and deposit insurance
towards deposits as may be accepted by it. The Company upon obtaining approval of the shareholders will proceed
to comply with the requirements stipulated under Sections 73 and 76 of the Companies Act, 2013 read with the
Companies (Acceptance of Deposits) Rules, 2014, before inviting/accepting/renewing deposits.
The Board of Directors of your Company recommend the resolution as set out in the accompanying notice for the
approval of the members of the Company.
None of the Directors or KMP of the Company or their relatives is concerned or interested in the Resolution except
to the extent of their deposit holding and/or their shareholding in the Company, if any.
447
Que. No. 25] Draft a resolution along with explanatory statement for appointing new auditor instead of retiring
auditor. Make suitable assumptions.
Ans.:
Appointment of Auditors, a person other than [Section 140]
retiring auditor
Nature of the Resolution — Ordinary Resolution
"RESOLVED THAT M/s. ................ & Co. Chartered Accountants, ................ (Registration No. ................ ) be
and are hereby appointed Auditors of ................ of the Company in place of the retiring auditors to hold office
from the conclusion of this Annual General Meeting until conclusion of the 16th Annual General Meeting at the
Remuneration of ? ................ plus out-of-pocket expenses."
The retiring auditors, namely, M/s. ................ & Co., have given notice in writing of their unwillingness to be re
appointed and that a special notice in terms of provisions of Section 115 of the Companies Act, 2013 read with
Section 140 of the Act has also been received from Shareholders of the Company for the appointment of new
Auditors M/s. ................ & Co. in place of the retiring auditors M/s. ................ & Co., Chartered Accountants.
The Company has forthwith communicated to the retiring auditors of the Special Notice and that the retiring
auditors have made no representation against the said special notice. A written certificate has been obtained
from M/s. ................ & Co., Chartered Accountants to the effect that in case of their appointment as Auditors of
the Company, the appointment will be in accordance with the limits prescribed under Section 139 (1) of the Act.
Your directors recommend the Resolution for your approval.
None of the Directors and KMP and their relatives are concerned or interested in this resolution.
Que. No. 26] Draft a resolution along with explanatory statement for removal of director.
Ans.:
Removal of Director [Section 169]
Passing Authority —General Meeting
Nature of the Resolution —Ordinary Resolution with special notice
"RESOLVED THAT Mr. (Din ................ ) be and is hereby removed from the office of director of the company
w.e.f. ................ "
The Company has received a special notice pursuant to the provisions of Section 169 of the Companies Act, 2013
from members holding 25% equity shares of the Company proposing for a resolution for removal of Mr. ................
from the office of the director of the Company. The Company has also communicated the above said notice to Mr.
................ for submission of his representation, if any.
Your directors submit the above said resolution for consideration and do not purport to support the same.
All the relevant documents are being placed at the Registered office of the Company for inspection till the date of
the annual general meeting.
Except Mr. ................ , none of the directors and KMP of the Company and their relatives are concerned or
interested in the resolution.
Que. No. 27] Draft a resolution along with explanatory statement for voluntary winding-up of the company.
Ans.:
Voluntary winding-up [Section 304]
Appointing authority — General Meeting
Nature of Resolution — Special Resolution
448
"RESOLVED THAT pursuant to the provisions of Section 304 (1) (b) of the Companies Act, 2013, the consent of the
members of the Company be and is hereby accorded to wind up the affairs of the Company as the members'
voluntary winding up, w.e.f. ................ "
"RESOLVED FURTHER THAT pursuant to the provisions of Section 275 of the Companies Act, 2013 Shri ................
s/o
Shri ................ , Chartered Accountant of Satara be and is hereby appointed as 'the Liquidator of the Company' for
the purpose of the members' voluntary winding up of the affairs of the Company."
"RESOLVED FURTHER THAT the consent of the members of the Company be and is hereby accorded to sanction the
remuneration of liquidator of ` 50,000 only (Rupees Fifty Thousand only) in addition to the actual out of pocket
expenses for the winding up of the affairs of the Company."
"RESOLVED FURTHER THAT Shri ................ , the liquidator be and is hereby authorized to exercise all the powers
as per the provisions of the Companies Act, 2013 to effectively winding up the affairs of the Company."
" RESOLVED FURTHER THAT notwithstanding the appointment of liquidator the Board of Directors of the Company
be and is hereby authorized to exercise all the powers in consideration with the liquidation of the Company like
filing of statement of affairs with the liquidator, filing of return with the Registrar of Companies, filling up vacancy
in the office of liquidator and such other matters incidental to the liquidation of the Company."
The Company was formed for the purpose of dealing in cosmetic products. Initially the business of the Company
was quite remunerative and earned adequate profits on capital invested. But as the members are aware the
Company is not doing any business activities for the las` 2-3 years. The Board of directors of the Company
considered the matter ahd were of the opinion that in view of the non-availability of business prospects, and long-
term financial resources it is not financially viable to carry on the business activities. It therefore does not serve
any fruitful purpose to maintain the status of the Company. The directors of the Company feel that there is no
alternative but to put the Company into voluntary winding-up, realize the assets thereof and distribute the
proceeds to the members.
The Board passed a resolution declaring solvency of the Company at a meeting held on the ................ and that such
declaration shall be delivered to the Registrar accompanied by a report of the auditors of the Company, as required
under Section 488 of the Companies Act, 2013.
Your approval is required for the voluntary winding up of the Company as given in Item No ................
Your approval is also required for appointing Shri ................ , as liquidator of the Company at a remuneration of
50,000 in addition to reimbursement of actual out of pocket expenses.
The above said declaration of solvency is available for inspection at the registered office of the Company during
business hours on any working day till the date of the meeting.
None of the directors of your Company and their relatives are interested in the proposed resolution, except to the
extent of their share holdings in the Company.
NOTICES
Que. No. 28] Draft a notice for first board meeting.
Ans.:
Sundaram Chemicals Ltd.
Registered Office: ................
CIN: ................ Website: ................ E-mail: ................ Tel: ................ Fax: ................
Date ................
Dear Sir,
I am directed to inform that the first meeting of the Board of Directors of the Company will be held on
................ , the ................ th day of ................ at the Registered Office of the Company at 10 a.m. to transact the
business, set out in the Agenda, a copy of which is enclosed.
449
You are requested to make it convenient to attend the Board Meeting.
Yours faithfully For Sundaram Chemicals Ltd.
Company Secretary
Ends. As above.
Que. No. 29] Draft a notice for subsequent Board Meeting.
Ans.:
New Infotech (P) Ltd.
Date ................
Mr. ................
Dear Sir,
NOTICE is hereby given that a meeting of the Board of Directors will be held at the registered office of the company
on ................ , the ................ th day of ................ at the Registered Office of the Company at 10 a.m. to transact
the business, set out in the Agenda, a copy of which is enclosed.
You are requested to make it convenient to attend the meeting.
A copy of the agenda of the business to be transacted at the meeting is enclosed herewith.
Yours faithfully, New Infotech (P) Ltd. Company Secretary
Ends. As above.
Que. No. 30] Draft a notice for AGM assuming that no special business is to be transacted at such AGM. Ans.:
ABC Ltd.
Date ................
NOTICE
NOTICE is hereby given that the 6th Annual General Meeting of ABC Ltd. will be held at on Thursday, 18th July, 2016
at 11.00 A.M. to transact the following business:
(1) To receive, consider and adopt the Audited Financial statement, this consists of Balance Sheet of the
Company as at 31s* March, 2016 and the Profit and Loss Account and Cash Flow Statement along with necessary
explanatory notes attached to and forming part of annual financial statements for the year ended 31st March, 2016
and the reports of the Board of Directors and Auditors thereon.
(2) To Declare Dividend for the financial year ................ as recommended by the Board o f Directors of the
Company.
(3) To appoint a Director in place of Mr. P who retires by rotation and being eligible offers himself for re
appointment.
(4) To appoint a Director in place of Mr. S who retires by rotation and being eligible offers himself for re
appointment.
(5) To appoint Auditors and to fix their remuneration.
By Order of the Board For ABC Co. Ltd.
Place: Company Secretary
Dated ................
Registered Office:
................
................
450
................
Notes:
(1) A member entitled to attend and vote is entitled to appoint a proxy to attend and vote instead of himself
and a proxy need not be a member.
(2) An Explanatory Statement pursuant to Section 102 of the Companies Act, 2013 relating to the special
business to be transacted at the Annual General Meeting is annexed.
Que. No. 31] Draft a notice of general meeting for removal of auditor.
Ans.:
ABC Ltd.
Registered Office: ....................
CIN: .................... Website: .................... E-mail: .................... Tel: .................... Fax: ....................
Date ....................
NOTICE
NOTICE is hereby given that an Extraordinary General Meeting of the Company will be held at : .................... on
.................... day the .................... 2016 at .................... to transact the following business: —
1. To consider and, if thought fit, to pass, with or without modifications, the following resolution as an ordinary
resolution, in respect of which a special notice has been received by the Company from a member(s) pursuant to
Section 139 read with Section 115 of the Companies Act, 2013:
"RESOLVED THAT Mr. XYZ be and is hereby removed from the office of auditor of the Company with effect from
the conclusion of this meeting/"
A copy of the representation with respect to the resolution set out above for the removal of Mr. XYZ as auditor has
been received from members and same is enclosed to this notice.
For ABC Co. Ltd.
Dated: By order of the Board,
Company Secretary
Note: '
1. A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead
of himself and the proxy need not be a member.
2. The Explanatory Statement pursuant to section 102 of the Companies Act, 2013, in respect of special
resolution set out above is annexed hereto.
Annexure
Explanatory statement pursuant to section 102 of the Companies Act, 2013
[Explanatory statement to the resolution to be set out here]
Que. No. 32] Draft a newspaper notice for closing register of members.
Ans.:
ABC Ltd.
Notice
Pursuant to Section 91 of the Companies Act, 2013 and the applicable clauses of the SEBI (LODR) Regulations, 2015,
notice is hereby given that the register of members and the share transfer register of the company will
remain closed, for the purpose of payment of interim dividend/final dividend, from the .................... th day of
.................... (month), .................... 2019 to the .................... th day of .................... 2019 (both days inclusive).
Members of the company are requested to intimate to the company at its registered office above, their latest
postal addresses, where the interim dividend warrants may be sent by the company.
451
Place: ....................
For .................... Limited
Date: ....................
Company Secretary
Que. No. 33] Board of directors of Desire Ltd. decides to go for creditors' winding-up of the company. For this
purpose the Board decides to call an extraordinary general meeting on 30th June, 2016. Draft a notice along with
explanatory statement for convening the meeting. Assume facts.
Ans.:
Young Indian Pvt. Ltd.
CIN: .................... Website: ....................
Phone No.: .................... Fax : ....................
NOTICE
Notice is hereby given that an extraordinary general meeting of the members of Young Indian Pvt. Ltd. shall
be held at Registered Office of the Company at .................... on 30 th June, 2016 at 11 AM to transact the
following business:
SPECIAL BUSINESS:
1. To consider and if thought fit, to pass with or without modification(s), if any, the following resolution as
special resolution:
"RESOLVED THAT pursuant to provisions of Section 304 (b) of the Companies Act, 2013, the consent of the
members of the company be and is hereby accorded to wind-up the affairs of the company as the creditors
voluntary winding-up, w.e.f .................... "
special resolution:
"RESOLVED THAT pursuant to provisions of Section 304 (b) of the Companies Act, 2013, Shri Manmohan Gurmukh
Singh, Chartered Accountant of Delhi on the panel of the Central Government be and is hereby appointed as the
liquidator of the company for the purpose of the creditors voluntary winding- up of the affairs of the company."
RESOLVED FURTHER THAT subject to consent of creditors and committee of inspection, the consent of the
members of the company be and is hereby accorded to sanction the remuneration of liquidator of ` 5,000 (Rupees
five thousand only) in addition to the actual out of pocket expenses for the winding- up of the affairs of the
company.
RESOLVED FURTHER THAT Shri Manmohan Gurmukh Singh, the liquidator be and is hereby authorized to exercise
all the powers as per the provisions of the Companies Act, 2013 to effectively winding up the affairs of the
Company."
special resolution:
"RESOLVED THAT notwithstanding the appointment of liquidator the board of directors of the company be and is
hereby authorized to exercise all the powers in consideration with the liquidation of the company like filing of
statement of affairs with liquidator, filing of return with Registrar of Companies, filing up vacancy in the office of
liquidator and such other matter incidental to the liquidation of the company."
By the orders of the Board
Place: ....................
Date: .................... (Director)
Notes:
452
(a) A member entitled to attend and vote at the meeting, is entitled to appoint a proxy to attend and vote
instead of himself and the proxy need not to be a member. Proxy in order to be effective must be received by the
company not less than 48 hours before the meeting.
(b) Explanatory statement setting out the material facts in respect of Item Nos. 1 and 2 are annexed hereto.
(c) All documents referred to in the accompanying notice and explanatory statement are open for inspection at
the Registered Office of the company on all working days, except Saturdays, between 11.00 AM to 1.00 AM.
Annexure to the notice
Explanatory statement pursuant to the provisions of Section 102 of the Companies Act, 2013 in respect of the
special business
Item Nos. 1 and 2
The Company was formed for the purpose of dealing in chemicals, drugs, pharmaceuticals. Initially the business of
the company was quite remunerative and earned adequate profits on capital invested but form las` 4 four years
the company is running into losses and liabilities of the company are far more than assets of the company making
it insolvent.
The boards of director of the company considered the matter and were of the opinion that in view of nonavailability
of business prospectus and continuous losses there is no alternative but to put the company into voluntary
winding-up. Since company is not solvent and no declaration of solvency can be filed under the Companies Act,
2013 such voluntary winding-up has to be treated as creditor's voluntary winding-up.
Since, it is creditor's voluntary winding-up a separate meeting of creditors is also required to be held and separate
resolution is also required to be passed at the meeting of creditors.
Your approval is required to for the winding-up of the Company as given in Item No. 1.
Your approval is also required for appointment of Shri Manmohan Gurmukh Singh as a liquidator of the company
at a remuneration of ` 5,000 (Rupees five thousand only) in addition to the actual out of pocket expenses.
None of the director and KMP of your company and their relatives are interested in the proposed resolution, except
to the extent of their share holding in the company.
By the orders of the Board
Place:
Date: (Director)
■■■ MINUTES
Que. No. 34] Draft minutes of the First Board Meeting. Assume facts.
Ans.:
MINUTES OF THE PROCEEDINGS OF THE FIRST MEETING OF THE BOARD OF DIRECTORS OF
XYZ LTD., HELD AT 11.00 A.M. AND CONCLUDED AT 1:30 PM ON THE .................... AT .................... THE
REGISTERED OFFICE OF THE COMPANY, AT ....................
The following were present:
1. Mr. R in the Chair
2. Mr. B, Director
3. Mr. C, Director In attendance
Mr. F — General Manager
1. Appointment of Chairman
(a) Of the meeting: Shri R was unanimously elected Chairman of the meeting.
(b) Of the company: As per Article 55 of the Articles of Association of the Company, the Board may appoint a
Chairman of the Company. The Board considered and it was
"RESOLVED THAT pursuant to Article 55 of the Articles of Association, Mr. R be and is hereby appointed as the
Chairman of the Board."
453
2. Certificate of Incorporation
The Certificate of Incorporation bearing CIN. .................... , dated .................... issued by the Registrar of
Companies, Pune was placed on the table and taken on record by the Board.
3. Memorandum and Articles of Association
A printed copy of the Memorandum and Articles of Association of the Company, as registered with the Registrar
of Companies, was placed before the meeting. The Board noted and taken on records the same. The following
resolution was passed:
"RESOLVED THAT printed copy of the Original Memorandum and Articles of Association of the Company laid before
the meeting, and perused be taken on record and Mr. R, Director of the Company be directed to keep the original
copy of the Certificate of Incorporation in safe custody."
4. First Directors
The meeting took note of the first directors named in Article 78 of the Articles of Association of the Company. It
was noted that giving consent to act as Director by Mr. R, Mr. B and Mr. C, the first Directors of the Company, had
already been filed along with e-Form DIR-12 with the Registrar of Companies. It was also noted that the directors
have paid for the qualification shares in accordance with the Articles of Association.
"RESOLVED THAT necessary intimation already given to this effect to the Registrar of Companies by filing
e-Form DIR-12 for appointment of Mr. R (DIN .................... ) Mr. B (DIN .................... ) and Mr. C. (DIN ....................
) pursuant
to Section 170 (2) of the Companies Act, 2013 be and is hereby approved and confirmed as the First Directors of
the Company from the date of its incorporation."
7. Registered Office
It was noted that the Registered Office of the Company will be at .................... the intimation of which had already
been given in the e-Form INC 22 to the Registrar of Companies from the date of incorporation of the Company.
8. Financial year
The Board discussed the matter of fixing the Accounting year of the Company. The following resolution was passed:
"RESOLVED THAT the financial year of company be and is hereby fixed from 1st April to 31st March, of the following
and subsequent years and the first year's accounts be prepared for the period commencing from the dale of
incorporation i.e .................... upto and including 31st March, 2015."
9. Adoption of Common seal
The art work of the common seal was produced before the meeting and it was —
"RESOLVED THAT the art work of the common seal as per impression shown below be and is hereby approved, and
Shri X, Company Secretary be instructed to get the common seal prepared and place it before the Board.
10. Vote of thanks
The meeting ended with vote of thanks.
Place:
Date: CHAIRMAN
454
chapter
29
LEGAL FRAMEWORK GOVERNING COMPANY SECRETARY
■ ■■* COMPANY SECRETARY
Que. No. 1] Discuss briefly the regulatory framework governing the profession of the Company Secretaries in
India.
Ans.: The following are the important statues, which governs Profession of the Company Secretaries in India:
♦ The Companies Act, 2013
♦ The Company Secretaries Act, 1980
♦ The Company Secretaries Regulations, 1982
♦ Rules made under the Company Secretaries Act, 1980
Various authorities/bodies that affect the profession of Company Secretaries are:
♦ Ministry of Corporate Affairs
♦ SEBI
♦ ICSI
Que. No. 2] Define the term: Company Secretary
Ans.: Company Secretary [Section 2(24)]: "Company Secretary" or "Secretary" means a company secretary as
defined in Section 2(l)(c) of the Company Secretaries Act, 1980 who is appointed by a company to perform the
functions of a Company Secretary under the Act.
As per Section 2(1) (c) of the Company Secretaries Act, 1980, Company Secretary means a person who is a member
of the ICSI.
Que. No. 3] What functions has to be performed by the Company Secretary under the Companies Act, 2013?
What are the statutory duties of the Company Secretary under the Companies Act, 2013.
Ans.: Functions of the Company Secretary [Section 205]: The functions of the Company Secretary includes the
following -
(a) To report to the Board about compliance with the provisions of the Companies Act, 2013 and the rules made
there under and other laws applicable to the company.
(b) To ensure that company complies with Secretarial Standards.
(c) To discharge other prescribed duties.
Explanation: The expression "Secretarial Standards" means secretarial standards issued by the ICSI and approved
by the Central Government.
Duties of Company Secretary [Rule 10 of the Companies (Appointment & Remuneration of Managerial
Personnel) Rules, 2014]: The duties of Company Secretary shall discharge the following duties:
(1) To provide guidance to the directors with regard to their duties, responsibilities and powers.
(2) To facilitate the convening of meetings and attend Board, committee and general meetings and maintain the
minutes of these meetings.
(3) To obtain approvals from the Board, general meeting, the government and other authorities as required
under the provisions of the Act.
(4) To represent before various Regulators, and other authorities in connection with discharge of various duties.
(5) To assist the Board in the conduct of the affairs of the company.
(6) To assist and advise the Board in ensuring and in complying good corporate governance and best practices.
(7) To discharge other specified duties under the Act or Rules.
455
(8) To discharge other duties as may be assigned by the Board from time to time.
Que. No. 4] State the provisions and procedure relating to appointment of Company Secretary.
Ans.: As per Section 2(51), Company Secretary is Key Managerial Personnel (KMP). Section 203 deals with the
mandatory appointment of KMP in certain classes of companies.
Thus, as per Section 203 read with Rules 8 & 8 A of the Companies (Appointment & Remuneration of Managerial
Personnel) Rules, 2014, appointment of Company Secretary in mandatory in following types of companies:
- Every other public company paid-up capital of which is ` 5 Crore or more
Section 8 company's i.e. non-profit making companies need to appoint Company Secretary. [MCA Notification dated
5.6.2015]
Appointment of Company Secretary: A Company Secretary shall be appointed by resolution of board of directors,
containing the terms and conditions of appointment including remuneration.
Filing of Return: Return of appointment of Company Secretary as well as cessation has to be filed with ROC in Form
DIR-12. In addition to this, From MR-1 is also required to filed as Company Secretary is KMP.
Details to be entered in Register of KMP: The Company Secretary is KMP and his details have to be included in
"Register of Directors & KMP" maintained u/s 170.
A whole time Company Secretary can be Company Secretary of subsidiary company: A whole time KMP (which
includes Company Secretary) shall not hold office in more than one company except in its subsidiary company at
the same time. [Section 203 (3)]
Company Secretary can be director of any company: A Company Secretary can be appointed as director of the
company or of any other company with the permission of Board. [Section 203(3)]
Vacancy to be filed in 6 months: Any vacancy in the post of Company Secretary should be filled within 6 months.
[Section 203(4)]
Company Secretary as Compliance Officer: As per Regulation 6 of the SEBI (Listing Obligation & disclosure
Requirement) Regulations, 2015, a listed company shall appoint qualified Company Secretary as Compliance
Officer.
Officer in default: The Company Secretary is included in definition of 'officer in default'. Thus, he may be penalized
for non compliance of the provisions of the Companies Act, 2013 and Rules and Regulations made there under.
■■■ THE COMPANY SECRETARIES ACT, 1980
Que. No. 5] Write a short note on: Company Secretary in Practice
Ans.: Company Secretary in Practice [Section 2(25)]: "Company secretary in practice" means a Company Secretary
who is deemed to be in practice as specified in Section 2(2) of the Company Secretaries Act, 1980.
As per Section 2(2) of the Company Secretaries Act, 1980, a member of the ICSI shall be deemed "to be in practice"
when, individually, or in partnership with one or more members of the Institute in practice or in
partnership with members of such other recognized professions as may be prescribed, he, in consideration of
remuneration received or to be received, -
(a) engages himself in the practice of the profession of Company Secretaries to, or in relation to, any company;
or
(b) offers to perform or performs services in relation to the promotion, forming, incorporation, amalgamation,
reconstruction, reorganization or winding up of companies; or
(c) offers to perform or performs such services as may be performed by -
(i) an authorized representative of a company with respect to filing, registering, presenting, attesting or
verifying any documents (including forms, applications and returns) by or on behalf of the company,
(ii) a share transfer agent,
(iii) an issue house,
(iv) a share and stock broker,
456
(v) a secretarial auditor or consultant,
(vi) an adviser to a company on management, including any legal or procedural matter falling under the
Industries (Development and Regulation) Act, 1951, the Companies Act, 2013, the Securities Contracts (Regulation)
Act, 1956, any of the rules or bye-laws made by a recognized stock exchange, the Competition Act, 2002, the
Foreign Exchange Management Act, 1999, or under any other law for the time being in force,
(vii) issuing certificates on behalf of, or for the purposes of a company; or (d) holds himself out to the public as a
Company Secretary in practice; or
(e) renders professional services or assistance with respect to matters of principle or detail relating to the
practice of the profession of Company Secretaries; or
(f) renders such other services as, in the opinion of the Council, are or may be rendered by a Company Secretary
in practice.
Certificate of Practice [Section 6]: No membe.r of‘the ICSI shall be entitled to practice, whether in India or
elsewhere, unless he has obtained from the Council a certificate of practice.
A member who desires to be entitled to practice shall make an application in prescribed form and pay prescribed
annual fee, for his certificate as may be determined, by notification, by the Council. Such fee shall be payable on
or before the 1st day of April in each year.
The certificate of practice may be cancelled by the Council under prescribed circumstances.
Que. No. 6] Distinguish between: Associate & Fellow Members
Ans.: Associates and Fellows [Section 5]: The members of the Institute shall be divided into two classes designated
respectively as Associates and Fellows.
Associate Company Secretary (ACS): Any person whose name is entered in the Register of Members maintained
by ICSI shall be deemed to have become an Associate and as long as his name remains so entered, shall be entitled
to use the letters "ACS" after his name to indicate that he is an Associate.
Fellow Company Secretary (FCS): A person, being an Associate who has been in continuous practice in India as a
Company Secretary for at leas` 5 years and a person who has been an Associate for a continuous period of not less
than 5 years and who possesses such qualifications or practical experience as the Council may prescribe with a
view to ensuring that he has experience equivalent to the experience normally acquired as a result of continuous
practice for a period of 5 years as a Company Secretary shall, on payment of fees, be entered in the Register as a
Fellow.
Que. No. 7] Whether a Company Secretary in practice can open branch office at other place?
Ans.: Maintenance of branch offices [Section 37]: Where a Company Secretary in practice or a firm of such
Company Secretaries has more than one office in India, each one of such offices shall be in the separate charge of
a member of the Institute.
However, the Council may in suitable cases exempt any Company Secretary in practice or firm of such Company
Secretaries from the operation of this provision.
Every Company Secretary in practice or firm of such Company Secretaries maintaining more than one office shall
send to the Council a list of offices and the persons in charge thereof and shall keep the Council informed of any
changes in relation thereto.
As per Section 37(1), where a Company Secretary in Practice or a firm of such Company Secretaries has more than
one office in India, each one of such offices must be in the separate charge of a member of the Institute. The
Council is, however, empowered to exempt in suitable cases any Company Secretary in Practice or firm of such
company secretaries from the operation of this provision.
Applications for opening of Branch Office without a member in the separate charge at places where there are few
or no Company Secretaries in Practice are decided by the Council on the merits of each case subject to the following
general conditions:
1. The branch office shall be an independent office and not in the office of some other professional.
457
2. One of the partners of the firm shall attend the branch office at least 100 days in a financial year. However,
if a candidate who has passed Intermediate examination of the Institute and also completed Management/
Apprenticeship Training or has passed the Final Examination of the Institute is posted at the said branch office, one
of the partners of the firm shall attend the branch office at least 60 days in the financial year.
3. The approval shall be valid for a period of 2 years within which a member must be appointed in the separate
charge of the branch office.
Que. No. 8] PK & Co., a firm of Company Secretary in practice at Chennai has an office in the suburbs of Chennai.
Due to increase in work, firm opens another office. For running the new office, firm has employed a retired
officer who was earlier working in the office of RCO at Chennai. Comment.
Ans.: As per Section 37, where a Company Secretary in practice or a firm of such Company Secretaries has more
than one office in India, each one of such offices shall be in the separate charge of a member of the Institute.
However, the Council may in suitable cases exempt any Company Secretary in practice or firm of such Company
Secretaries from the operation of this provision.
The Council has granted general exemption to open new office at different place subject to certain conditions.
Thus, PK & Co. can open another office at different place subject to fulfilment of following conditions.
1. The branch office shall be an independent office and not in the office of some other professional.
2. One of the partners of the firm shall attend the branch office at least 100 days in a financial year. However,
if a candidate who has passed Intermediate examination of the Institute and also completed Management/
Apprenticeship Training or has passed the Final Examination of the Institute is posted at the said branch office, one
of the partners of the firm shall attend the branch office at least 60 days in the financial year.
3. The approval shall be valid for a period of 2 years within which a member must be appointed in the separate
charge of the branch office.
■ ■■ PROFESSIONAL MISCONDUCT, OFFENCES & PENALTIES
Que. No. 9] State the circumstances under which name of member may be removed from register of members
under the Companies Secretaries Act, 1980?
Ans.: Removal from the Register [Section 20]: The Council may remove from the Register the name of any member
of the Institute -
(a) Who is dead or
(b) From whom a request has been received to that effect or
(c) Who has not paid any prescribed fee required to be paid by him or
(d) Who is found to have been subject at the time when his name was entered in the Register, or who at any
time there-after has become subject, to any of the disabilities mentioned in Section 8, or who for any other reason
has ceased to be entitled to have his name borne on the Register.
The Council shall remove from the Register the name of any member in respect of whom an order has been passed
removing him from membership of the Institute.
If the name of any member has been removed from the Register, on receipt of an application, his name may be
entered again in the Register on payment of the arrears of annual fee and entrance fee along with such additional
fee, as may be determined, by notification, by the Council, which.
Que. No. 10] Write a short note on: Disciplinary Directorate Ans.: Disciplinary Directorate [Section 21]:
(1) The Council shall, by notification, establish a Disciplinary Directorate headed by an officer of the Institute
designated as Director (Discipline) and such other employees for making investigations in respect of any
information or complaint received by it.
(2) On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive
at a prima facie opinion on the occurrence of the alleged misconduct.
(3) Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other
misconduct mentioned in the First Schedule, he shall place the matter before the Board of Discipline and where
the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct
458
mentioned in the Second Schedule or in both the Schedules, he shall place the matter before the Disciplinary
Committee.
(4) In order to make investigations, the Disciplinary Directorate shall follow such procedure as may be specified.
(5) Where a complainant withdraws the complaint, the Director (Discipline) shall place such withdrawal before
the Board of Discipline or as the case may be, the Disciplinary Committee, and the said Board or Committee may,
if it is of the view that the circumstances so warrant, permit the withdrawal at any stage.
Que. No. 11] Write a short note on: Board of Discipline
What actions can be taken by the Board of Discipline if it is of the opinion that a member is guilty of a
professional misconduct mentioned in the First Schedule to the Companies Secretaries Act, 1980?
Ans.: Board of Discipline [Section 21A]:
(1) The Council shall constitute a Board of Discipline consisting of -
(a) A person with experience in law and having knowledge of the disciplinary matters and the profession, to be
its presiding officer;
(b) Two members one of whom shall be a member of the Council elected by the Council and the other member
shall be the person designated u/s (16)(l)(c);
(c) The Director (Discipline) shall function as the Secretary of the Board.
■ (2) The Board of Discipline shall follow summary disposal procedure in dealing with all the cases before it.
(3) Where the Board of Discipline is of the opinion that a member is guilty of a professional or other misconduct
mentioned in the First Schedule, it shall afford to the member an opportunity of being heard before making any
order against him and may thereafter take any one or more of the following actions, namely:
(a) Reprimand the member.
(b) Remove the name of the member from the Register up to a period of 3 months.
(c) Impose such fine as it may think fit which may extend to ` 1 lakh.
(4) The Director (Discipline) shall submit before the Board of Discipline all information and complaints where he
is of the opinion that there is no prima facie case and the Board of Discipline may, if it agrees with the opinion of
the Director (Discipline), close the matter or in case of disagreement, may advise the Director (Discipline) to further
investigate the matter.
Que. No. 12] Write a short note on: Disciplinary Committee
What actions can be taken by the Disciplinary Committee if it is of the opinion that a member is guilty of a
professional misconduct mentioned in the Second Schedule or both the First Schedule and the Second Schedule
to the Companies Secretaries Act, 1980?
Ans.: Disciplinary Committee [Section 21B]:
(1) The Council shall constitute a Disciplinary Committee consisting of the President or the Vice-President of the
Council as the Presiding Officer and two members to be elected from amongst the members of the Council and
two members to be nominated by the Central Government from amongst the persons of eminence having
experience in the field of law, economics, business, finance or accountancy:
However, the Council may constitute more Disciplinary Committees as and when it considers necessary.
(2) The Disciplinary Committee, while considering the cases placed before it, shall follow such procedure as may
be specified.
(3) Where the Disciplinary Committee is of the opinion that a member is guilty of a professional or other
misconduct mentioned in the Second Schedule or both the First Schedule and the Second Schedule,
it shall afford to the member an opportunity of being heard before making any order against him and may
thereafter take any one or more of the following actions -
(a) Reprimand the member;
(b) Remove the name of the member from the Register permanently or for such period, as it thinks fit;
459
(c) Impose such fine as it may think fit, which may extend to ` 5 lakh.
Que. No. 13] A Company Secretary in practice has been suspended from practice for a period of 6 months. During
the said period, though he did not undertake assignment as Company Secretary since he had surrendered
certificate of practice. However, he had appeared before Registrar of Companies in his capacity as a Company
Secretary.
Ans.: A Company Secretary not holding certificate of practice cannot take up any other work because it would
amount to violation of the provisions of the Company Secretaries Act, 1980.
In case a member is suspended and is not holding Certificate of Practice, he cannot in any other capacity take up
any practice separable from his capacity to practices as a member of the Institute. This is because once a person
becomes a member of the Institute, he is bound by the provisions of the Company Secretaries Act, 1980 and its
Regulations.
If he appears before the Registrar of Companies, he is only doing so in his capacity as a Company Secretary and a
member of the Institute. Having bound himself by the said Act and its Regulations made there under, he cannot
then set the Regulations at naught by contending that even though he continues to be a member and has been
punished by suspension, he would be entitled to practice in some other capacity.
Thus, in the instant case, a Company Secretary would not be allowed to represent before the Registrar of
Companies for the period he remains suspended. Accordingly, in the present case he is guilty of professional
misconduct.
Que. No. 14] Write a short note on: Power of Disciplinary Committee, Board of Discipline and Director
(Discipline)
Ans.: Authority, Disciplinary Committee, Board of Discipline and Director (Discipline) to have powers of Civil
Court [Section 21C]: For the purposes of an inquiry, the Authority, the Disciplinary Committee, Board of Discipline
and the Director (Discipline) shall have the same powers as are vested in a Civil Court under the Code of Civil
Procedure, 1908, in respect of the following matters -
(a) Summoning and enforcing the attendance of any person and examining him on oath;
(b) The discovery and production of any document; and
(c) Receiving evidence on affidavit.
Explanation: For the purposes of Sections 21, 21A, 21B, 21C and 22, "member of the Institute" includes a person
who was a member of the Institute on the date of the alleged misconduct although he has ceased to be a member
of the Institute at the time of the inquiry.
Que. No. 15] The Disciplinary Committee of the ICSI has passed an order holding Mr. X (Company Secretary)
guilty of a professional misconduct mentioned in the Second Schedule to fhe Company Secretaries Act, 1980.
Advice Mr. X procedure for filing the appeal against the order of Disciplinary Committee.
Ans.: Appeal to Authority [Section 22E]: Any member of the Institute aggrieved by any order of the Board of
Discipline or the Disciplinary Committee imposing on him any of the penalties, may within 90 days from the date
on which the order is communicated to him, prefer an appeal to the Authority.
The Director (Discipline) may also appeal against the decision of the Board of Discipline or the Disciplinary
Committee to the Authority if so authorized by the Council, within 90 days.
The Authority may entertain any such appeal after the expiry of the said period of 90 days, if it is satisfied that
there was sufficient cause for not filing the appeal in time.
The Authority may, after calling for the records of any case, revise any order made by the Board of Discipline or
the Disciplinary Committee and may -
(a) Confirm, modify or set aside the order;
(b) Impose any penalty or set aside, reduce, or enhance the penalty imposed by the order;
(c) Remit the case to the Board of Discipline or Disciplinary Committee for such further enquiry as the Authority
considers proper in the circumstances of the case; or
(d) Pass such other order as the Authority thinks fit.
460
The Authority shall give an opportunity of being heard to the parties concerned before passing any order.
Que. No. 16] What is the penalty for falsely claiming to be a member ICSI under Company Secretaries Act, 1980?
Ans.: Penalty for falsely claiming to be a member [Section 24]:
(A) Any person who not being a member of the ICSI -
(z) represents that he is a member of the ICSI or (z'z) uses the designation 'Company Secretary' or (tit) uses the
letters 'ACS' or 'FCS' after his name or
(B) Being a member of the ICSI, but not having a certificate of practice, represents that he is in practice or
practices as a Company Secretary shall be punishable
- on first conviction with fine which may extend to ` 1,000, and
- on any subsequent conviction with imprisonment which may extend to 6 months, or with fine which may
extend to ` 5,000, or with both.
Que. No. 17] What is the penalty for using name of the Council or awarding degree of Company Secretary under
Company Secretaries Act, 1980? * 1
Ans.: Penalty for using name of the Council or awarding degree of Company Secretary [Section 25]:
(1) No person shall -
(a) Use a name or a common seal which is identical with the name or the common seal of the ICSI or so nearly
resembles it as to deceive or as is likely to deceive the public;
(b) Award any degree, diploma or certificate or bestow any designation which indicates or purports to indicate
the position or attainment of any qualification or competence in Company Secretaryship similar to that of a
member of the ICSI; or
(c) Seek to regulate in any manner whatsoever the profession of Company Secretaries.
However, nothing contained herein shall disentitle a Company Secretary from being a director of a company except
as provided in the Companies Act, 2013.
(11) Allows a person not being a member of the Institute in practice, or a member not being his partner to sign on
his behalf or on behalf of his firm, anything which he is required to certify as a Company Secretary, or any other
statements relating thereto.
Que. No. 23] State the acts or omissions which constitute professional misconduct in relation to members of the
Institute in service under PART II of the First Schedule to the Company Secretaries Act, 1980.
Ans.: Professional misconduct in relation to members of the Institute in service [Part II of the First Schedule]:
A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional
misconduct, if he, being an employee of any company, firm or person -
(1) Pays or allows or agrees to pay, directly or indirectly, to any person any share in the emoluments of the
employment undertaken by him.
(2) Accepts or agrees to accept any part of fees, profits or gains from a lawyer, a Company Secretary or broker
engaged by such company, firm or person or agent or customer of such company, firm or person by way of
commission or gratification.
Institute generally under PART III of the First Schedule to the Company Secretaries Act, 1980.
Ans.: Professiorial misconduct in relation to members of the Institute generally [PART III of the First Schedule]:
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if
he -
(1) Not being a Fellow of the Institute, acts as a Fellow of the Institute;
(2) Does not supply the information called for, or does not comply with the requirements asked for, by the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
' Committee, Quality Review Board or the Appellate Authority;
461
(3) While inviting professional work from another Company Secretary or while responding to tenders or
enquiries or while advertising through a write up, or anything as provided for in clauses (6) and (7) of Part I of
Schedule I, gives information knowing it to be false.
Que. No. 25] State the acts or omissions which constitute misconduct in relation to members of the Institute
generally under PART IV of the First Schedule to the Company Secretaries Act, 1980.
Ans.: Other misconduct in relation to members of the Institute generally [Part IV of the First Schedule]: A
member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if -
(1) He is held guilty by any Civil or Criminal Court for an offence which is punishable with imprisonment for a
term not exceeding 6 months.
(2) In the opinion of the Council, he brings disrepute to the profession or the institute as a result of his action
whether or not related to his professional work.
Following may amount to misconduct under Clause (2) of Part IV of the First Schedule:
♦ Sending an e-mail to number of members (e-groups) criticizing the decisions of the Council in derogatory
and filthy language.
♦ Discussing through e-forms failures of the Council/President/Secretary by using derogatory and filthy
language.
♦ Writing letter(s) in an aggressive, loud and filthy language to the Ministry of Corporate Affairs, about
working of ROC offices/MCA site, inability to upload forms etc.
♦ Arranging DHARANA/agitations at the gates of the Govt. Offices/Institute’s offices in a manner not
befitting a professional.
♦ Instigating Students or other members by creating a pandemonium in or around Institute's offices by
raising issues pertaining to syllabus, training, examination or any other reason what so ever.
♦ Misusing the confidential data available with the offices of the Institute for personal purposes.
♦ Inviting Govt. Officers for Chapter's/Regional Council's Programs by spending heavily on their travel & stay
arrangements, with an intention to get personal mileage.
♦ Tampering with the Books of Account/ Minutes of the meetings of the Managing Committees of Chapter/
Regional Councils.
Que. No. 26] State the acts or omissions which constitute professional misconduct in relation to Company
Secretaries in Practice under PART I of the Second Schedule to the Company Secretaries Act, 1980.
Ans.: Professional misconduct in relation to Company Secretaries in Practice [PART I of the Second Schedule]:
A Company Secretary in practice shall be deemed to be guilty of professional misconduct, if he -
(1) Discloses information acquired in the course of his professional engagement to any person other than his
client so engaging him, without the consent of his client, or otherwise than as required by any law for the time
being in force.
(2) Certifies or submits in his name, or in the name of his firm, a report of an examination of the matters relating
to company secretarial practice and related statements unless the examination of such statements has been made
by him or by a partner or an employee in his firm or by another Company Secretary in practice.
(3) Permits his name or the name of his firm to be used in connection with any report or statement contingent
upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast.
(4) Expresses his opinion on any report or statement given to any business or enterprise in which he, his firm,
or a partner in his firm has a substantial interest.
(5) Fails to disclose a material fact known to him in his report or statement but the disclosure of which is
necessary in making such report or statement, where he is concerned with such report or statement in a
professional capacity.
(6) Fails to report a material mis-statement known to him and with which he is concerned in a professional
capacity.
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(7) Does not exercise due diligence, or is grossly negligent in the conduct of his professional duties.
(8) Fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are
sufficiently material to negate the expression of an opinion.
(9) Fails to invite attention to any material departure from the generally accepted procedure relating to the
secretarial practice.
(10) Fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a
separate banking account or to use such moneys for purposes for which they are intended within a reasonable
time.
Institute generally under PART II of the Second Schedule to the Company Secretaries Act, 1980.
Ans.: Professional misconduct in relation to members of the Institute generally [PART II of the Second Schedule]:
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if
he -
(1) Contravenes any of the provisions of the Company Secretaries Act, 1980 or the regulations made thereunder
or any guidelines issued by the Council.
(2) Being an employee of any company, firm or person, discloses confidential information acquired in the course
of his employment, except as and when required by any law for the time being in force or except as permitted by
the employer.
(3) Includes in any information, statement, return or form to be submitted to the Institute, Council or any of its
Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the
Appellate Authority any particulars knowing them to be false;
(4) Defalcates or embezzles moneys received in his professional capacity.
Que. No. 28] State the acts or omissions which constitute misconduct in relation to members of the Institute
generally under PART III of the Second Schedule to the Company Secretaries Act, 1980.
Ans.: Other misconduct in relation to members of the Institute generally [PART III of the Second Schedule]:
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is
held guilty by any Civil or Criminal Court for an offence which is punishable with imprisonment for a term
exceeding 6 months.
Que, No. 29] CS Prabhu is a leading practitioner and consultant for Corporate & Allied Laws services. He resides
in Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives. Every day,
he invests nearly 50% of his time to settle the commodity transactions. Is CS Prabhu liable for professional
misconduct?
Ans.: As per Clause (10) of the Part I of the First Schedule, a Company Secretary in Practice shall be deemed to be
guilty of professional misconduct, if he engages in any business or occupation other than the profession of Company
Secretary unless permitted by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain specific occupation. In
respect of all other occupations specific permission of the Institute is necessary.
In this case, CS Prabhu is engaged in the occupation of trading in commodity derivatives which is not covered under
the general permission.
Hence, specific permission <?f the Institute has to be obtained otherwise he will be deemed to be guilty of
professional misconduct under Clause (10) of Part I of First Schedule of the Company Secretaries Act, 1980.
Que. No. 30] Mr. X passed his CS Final examination of ICSI on 18th July, 2016 and started his practice from 15th
August, 2016. On 16th August 2019, one female candidate approached him for article-ship. In addition to
monthly stipend, Mr. X also offered her 1% profits of his CS firm. She agreed to take both 1% profits of the CS
firm and stipend as per the rate prescribed by the ICSI. The Institute of Company Secretaries of India sent a letter
to Mr. X objecting the payment of 1% profits. Mr. X replies to the ICSI stating that he is paying 1% profits of his
463
firm over and above the stipend to help the articled clerk as the financial position of the articled clerk is very
weak. Is Mr. X Liable to professional misconduct?
guilty of professional misconduct, if he pays or allows or agrees to pay or allow, directly or indirectly, any share,
commission or brokerage in the fees or profits of his professional business,'to any person other than a member of
the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any
other professional body or with such other persons having such qualifications as may be prescribed for the purpose
of rendering such professional services from time to time in or outside India.
In view of the above, the objections of the ICSI, as given in the case, are correct and reply of Mr. X, stating that he
is paying 1 % profits of his firm over and above the stipend to help the articled clerk as the position of the articled
clerk is weak is not tenable.
Hence, Mr. X is guilty of professional misconduct in terms of Clause (2) of Part I of First Schedule to the Company
Secretaries Act, 1980.
Que. No. 31] Mr. Honest, a Company Secretary in practice, wrote two letters to M/s. XY a firm of Company
Secretaries requesting them to allot him some professional work. As he did not have a significant practice or
clients he also wrote a letter to M/s. ABC, a firm of Company Secretaries for securing professional work. Mr.
Clever, an another CS, informed ICSI regarding Mr. Honest's approach to secure the professional work. Is Mr.
Honest wrong in soliciting professional work?
guilty of professional misconduct, if he solicits clients or professional work, either directly or indirectly, by circular,
advertisement, personal communication or interview or by any other means.
However, nothing herein contained shall be construed as preventing or prohibiting -
(i)‘ Any company secretary from applying or requesting for or inviting or securing professional work from another
company secretary in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional services or
organizations from time to time and securing professional work as a consequence
In the given case, Mr. Honest wrote letters only to other Company Secretaries, M/ s. XY and M/s. ABC requesting
them to allot some professional work to him, which is not prohibited. Mr. Honest is not wrong in soliciting
professional work. Hence, there is no professional misconduct in terms of Clause (6) of Part I of First Schedule to
the Company Secretaries Act, 1980.
Que. No. 32] Mr. N, a Company Secretary in practice, delivered a speech in the national conference organized
by the Ministry of Textiles. While delivering the speech, he told to the audience that he is a management expert
and his firm provides services of secretarial audit at reasonable rates. He also requested the audience to
approach his firm of Company Secretary for these services and at the request of audience he also distributed his
business cards and telephone number of his firm to those in the audience. Comment.
As per Clause (7) of the Part I of the First Schedule, a Company Secretary in Practice shall be deemed to be guilty
of professional misconduct, if he advertises his professional attainments or services, or uses any designation or
expressions other than Company Secretary on professional documents, visiting cards, letterheads or sign boards,
unless it be a degree of a University established by law in India or recognized by the Central Government or a title
indicating membership of the ICSI or of any other institution that has been recognized by the Central Government
or may be recognized by the Council. Under the clause, use of any designation or expression other than Company
Secretary for a Company Secretary in practice, on professional documents, visiting cards, etc. amounts to a
misconduct unless it be a degree of a university or a title indicating membership of any other professional body
recognized by the Central Government or the Council.
Member may appear on television and films and agree to broadcast in the Radio or give lectures at forums and
may give their names and describe themselves as Company Secretaries. Special qualifications or specialized
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knowledge directly relevant to the subject matter of the programme may also be given but no reference should be
made, in the case of practicing member to the name and address or services of his firm. What he may say or write
must not be promotional of his or his firm but must be an objective professional view of the topic under
consideration.
Thus, it is improper to use designation "Management Expert" since neither it is a degree of a University established
by law in India or recognized by the Central Government nor it is a recognized professional membership by the
Central Government or the Council. Therefore, he is deemed to be guilty of professional misconduct under both
Clauses (6) and (7) as he has used the designation "Management Expert" in his speech and also he has made
reference to the services provided by his firm of Company Secretaries at reasonable rates. Distribution of cards to
audience is also misconduct in terms of Clause (6).
Que. No. 33] Mr. B, a practicing Company Secretary as well as a qualified lawyer, was permitted by the Bar
Council to practice as a lawyer also. He printed his visiting card where he mentioned his designation as Company
Secretary and Advocate. Is Mr. B liable for professional misconduct?
guilty of professional misconduct, if he advertises his professional attainments or services, or uses any designation
or expressions other than Company Secretary on professional documents, visiting cards, letterheads or sign boards,
unless it be a degree of a University established by law in India or recognized by the Central Government or a title
indicating membership of the ICSI or of any other institution that has been recognized by the Central Government
or may be recognized by the Council.
This clause prohibits advertising of professional attainments or services of a member. It also restrains a member
from using any designation or expression other than that of a Company Secretary in documents through which the
professional attainments of the member would come to the notice of the public.
Members of the Institute in practice who are otherwise eligible may practice as advocates subject to the permission
of the Bar Council but in such case, they should not use designation 'Company Secretary' in respect of the matters
involving the practice as an advocate. In respect of other matters they should use the designation 'Company
Secretary' but they should not use the designation 'Company Secretary' and 'advocate' simultaneously.
Since Mr. B has printed his visiting card where he mentioned his designation as Company Secretary and Advocate
which is prohibited under the above clause and hence Mr. B is guilty of professional misconduct.
Que. No. 34] M, a practicing Company Secretary sent a letter to another firm of Company Secretaries, claiming
himself to be a pioneer in liaisoning with Central Government Ministries and its allied Departments for getting
various Government clearances for which he had claimed to have expertise and had given a list of his existing
clients and details of his staff etc. Is M liable for professional misconduct?
In the present case, Mr. M, a practicing Company Secretary sent the letter to another firm of Company Secretaries,
claiming himself to be a pioneer in liaisoning with Central Government Ministries and its allied Departments for
getting various Government clearances for which he had claimed to have expertise and had also given a list of his
existing clients and details of his staff etc. which seems to be indirect methods to adventure their professional
practice with a view to gain publicity and thereby solicit clients or professional work.
Hence, Mr. M was guilty of professional misconduct as per Clause (6) of Part I of First Schedule to the Company
Que. No. 35] CS Tanishka N. Zad is a leading practitioner and consultant for Corporate & Allied Laws services and
practicing as Company Secretary. She resides in Satara and conducts private tutorship for CS Examination
conducted by ICSI. Every day, she invests nearly four hours in day on tutorship to CS Students. Is CS T. N. Zad
liable for professional misconduct` 1
guilty of professional misconduct, if he engages in any business or occupation other than the profession of Company
Secretary unless permitted by the Council so to engage.
465
However, the Council has granted general permission to the members to engage in certain specific occupation. In
respect of all other occupations specific permission of the Institute is necessary.
In this case, CS Tanishka N. Zad is engaged in the occupation of private tutorship which is covered under the general
permission. Further total tutorship time in day also does not exceed 4 hours in day. Hence, there is no professional
misconduct in terms of Clause (10) of Part I of First Schedule to the Company Secretaries Act, 1980.
The Council has permitted the members in practice to engage in the follmoing other business or occupation under
Regulation 168 of the Company Secretaries Regulations, 1982.
Permission granted generally:
1. Private tutorship.
2. Authorship of books and articles.
3. Holding of Life Insurance Agency Licence for the limited purpose of getting renewal commission.
.4. Holding of public elective offices such as MP, MLA, MLC.
5. Honorary office-bearership of charitable, educational or other non-commercial organizations.
6. Acting as Justice of Peace, Special Executive Magistrate and the like.
7. Teaching assignment under the Coaching Organization of the Institute or any other organization, so long
as the hours during which a member in practice is so engaged in teaching do not exceed average 4 hours in a day
irrespective of the manner in which such assignment is described or the remuneration is receivable (whether by
way of fixed amount or oh the basis of any time scale of pay or in any other manner) by the member in practice
for such assignment.
8. Valuation of papers, acting as a paper-setter, head examiner or a moderator, for any examination.
9. Editorship of professional journals.
10. Acting as ISO lead auditor.
11. Providing Risk Management Services for non-life insurance policies except marketing or procuring of
policies.
12. Acting as Recovery Consultant in the Banking Sector.
13. Becoming non-executive director/ promoter/ promoter director/subscriber to the Memorandum and
Articles of Association of a company the objects of which include areas, which fall within the scope of the
profession of Company Secretaries irrespective of whether or not the practicing member holds substantial
interest in that company.
14. Becoming non-executive director/promoter/promoter director/subscriber to the Memorandum and
Articles of Association of a company which is engaged in any other business or occupation provided that the
practicing member does not hold substantial interest in the company.
Permission to be granted specifically:
Members of the Institute in practice may engage in the following categories of business or occupation, after
obtaining the specific and prior approval of the Executive Committee of the Council in each case:
1. Interest or association in family business concerns provided that the member does not hold substantial
interest in such concerns.
2. Interest in agricultural and allied activities carried on with the help, if required, of hired labour.
3. Editorship of journals other than professional journals.
Que. No. 36] Mr. C, a Company Secretary while in employment, recommends a particular lawyer to his employer
company in respect of a case. The lawyer, out of the professional fee received from employer company paid a
particular sum as referral fee to Mr. C.
Give your comments with reference to provisions of the Company Secretaries Act, 1980 and state whether it
amounts to professional misconduct or not.
Ans.: As per Clause (2) of the Part II of the First Schedule, a Member of the Institute who is in service shall be
deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person accepts
466
or agrees to accept any part of fees, profits or gains from a lawyer, a Company Secretary or broker engaged by such
company, firm or person or agent or customer of such company, firm or person by way of commission or
gratification.
In the present case, Mr. C is an employee and by referring a lawyer to the company in respect of a ease, he receives
a particular sum as referral fee from the lawyer out of his professional fee.
Therefore, Mr. C is guilty of professional misconduct by virtue of Clause (2) of Part II of First Schedule to Company
Que. No. 37] Mr. G, while applying for a certificate of practice, did not fill in the columns which solicit information
about his engagement in other occupation or business, while he was indeed engaged in a business. Examining
the provisions of the Company Secretaries Act, 1980, state whether it amounts to Professional Misconduct.
Ans.: As per Clause (2) of Part III of the First Schedule, a member of the Institute, whether in practice or not, shall
be deemed to be guilty of professional misconduct, if he does not supply the information called for, or does not
comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline),
Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.
In the given case, Mr. G, a Company Secretary while applying for a certificate of practice, did not fill in the columns
which solicit information about his engagement in other occupation or business, while he was indeed engaged in
a business. Details of engagement in business need to be disclosed while applying for the certificate of practice as
it was the information called for in the application, by the Institute.
Thus, Mr. G will be held guilty for professional misconduct under the Clause (2) of Part III of First Schedule to the
Company Secretaries Act, 1980.
Que. No. 38] Mr. A, a practicing Company Secretary, failed to return the books and other documents of a client
despite many reminders from the client. The client had settled his entire fees dues also. Is Mr. A liable for
professional misconduct?
Ans.: As per Part IV of the First Schedule to the Company Secretaries Act, 1980, a member of the Institute, whether
in practice or not, shall be deemed to be guilty of other misconduct, if -
(1) He is held guilty by any Civil or Criminal Court for arvoffence which is punishable with imprisonment for a
A member may be found guilty of "Other Misconduct", as per Clause (2), under the aforesaid provisions rendering,
himself unfit to be member if he retains the books and other documents of the client and fails to return these to
the client on request without a reasonable cause.
In the given case, Mr. A failed to return the books and other documents of his client without any reasonable cause,
therefore, he would be guilty of other misconduct under the aforesaid provisions.
Que. No. 39] Mr. R, a Company Secretary in practice approached Manager of a Nationalized Bank for a loan of `
25 lakhs. He has also informed the Manager that if the loan is sanctioned, he will prepare secretarial record and
Annual Return for the bank without charging any fees, as quid pro quo for the loan sanctioned. Is Mr. R liable for
Ans.: As per Part IV of the First Schedule to the Company Secretaries Act, 1980, a member of the Institute,
whether in practice or not, shall be deemed to be guilty of other misconduct, if -
(1) He is held guilty by any Civil or Criminal Court for an offence which is punishable with imprisonment for a
Accordingly, a Company Secretary is also expected to maintain the highest standards and integrity even in his
personal affairs and any deviation from these standards calls for disciplinary action.
467
In the present case, the action of Mr. R, a Company Secretary in practice offering free service in return to sanction
of loan brings disrepute to the profession of a Company Secretary. Hence, Mr. R will be held guilty of other
misconduct under Clause (2) of Part IV of the First Schedule to the Company Secretaries Act, 1980.
Que. No. 40] Mr. Z, a Company Secretary was invited by the Chamber of Commerce to present a paper in a
symposium on the issues facing Indian Textile Companies. During the course of his presentation he shared some
vital information of his client's business under the impression that it will help the Nation to compete with other
countries at the international level. Whether it constitutes professional misconduct?
Ans.: As per Clause (1) of the Part I of the Second Schedule, a Company Secretary in practice shall be deemed to
be guilty of professional misconduct, if he discloses information acquired in the course of his professional
engagemen t to any person other than his client so engaging him, without the consent of his client, or otherwise
than as required by any law for the time being in force.
The Code of Ethics further clarifies that such a duty continues even after completion of the assignment. The
Company Secretary may however, disclose the information, in case it is required as a part of performance of his
professional duties.
In the given case, Mr. Z, a Company Secretary, has disclosed vital information of his client's business without the
consent of the client under the impression that it will help the nation to compete with other countries at
;-
International level.
Thus, it is a professional misconduct covered by Clause (1) of Part I of Second Schedule to the Company Secretaries
Act, 1980.
Que. No. 41] Mr. E, a Practicing Company Secretary, was requested by one of his client to prepare a projection
for next five years and also a report on the same. Mr. 'E' after having prepared the same stated in his report 'The
sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts.
He also stated that he does not vouch for the accuracy of the forecasts. Give your comments with reference to
Company Secretaries Act, 1980 and Schedules there to.
be guilty of professional misconduct, if he permits his name or the name of his firm to be used in connection with
any report or statement contingent upon future transactions in a manner which may lead to the belief that he
vouches for the accuracy of the forecast.
In the instant case, Mr. E after having prepared the projections for next five years stated in his report, "the sources
of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts." He also
stated that he does not vouch for the accuracy of the forecasts. Therefore there is no violation and it does amounts
to professional misconduct under Clause (3) of Part I of Second Schedule to the Company Secretaries Act, 1980.
Que. No. 42] A firm of Company Secretaries was appointed by a company to evaluate report in which one of the
partners of the firm of company secretaries was a non-executive director of the company. Whether it constitutes
be guilty of professional misconduct, if he expresses his opinion on any report or statement given to any business
or enterprise in which he, his firm, or a partner in his firm has a substantial interest.
As per facts given in case, the firm of company secretaries is appointed to evaluate the report and not for
expressing any opinion and hence it does not constitute professional misconduct under Clause (4) of Part I of
Second Schedule to the Company Secretaries Act, 1980.
Que. No. 43] Mr. D, a practicing Company Secretary, did not complete his work relating to the audit of a company
and had not submitted his audit report in due time to enable the company to comply with the statutory
requirements. Is Mr. D liable for professional misconduct?
be guilty of professional misconduct, if he Does not exercise due diligence, or is grossly negligent in the conduct of
his professional duties.
468
It is a vital clause which unusually gets attracted whenever it is necessary to judge whether the accountant has
honestly and reasonably discharged his duties. The expression negligence covers a wide field and extends from the
frontiers of fraud to collateral minor negligence.
Where a Company Secretary had not completed his work relating to the audit of the accounts a company and had
not submitted his audit report in due time to enable the company to comply with the statutory requirement in this
regard. He was guilty of professional misconduct under Clause (7). *
Since Mr. D has not completed his audit work in time and consequently could not submit audit report in due time
and consequently, company could not comply with the statutory requirements, therefore, Mr. D is guilty of
professional misconduct under Clause (7) of Part I of the Second Schedule to the Company Secretaries Act, 1980.
Que. No. 44] M/s. ABC, a firm of Company Secretaries received ` 2 lakhs in March, 2019 from a XYZ Ltd. to pay
the filing fee to the ROC. However, the firm has used that money for its own purpose and later on adjusted the
same with the outstanding fee payable. Whether it constitutes professional misconduct?
be guilty of professional misconduct, if he fails to keep moneys of his client other than fees or remuneration or
money meant to be expended in a separate banking account or to use such moneys for purposes for which they are
intended within a reasonable time.
In the given case, M/s. ABC received the money in March, 2019 to pay the filing fee to the ROC; hence it should be
deposited in a separate bank account.
Since in this case M/s. ABC have failed to keep the sum of ` 2 lakhs received on behalf of their client in a separate
Bank Account, it amounts to professional misconduct under Clause (10) of Part I of Second Schedule to the
Company Secretaries Act, 1980.
Que. No. 45] Discuss briefly procedure for making complaints and enquiries relating to professional or other
misconduct of members of ICSI as provided under the Company Secretaries Regulations, 1982.
Ans.: Complaints and enquiries relating to professional or other misconduct of members [Regulation 15 of the
Company Secretaries Regulations, 1982]:
(1) Any complaint received against a member u/s 21 shall be investigated, and any enquiry relating to
misconduct of such member shall be held by the Disciplinary Committee. However, If the subject matter of a
complaint is, in the opinion of the President, substantially the same as or has been covered in any previous
information of complaint received, the Secretary may file the complaint without any further action or inform the
complainant, accordingly, as the case may be.
(2) A complaint shall be made to the Council in the appropriate from, duly verified as required therein.
(3) Every complaint shall contain the following particulars, namely -
(a) The acts or omissions which, if proved, would render the member complained against guilty of any
professional or other misconduct.
(b) The oral and/or documentary evidence relied upon in support of the allegations made in the complaint.
(4) Every complaint other than a complaint made by or on behalf of the Central or any State Government, shall
be accompanied by a deposit of ` 50 which shall be forfeited, if the Council, after considering the complaint, comes
to the conclusion that no prima facie case is made out and, moreover, that the complaint is either frivolous or has
been made with mala fide intention.
(5) The Secretary shall return a complaint which is not in the proper form or which does not contain the aforesaid
particulars or which is not accompanied by the deposit of ` 50 to the complainant for resubmission after compliance
with such requirements and within such time as the Secretary may specify.
(6) Ordinarily within 60 days of the receipt of a complaint u/s 21 the Secretary shall -
(a) If it is against an individual member send particulars of the acts of omissions alleged or a copy of the
complaint, as the case may be, to such member at his address as entered in the Register;
(b) If it is against a firm, send particulars of the acts or omissions or a copy of the complaint, as the case may be,
to the firm concerned at the address of the head office of the firm as entered in the Register of offices and firms
469
which a notice calling upon the firm of disclose the names of the members concerned and to send particulars of
acts or omissions or a copy of the complaint, as the case may be to members. Explanation: A notice shall be deemed
to be a notice to all the members who are partner or employees of that firm.
(7) A member (respondent) who has been intimated of the complaint made against him shall, within 14 days of
i§sue of such intimation or within such further time as the Secretary may allow, forward to the Secretary a written
statement in his defence verified in the same manner as the complaint.
(8) On a perusal of the complaint and written statement in any, the Secretary may call for such additional
particulars or documents connected there with either from the complainant or the respondent, as he may consider
necessary or as may be directed by the President, for perusal of the Council.
(9) Where on a perusal of the complaint, the written statement, if any, of the respondent and other relevant
documents and papers, the Council is prima facie of opinion that any member has been guilty of professional or
other misconduct, the Council shall cause an enquiry to be made in the matter by the Disciplinary Committee and
where the Council is prima facie of opinion that there is no case against the respondent, the case shall be dismissed
and the complainant, if any, and the respondent shall be informed accordingly.
Provided that the Council may, if deemed necessary, call for any additional particulars or documents connected
therewith from the complainant, if any, or the respondent.
(10) Every notice issued by the Secretary or by the Disciplinary Committee shall be sent to the member or the
firm concerned by registered post with acknowledgement due.
If the notice is returned un-served with an endorsement to the effect that the addressee had refused to accept the
notice, it shall be deemed to have been served.
If the notice is returned with an endorsement indicating that the addressee cannot be found at the address given,
the Secretary shall ask the complainant to supply to him the correct address to the member or firm concerned and
send a fresh notice to the member or firm at the address so supplied.
(11) The provision relating to a notice shall apply mutatis mutandis to a letter.
Que. No. 46] Discuss briefly procedure in enquiry before the Disciplinary committee as provided under the
Company Secretaries Regulations, 1982.
Ans.: Procedure in enquiry before the Disciplinary committee [Regulation 18 of the Company Secretaries
Regulations, 1982]: Applicable to the complaint or information pending before the Council or any inquiry initiated
by the Disciplinary Committee or any reference or appeal made to a High Court prior to 17.11.2006.
(1) It shall be the duty of the Secretary to place before the Disciplinary Committee all facts brought to his
knowledge which are relevant for the purpose of any enquiry by the Disciplinary Committee.
(2) The Disciplinary Committee shall have the power to regulate its procedure in such manner as it considers
necessary and during the course of enquiry, may examine witnesses on oath and receive evidences on affidavits
and any other oral or documentary evidence.
(3) The Disciplinary Committee shall give the complainant and respondent a notice of the meeting at which the
case shall be considered by the Committee.
(4) Such complainant and respondent may be allowed to defend themselves before the Disciplinary Committee
either in person or through a legal practitioner or any other member of the Institute.
(5) Where, in the course of a disciplinary enquiry, a change occurs in the composition of the Disciplinary
Committee, unless any of the parties to such enquiry makes a demand within 15 days of receipt of a notice of a
meeting of such Disciplinary Committee, that the enquiry be made de novo report of the Disciplinary Committee
shall be called in question on the ground that any member of the Disciplinary Committee did not possess sufficient
knowledge of the facts relating to such inquiry.
(6) The Disciplinary Committee shall after investigation report the result of its enquiry to the Council for its
consideration
Que. No. 47] Discuss briefly procedure in enquiry the Council as provided under the Company Secretaries
Regulations, 1982. * 1
470
Ans.: Procedure in a hearing before the Council [Regulation 18 of the Company Secretaries Regulations, 1982]:
(1) The Council shall consider the report of the Disciplinary Committee and if in its opinion, a further enquiry is
necessary, may cause such furtheV enquiry to be made and a further report submitted by the Disciplinary
Committee.
(2) After considering such report or further report of the Disciplinary Committee, as the case may be, where the
Council finds that the respondent is not guilty of any professional or other misconduct, it shall record its findings
accordingly and direct that the proceedings shall be filed or the complaint shall be dismissed as the case may be.
(3) After considering such report or further report of the Disciplinary Committee, as the case may be, where the
Council finds that the respondent has been guilty of a professional or other misconduct, it shall record its findings
accordingly and shall proceed in the manner as laid down in the succeeding sub-regulations.
(4) Where the finding is that the member of the Institute has been guilty of a professional or other misconduct,
the Council shall afford to the member an opportunity of being heard before orders are passed against him in the
case. The Council after hearing the respondent, if he appears in person or after considering the representations, if
any, made by him, pass such orders as it may think fit, as provided u/ s 21(4).
(5) The orders passed by the Council shall be communicated to the complainant and the respondent.
Que. No. 48] State the Guideline issued by ICSI for advertisement through website.
Ans.: In case of advertisement through website:
(a) A Company Secretary or a firm of Company Secretaries may display photograph of the Company Secretary
or partners of the firm of Company Secretaries in Practice.
(b) While designing or hosting the particulars on the website, certain keywords should be provided so as to
enable the search engine to locate the website and these keywords will not be visible or displayed on the website.
Any one of the following key words may be used for this purpose. Company Secretary/ Company Secretary in
Whole-time Practice/ Company Secretary in Practice/Practicing Company Secretary/Indian Chartered
Secretary/Indian Certified Corporate Secretary/Indian CS/Indian Company Secretary/Corporate Advisor/Company
Law Consultant/Secretarial Auditor/Secretarial Consultant/ Indian Certified Public Secretary/CS/
ACS/FCS/PCS/CSP. However, the keywords shall not be materially different from the designations used for a
Company Secretary.
(c) The website may provide a hyperlink to the website of ICSI, its Regional Councils and Chapters and other
regulatory bodies of the Government, after obtaining necessary permission from the concerned body.
(d) A Company Secretary in Practice may provide online advice to their clients or other members/ firms of
Company Secretaries who specifically request for the same.
(e) A Company Secretary or a firm of Company Secretaries may disclose the fact that he/she or their firm has
been Peer Reviewed. Any such disclosure shall clearly state the period for which the Peer Review has been
conducted and in case the member has more than one office or place of practice, then it shall be mentioned that
the Peer Review has been done for which branch office.
471
CHAPTER
30
SECRETARIAL STANDARDS
DOARD
Ans.: Compliance with Secretarial Standard relating to general and board meeting [Section 118 (10)]: Every
company shall observe secretarial standards with respect to general and Board meetings specified by the ICSI
constituted u/s 3 of the Company Secretaries Act, 1980, and approved as such by the Central Government.
In the context of this provision, observance of Secretarial Standard issued by the ICSI assumes special relevance
and companies will have to ensure that there is compliance with these standards on their part.
ICSI has so far issued the following Standards:
♦ Secretarial Standards on Meetings of Board of Directors [SS-1]
♦ Secretarial Standards on General Meetings [SS-2]
♦ Secretarial Standard on Dividend [SS-3] (adoption of the same is voluntary)
Que. No. 2] Write a short note on: Secretarial Standards
Ans.: The Institute of Company Secretaries of India (ICSI), recognizing the need for integration, harmonization and
standardization of diverse secretarial practices prevalent in the corporate sector, has constituted the Secretarial
Standards Board (SSB) with the objective of formulating Secretarial Standards.
SSB was constituted in the year 2000. The formulation of SSB is a unique and pioneering step by the Institute of
Company Secretaries of India (ICSI) since there was no such Board or body throughout the world.
The purpose of constituting this Board was for long-term benefits for the growth and enhanced visibility of the
profession and setting up international benchmarks.
The SSB comprises of representatives from major industry associations viz. The Federation of Indian Chambers of
Commerce and Industry (FICCI), Confederation of Indian Industry (CII), The Associated Chambers of Commerce &
Industry of India (ASSOCHAM), PHD Chamber of Commerce and Industry, representatives of regulatory authorities,
such as the Ministry of Corporate Affairs, SEBI, RBI, BSE, NSE and the sister professional bodies viz. the ICAI and the
Institute of Cost Accountants of India and eminent members of the ICSI in employment and in practice.
The scope of SSB is to identify the areas in which Secretarial Standards need to be issued by the Council of ICSI and
to formulate such Standards. SSB also clarify issues, if any, arising out of such Standards and issue guidance notes
for the benefit of members of ICSI, corporates and other stakeholders.
Que. No. 3] Write a short note on: Functions of the Secretarial Standards Board
Ans.: The main functions of SSB are as follows:
♦ Formulating Secretarial Standards.
♦ Clarifying issues arising out of the Secretarial Standards.
♦ Issuing Guidance Notes.
♦ Reviewing and updating the Secretarial Standards/Guidance Notes at periodic intervals.
Que. No. 4] Write a short note on: Need of Secretarial Standards
Ans.: Companies follow diverse secretarial practices and, therefore, there is a need to integrate, harmonies and
standardize such practices so as to promote uniformity and consistency.
SSB formulates Secretarial Standards taking into consideration the applicable laws, business environment, practical
applicability and the best secretarial practices prevalent.
Secretarial Standards are developed in a transparent manner after extensive deliberations, analysis, research and
after considering the views of corporates, regulators and the public at large.
472
Que. No. 5] Write a short note on: Scope of Secretarial Standards
Ans.: Secretarial Standards do not seek to substitute or supplant any existing laws or rules and regulations framed
thereunder but, in fact, seek to supplement such laws, rules and regulations.
Secretarial Standards are issued in conformity with the provisions of the applicable laws. However, if, due to
subsequent changes in the law, a particular Standard or any part thereof becomes inconsistent with such law, the
provisions of the said law shall prevail.
Que. No. 6] Write a short note on: Process of making Secretarial Standards
Ans.: The following procedure is adopted for formulating and issuing Secretarial Standards:
(1) SSB, in consultation with the Council, determine the areas in which Secretarial Standards need to be
formulated and the priority thereof.
(2) In the preparation of Secretarial Standards, SSB may constitute Working Groups to formulate preliminary
drafts of the proposed Standards.
(3) The preliminary draft of the Secretarial Standard prepared by the Working Group shall be circulated amongst
the members of SSB for discussion and shall be modified appropriately, if so required.
(4) The preliminary draft will then be circulated to the members of the Central Council, as w ell as to Regional
Councils/ Chapters of ICSI, various professional bodies, Industry Association/ Chambers of Commerce, regulatory
authorities such as the Ministry of Corporate Affairs, the SEBI, RBI, Department of Public Enterprises and to such
other bodies/organizations as may be decided by SSB, for ascertaining their views, specifying a time-frame within
which such views, comments and suggestions are to be received.
(5) On the basis of suggestions received on the preliminary draft, an Exposure Draft of proposed Secretarial
Standard will be prepared and published in the "Chartered Secretary", the journal of ICSI, and placed on the
Website of ICSI for inviting suggestions/ comments from public at large. The exposure draft will also circulated to:
- All Council Members
- Regional Council/ Chapters
- Professional Bodies (ICAI/ICWAI)
- Chambers of Commerce/Industry Associations
- MCA/SEBI/RBI and such other bodies/organizations as may be decided by SSB
- All members of the Institute through bulk e-mail/website link etc.
(6) After taking into consideration the comments received, the draft of the proposed Secretarial Standard will
be finalized by SSB and submitted to the Council of ICSI.
(7) The Council will consider the final draft of the proposed Secretarial Standard and finalize the same in
consultation with SSB. The Secretarial Standard on the relevant subject will then be issued under the authority of
the Council.
473
AppendIx
SECRETARIAL STANDARDS
SECRETARIAL STANDARD - 1: MEETINGS OF THE BOARD OF DIRECTORS
Introduction: This Standard prescribes a set of principles for convening and conducting Meetings of the Board of
Directors and matters related thereto.
Scope: This Standard is applicable to the Meetings of Board of Directors of all companies incorporated under the
Act except One Person Company (OPC) in which there is only one Director on its Board and a company licensed
under Section 8 of the Companies Act, 2013 or corresponding provisions of any previous enactment thereof.
However, Section 8 companies need to comply with the applicable provisions of the Act relating to Board Meetings.
The principles enunciated in this Standard for Meetings of the Board of Directors are also applicable to Meetings
of Committee(s) of the Board, unless otherwise stated herein or stipulated by any other applicable Guidelines,
Rules or Regulations.
This Standard is in conformity with the provisions of the Act. However, if, due to subsequent changes in the Act, a
particular Standard or any part thereof becomes inconsistent with the Act, the provisions of the Act shall prevail.
1. Convening a Meeting
1.1 Authority
1.1.1 Any Director of a company may, at any time, summon a Meeting of the Board, and the Company Secretary
or where there is no Company Secretary, any person authorized by the Board in this behalf, on the requisition of a
Director, shall convene a Meeting of the Board, in consultation with the Chairman or in his absence, the Managing
Director or in his absence, the Whole-time Director, where there is any, unless otherwise provided in the Articles.
1.1.2 The Chairman may, unless dissented to or objected by the majority of Directors present at a Meeting at
which a Quorum is present, adjourn the Meeting for any reason, at any stage of the Meeting.
1.2 Day, Time, Place, Mode and Serial Number of Meeting
1.2.1 Every Meeting shall have a serial number.
1.2.2 A Meeting may be convened at any time and place, on any day.
Notice of the Meeting shall clearly mention a venue, whether registered office or otherwise, to be the venue of
the Meeting and all the recordings of the proceedings of the Meeting, if conducted through Electronic Mode, shall
be deemed to be made at such place.
1.2.3 Any Director may participate through Electronic Mode in a Meeting unless the Act or any other law
specifically prohibits such participation through Electronic Mode in respect of any item of business.
Directors shall not participate through Electronic Mode in the discussion on certain restricted items. Such restricted
items of business include approval of the annual financial statement, Board's report, prospectus and matters
relating to amalgamation, merger, demerger, acquisition and takeover. Similarly, participation in the discussion
through Electronic Mode shall not be allowed in Meetings of the Audit Committee for consideration of annual
financial statement including consolidated financial statement, if any, to be approved by the Board.
1.3 Notice
1.3.1 Notice in writing of every Meeting shall be given to every Director by hand or by speed post or by registered
post or by facsimile or by e-mail or by any other electronic means.
The Notice shall be sent to the postal address or e-mail address, registered by the Director with the company or in
the absence of such details or any change thereto, any of such addresses appearing in the Director Identification
Number (DIN) registration of the Director.
Where a Director specifies a particular means of delivery of Notice, the Notice shall be given to him by such means.
However, in case of a Meeting conducted at a shorter Notice, the company may choose an expedient mode of
sending Notice.
Proof of sending Notice and its delivery shall be maintained by the company for such period as decided by the
Board, which shall not be less than three years from the date of the Meeting.
474
1.3.2 Notice shall be issued by the Company Secretary or where there is no Company Secretary, any Director or
any other person authorized by the Board for the purpose.
1.3.3 The Notice shall specify the serial number, day, date, time and full address of the venue of the Meeting.
1.3.4 The Notice shall inform the Directors about the option available to them to participate through Electronic
Mode and provide them all the necessary information.
If a Director intends to participate through Electronic Mode, he shall give sufficient prior intimation to the Chairman
or the Company Secretary to enable them to make suitable arrangements in this behalf.
The Director may intimate his intention of participation through Electronic Mode at the beginning of the Calendar
Year also, which shall be valid for such Calendar Year.
The Notice shall also contain the contact number or e-mail address of the Chairman or the Company Secretary or
any other person authorized by the Board, to whom the Director shall confirm in this regard. In the absence of an
advance communication or confirmation from the Director as above, it shall be assumed that he will attend the
Meeting physically.
1.3.5 The Notice of a Meeting shall be given even if Meetings are held on pre-determined dates or at pre-
determined intervals.
1.3.6 Notice convening a Meeting shall be given at least seven days before the date of the Meeting, unless the
Articles prescribe a longer period.
In case the company sends the Notice by speed post or by registered post, an additional two days shall be added
for the service of Notice.
Notice of an adjourned Meeting shall be given to all Directors including those who did not attend the Meeting on
the originally convened date and unless the date of adjourned Meeting is decided at the Meeting, Notice thereof
shall also be given not less than seven days before the Meeting.
1.3.7 The Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given
to the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer period.
Agenda and Notes on Agenda shall be sent to all Directors by hand or by speed post or by registered post or by e-
mail or by any other electronic means.
These shall be sent to the postal address or e-mail address or any other electronic address registered by the
Director with the company or in the absence of such details or any change thereto, to any of such addresses
appearing in the Director Identification Number (DIN) registration of the Directors.
In case the company sends the Agenda and Notes on Agenda by speed post or by registered post, an additional
two days shall be added for the service of Agenda and Notes on Agenda.
Where a Director specifies a particular means of delivery of Agenda and Notes on Agenda, these papers shall be
sent to him by such means. However, in case of a Meeting conducted at a shorter Notice, the company may choose
an expedient mode of sending Agenda and Notes on Agenda.
Proof of sending Agenda and Notes on Agenda and their delivery shall be maintained by the company for such
period as decided by the Board, which shall not be less than three years from the date of the Meeting.
The Notice, Agenda and Notes on Agenda shall be sent to the Original Director also at the address registered with
the company, even if these have been sent to the Alternate Director. However, the mode of sending Notice, Agenda
and Notes on Agenda to the original director shall be decided by the company.
Notes on items of business which are in the nature of Unpublished Price Sensitive Information may be given at a
shorter period of time than stated above, with the consent of a majority of the Directors, which shall include at
least one Independent Director, if any.
For this purpose,
"Unpublished Price Sensitive Information" means any information, relating to a company or its securities, directly
or indirectly, that is not generally available, which upon becoming generally available, is likely to materially affect
the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:
-
475
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions;
(v) changes in key managerial personnel; and
(vi) material events in accordance with the listing agreement*.
General consent for giving Notes on items of Agenda which are in the nature of Unpublished Price Sensitive
Information at a shorter Notice may be taken in the first Meeting of the Board held in each financial year and also
whenever there is any change in Directors.
Where general consent as above has not been taken, the requisite consent shall be taken before the concerned
items are taken up for consideration at the Meeting. The fact of consent having been taken shall be recorded in
the Minutes.
Supplementary Notes on any of the Agenda Items may be circulated at or prior to the Meeting but shall be taken
up with the permission of the Chairman and with the consent of a majority of the Directors present in the Meeting,
which shall include at least one Independent Director, if any.
1.3.8 Each item of business requiring approval at the Meeting shall be supported by a note setting out the details
of the proposal, relevant material facts that enable the Directors to understand the meaning, scope and
implications of the proposal and the nature of concern or interest, if any, of any Director in the proposal, which
the Director had earlier disclosed.
Where approval by means of a Resolution is required, the draft of such Resolution shall be either set out in the
note or placed at the Meeting. However, any other decision taken at the Meeting may also be recorded in the
Minutes in the form of Resolution.
The items of business that are required by the Act or any other applicable law to be considered at a Meeting of the
Board shall be placed before the Board at its Meeting. An illustrative list of such items is given at Annexure 'A'.
There are certain items which shall be placed before the Board at its first Meeting. An illustrative list thereof is
given at Annexure 'B'.
1.3.9 Each item of business to be taken up at the Meeting shall be serially numbered.
Numbering shall be in a manner which would enable ease of reference or cross-reference.
1.3.10Any item not included in the Agenda may be taken up for consideration with the permission of the Chairman
and with the consent of a majority of the Directors present in the Meeting.
The decision taken in respect of any other item shall be final only on its ratification by a majority of the Directors
of the company, unless such item was approved at the Meeting itself by a majority of Directors of the company.
1.3.11To transact urgent business, the Notice, Agenda and Notes on Agenda may be given at shorter period of time
than stated above, if at least one Independent Director, if any, shall be present at such Meeting.
If no Independent Director is present, decisions taken at such a Meeting shall be circulated to all the Directors and
shall be final only on ratification thereof by at least one Independent Director, if any.
In case the company does not have an Independent Director, the decisions shall be final only on ratification thereof
by a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a
majority of Directors of the company.
The fact that the Meeting is being held at a shorter Notice shall be stated in the Notice.
2. Frequency of Meetings
2.1 Meetings of the Board
The company shall hold at least four Meetings of its Board in each Calendar Year with a maximum interval of one
hundred and twenty days between any two consecutive Meetings.
476
The company shall hold first Meeting of its Board within thirty days of the date of incorporation. It shall be sufficient
if subsequent Meetings are held with a maximum interval of one hundred and twenty days between any two
consecutive Meetings.
Further, it shall be sufficient if a One Person Company, Small Company or Dormant Company holds one Meeting
of the Board in each half of a Calendar Year and the gap between the two Meetings of the Board is not less than
ninety days.
An adjourned Meeting being a continuation of the original Meeting, the interval period in such a case, shall be
counted from the date of the original Meeting.
2.2 Meetings of Committees
Committees shall meet as often as necessary subject to the minimum number and frequency prescribed by any
law or any authority or as stipulated by the Board.
2.3 Meeting of Independent Directors
Where a company is required to appoint Independent Directors under the Act, such Independent Directors shall
meet at least once in a Calendar Year.
The Meeting shall be held to review the performance of Non-Independent Directors and the Board as a whole; to
review the performance of the Chairman and to assess the quality, quantity and timeliness of flow of information
between the company management and the Board and its members that is necessary for the Board to effectively
and reasonably perform their duties.
The Company Secretary, wherever appointed, shall facilitate convening and holding of such Meeting, if so desired
by the Independent Directors.
3. Quorum
3.1 Quorum shall be present throughout the Meeting.
Quorum shall be present not only at the time of commencement of the Meeting but also while transacting
business.
3.2 A Director shall neither be reckoned for Quorum nor shall be entitled to participate in respect of an item of
business in which he is interested. However, in case of a private company, a Director shall be entitled to participate
in respect of such item after disclosure of his interest.
For this purpose, a Director shall be treated as interested in a contract or arrangement entered into or proposed
to be entered into by the company:
(a) with any body corporate, if such Director, along with other Directors holds more than two per cent of the
paid-up share capital of that body corporate, or he is a promoter, or manager or chief executive officer of that
body corporate; or
(b) with a firm or other entity, if such Director is a partner, owner or Member, as the case may be, of that firm
or other entity.
If the item of business is a related party transaction, then he shall not be present at the Meeting, whether physically
or through Electronic Mode, during discussions and voting on such item.
3.3 Directors participating through Electronic Mode in a Meeting shall be counted for the purpose of Quorum,
unless they are to be excluded for any items of business under the provisions of the Act or any other law.
3.4.1 The Quorum for a Meeting of the Board shall be one-third of the total strength of the Board, or two Directors,
whichever is higher.
Any fraction contained in the above one-third shall be rounded off to the next one.
Where the Quorum requirement provided in the Articles is higher than one third of the total strength, the company
shall conform to such higher requirement.
Total strength for this purpose, shall not include Directors whose places are vacant.
477
If the number of Interested Directors exceeds or is equal to two-thirds of the total strength, the remaining Directors
present at the Meeting, being not less than two, shall be the Quorum during such item.
If a Meeting of the Board could not be held for want of Quorum, then, unless otherwise provided in the Articles,
the Meeting shall automatically stand adjourned to the same day in the next week, at the same time and place or,
if that day is a National Holiday, to the next succeeding day which is not a National Holiday, at the same time and
place.
If there is no Quorum at the adjourned Meeting also, the Meeting shall stand cancelled.
3.4.2 Where the number of Directors is reduced below the minimum fixed by the Articles, no business shall be
transacted unless the number is first made up by the remaining Director(s) or through a General Meeting.
If the number of Directors is reduced below the Quorum fixed by the Act for a Meeting of the Board, the continuing
Directors may act for the purpose of increasing the number of Directors to that fixed for the Quorum or of
summoning a general meeting of the company, and for no other purpose.
Unless otherwise stipulated in the Act or the Articles or under any other law, the Quorum for Meetings of any
Committee constituted by the Board shall be as specified by the Board. If no such Quorum is specified, the presence
of all the members of any such Committee is necessary to form the Quorum.
Regulations framed under any other law may contain provisions for the Quorum of a Committee and such
stipulations shall be followed.
4. Attendance at Meetings
4.1 Attendance register
4.1.1 Every company shall maintain attendance register for the Meetings of the Board and Meetings of the
Committee. The pages of the attendance register shall be serially numbered. If an attendance register is maintained
in loose-leaf form, it shall be bound periodically, at least once in every three years.
4.1.2 The attendance register shall contain the following particulars:
Serial number and date of the Meeting; in case of a Committee Meeting name of the Committee; place of the
Meeting; time of the Meeting; names and signatures of the Directors, the Company Secretary and also of persons
attending the Meeting by invitation and their mode of presence, if participating through Electronic Mode.
4.1.3 The attendance register shall be deemed to have been signed by the Directors participating through
Electronic Mode, if their attendance is recorded in the attendance register and authenticated by the Company
Secretary or where there is no Company Secretary, by the Chairman or by any other Director present at the
Meeting, if so authorized by the Chairman and the fact of such participation is also recorded in the Minutes.
In case of Directors participating through Electronic Mode, the Chairman shall confirm the attendance of such
Directors. For this purpose, at the commencement of the Meeting, the Chairman shall take a roll call. The Chairman
or Company Secretary shall request the Director participating through Electronic Mode to state his full name and
location from where he is participating and shall record the same in the Minutes. The proceedings of such Meetings
shall be recorded through any electronic recording mechanism and the details of the venue, date and time shall be
mentioned.
4.1.4 The attendance register shall be maintained at the Registered Office of the company or such other place as
may be approved by the Board.
The attendance register may be taken to any place where a Meeting of the Board or Committee is held.
4.1.5 The attendance register is open for inspection by the Directors.
Even after a person ceases to be a Director, he shall be entitled to inspect the attendance register of the Meetings
held during the period of his Directorship.
The Company Secretary in Practice appointed by the company or the Secretarial Auditor or the Statutory Auditor
of the company can also inspect the attendance register as he may consider necessary for the performance of his
duties.
A Member of the company is not entitled to inspect the attendance register.
478
4.1.6 The attendance register shall be preserved for a period of at least eight financial years from the date of last
entry made therein and may be destroyed thereafter with the approval of the Board.
4.1.7 The attendance register shall be in the custody of the Company Secretary.
Where there is no Company Secretary, the attendance register shall be in the custody of any other person
authorized by the Board for this purpose.
4.2 Leave of absence shall be granted to a Director only when a request for such leave has been communicated
to the Company Secretary or to the Chairman or to any other person authorized by the Board to issue Notice of
the Meeting.
The office of a Director shall become vacant in case the Director absents himself from all the Meetings of the Board
held during a period of twelve months with or without seeking leave of absence of the Board.
5. Chairman
5.1.1 The Chairman of the company shall be the Chairman of the Board. If the company does not have a Chairman,
the Directors may elect one of themselves to be the Chairman of the Board.
5.1.2 The Chairman of the Board shall conduct the Meetings of the Board. If no such Chairman is elected or if the
Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of themselves to
chair and conduct the Meeting, unless otherwise provided in the Articles.
It would be the duty of the Chairman to check, with the assistance of Company Secretary, that the Meeting is duly
convened and constituted in accordance with the Act or any other applicable guidelines, Rules and Regulations
before proceeding to transact business. The Chairman shall then conduct the Meeting.
The Chairman shall encourage deliberations and debate and assess the sense of the Meeting.
If the Chairman is interested in an item of business, he shall entrust the conduct of the proceedings in respect of
such item to any Non-Interested Director with the consent of the majority of Directors present and resume the
chair after that item of business has been transacted. However, in case of a private company, the Chairman may
continue to chair and participate in the Meeting after disclosure of his interest.
If the item of business is a related party transaction, the Chairman shall not be present at the Meeting, whether
physically or through Electronic Mode, during discussions and voting on such item.
In case some of the Directors participate through Electronic Mode, the Chairman and the Company Secretary shall
take due and reasonable care to safeguard the integrity of the Meeting by ensuring sufficient security and
identification procedures to record proceedings and safe keeping of the recordings. No person other than the
Director concerned shall be allowed access to the proceedings of the Meeting where Director(s) participate
through Electronic Mode, except a Director who is differently abled, provided such Director requests the Board to
allow a person to accompany him and ensures that such person maintains confidentiality of the matters discussed
at the Meeting.
The Chairman shall ensure that the required Quorum is present throughout the Meeting and at the end of
discussion on each agenda item the Chairman shall announce the summary of the decision taken thereon.
Unless otherwise provided in the Articles, in case of an equality of votes, the Chairman shall have a second or
casting vote.
A member of the Committee appointed by the Board or elected by the Committee as Chairman of the Committee,
in accordance with the Act or any other law or the Articles, shall conduct the Meetings of the Committee. If no
Chairman has been so elected or if the elected Chairman is unable to attend the Meeting, the Committee shall
elect one of its members present to chair and conduct the Meeting of the Committee, unless otherwise provided
in the Articles.
6. Passing of Resolution by Circulation
479
The Act requires certain business to be approved only at Meetings of the Board. However, other business that
requires urgent decisions can be approved by means of Resolutions passed by circulation. Resolutions passed by
circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.
6.1 Authority
6.1.1 The Chairman of the Board or in his absence, the Managing Director or in their absence, any Director other
than an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors, whether the
approval of the Board for a particular business shall be obtained by means of a Resolution by circulation.
An illustrative list of items which shall be placed before the Board at its Meeting and shall not be passed by
circulation is given at Annexure 'A'.
6.1.2 Where not less than one-third of the total number of Directors for the time being require the Resolution
under circulation to be decided at a Meeting, the Chairman shall put the Resolution for consideration at a Meeting
of the Board.
Interested Directors shall not be excluded fot the purpose of determining the above one-third of the total number
of Directors.
6.2 Procedure
6.2.1 A Resolution proposed to be passed by circulation shall be sent in draft, together with the necessary papers,
to all the Directors including Interested Directors on the same day.
6.2.2 The draft of the Resolution to be passed and the necessary papers shall be circulated amongst the Directors
by hand, or by speed post or by registered post or by courier, or by e-mail or by any other recognized electronic
means.
The draft of the Resolution and the necessary papers shall be sent to the postal address or e-mail address registered
by the Director with the company or in the absence of such details or any change thereto, any of the addresses
appearing in the Director Identification Number (DIN) registration of the Director.
Proof of sending and delivery of the draft of the Resolution and the necessary papers shall be maintained by the
company for such period as decided by the Board, which shall not be less than three years from the date of the
Meeting.
6.2.3 Each business proposed to be passed by way of Resolution by circulation shall be explained by a note setting
out the details of the proposal, relevant material facts that enable the Directors to understand the meaning, scope
and implications of the proposal, the nature of concern or interest, if any, of any Director in the proposal, which
the Director had earlier disclosed and the draft of the Resolution proposed.
The note shall also indicate how a Director shall signify assent or dissent to the Resolution proposed and the date
by which the Director shall respond.
Each Resolution shall be separately explained.
The decision of the Directors shall be sought for each Resolution separately.
Not more than seven days from the date of circulation of the draft of the Resolution shall be given to the Directors
to respond and the last date shall be computed accordingly.
An additional two days shall be added for the service of the draft Resolution, in case the same has been sent by
the company by speed post or by registered post or by courier.
6.3 Approval
6.3.1 The Resolution is passed when it is approved by a majority of the Directors entitled to vote on the Resolution,
unless not less than one-third of the total number of Directors for the time being require the Resolution under
circulation to be decided at a Meeting.
Every such Resolution shall carry a serial number..
If any special majority or the affirmative vote of any particular Director or Directors is specified in the Articles, the
Resolution shall be passed only with the assent of such special majority or such affirmative vote.
An Interested Director shall not be entitled to vote. For this purpose, a Director shall be treated as interested in a
contract or arrangement entered or proposed to be entered into by the company:
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(a) with any body corporate, if such Director, along with other Directors holds more than two per cent of the
paid-up share capital of that body corporate, or he is a promoter, or manager or chief executive officer of that
body corporate; or
(b) with a firm or other entity, if such Director is a partner, owner or Member, as the case may be, of that firm
or other entity.
6.3.2 The Resolution, if passed, shall be deemed to have been passed on the earlier of;
(a) the last date specified for signifying assent or dissent by the Directors, or
(b) the date on which assent has been received from the required majority, provided that on that date the
number of Directors, who have not yet responded on the resolution under circulation, along with the Directors
who have expressed their desire that the resolution under circulation be decided at a Meeting of the Board, shall
not be one third or more of the total number of Directors; and shall be effective from that date, if no other effective
date is specified in such Resolution.
Directors shall signify their assent or dissent by signing the Resolution to be passed by circulation or by e-mail or
any other electronic means.
Directors shall append the date on which they have signed the Resolution. In case a Director does not append a
date, the date of receipt by the company of the signed Resolution shall be taken as the date of signing.
In cases where the interest of a Director is yet to be communicated to the company, the concerned Director shall
disclose his interest before the last date specified for the response and abstain from voting.
In case not less than one-third of the Directors wish the matter to be discussed and decided at a Meeting, each of
the concerned Directors shall communicate the same before the last date specified for the response.
In case the Director does not respond on or before the last date specified for signifying assent or dissent, it shall
be presumed that the Director has abstained from voting.
If the approval of the majority of Directors entitled to vote is not received by the last date specified for receipt of
such approval, the Resolution shall be considered as not passed.
6.4 Recording
Resolutions passed by circulation shall be noted at a subsequent Meeting of the Board and the text thereof with
dissent or abstention, if any, shall be recorded in the Minutes of such Meeting.
6.5 Validity
Passing of Resolution by circulation shall be considered valid as if it had been passed at a duly convened Meeting
of the Board. This shall not dispense with the requirement for the Board to meet at the specified frequency.
7. Minutes
Every company shall keep Minutes of all Board and Committee Meetings in a Minutes Book. Minutes kept in
accordance with the provisions of the Act evidence the proceedings recorded therein. Minutes help in
understanding the deliberations and decisions taken at the Meeting.
7.1 Maintenance of Minutes
7.1.1 Minutes shall be recorded in books maintained for that purpose.
7.1.2 A distinct Minutes Book shall be maintained for Meetings of the Board and each of its Committees.
7.1.3 A company may maintain its Minutes in physical or in electronic form.
Minutes may be maintained in electronic form in such manner as prescribed under the Act and as may be decided
by the Board. Minutes in electronic form shall be maintained with Timestamp.
A company shall however follow a uniform and consistent form of maintaining the Minutes. Any deviation in such
form of maintenance shall be authorized by the Board.
7.1.4 The pages of the Minutes Books shall be consecutively numbered.
This shall be followed irrespective of a break in the Book arising out of periodical binding in case the Minutes are
maintained in physical form. This shall be equally applicable for maintenance of Minutes Book in electronic form
with Timestamp.
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In the event any page or part thereof in the Minutes Book is left blank, it shall be scored out and initialled by the
Chairman who signs the Minutes.
7.1.5 Minutes shall not be pasted or attached to the Minutes Book, or tampered with in any manner.
7.1.6 Minutes Books, if maintained in loose-leaf form, shall be bound periodically depending on the size and
volume and coinciding with one or more financial years of the company.
There shall be a proper locking device to ensure security and proper control to prevent removal or manipulation
of the loose leaves.
7.1.7 Minutes Books shall be kept at the Registered Office of the company or at such other place as may be
approved by the Board.
7.2 Contents of Minutes
7.2.1 General Contents
7.2.1.1Minutes shall state, at the beginning the serial number and type of the Meeting, name of the company, day,
date, venue and time of commencement of the Meeting.
In respect of a Meeting adjourned for want of Quorum, a statement to that effect by the Chairman or in his
absence, by any other Director present at the Meeting shall be recorded in the Minutes.
7.2.1.2Minutes shall record the names of the Directors present physically or through Electronic Mode, the
Company Secretary who is in attendance at the Meeting and Invitees, if any, including Invitees for specific items.
The names of the Directors shall be listed in alphabetical order or in any other logical manner, but in either case
starting with the name of the person in the Chair.
The capacity in which an Invitee attends the Meeting and where applicable, the name of the entity such Invitee
represents and the relation, if any, of that entity to the company shall also be recorded.
7.2.1.3 Minutes shall contain a record of all appointments made at the Meeting.
Where the Minutes have been kept in accordance with the Act and all appointments have been recorded, then
until the contrary is proved, all appointments of Directors, First Auditors, Key Managerial Personnel, Secretarial
Auditors, Internal Auditors and Cost Auditors, shall be deemed to have been duly approved by the Board.
7.2.2 Specific Contents
7.2.2.1 Minutes shall inter alia contain:
(a) The name(s) of Directors present and their mode of attendance, if through Electronic Mode.
(b) In case of a Director participating through Electronic Mode, his particulars, the location from where he
participated and wherever required, his consent to sign the statutory registers placed at the Meeting.
(c) The name of Company Secretary who is in attendance and Invitees, if any, for specific items and mode of
their attendance if through Electronic Mode.
(d) Record of election, if any, of the Chairman of the Meeting.
(e) Record of presence of Quorum.
(f) The names of Directors who Sought and were granted leave of absence.
(g) Noting of the Minutes of the preceding Meeting.
(h) Noting the Minutes of the Meetings of the Committees.
(i) The text of the Resolution(s) passed by circulation since the last Meeting, including dissent or abstention, if
any.
(j) The fact that an Interested Director did not participate in the discussions and did not vote on item of business
in which he was interested and in case of a related party transaction such director was not present in the meeting
during discussions and voting on such item.
(k) The views of the Directors particularly the Independent Director, if specifically insisted upon by such
Directors, provided these, in the opinion of the Chairman, are not defamatory of any person, not irrelevant Or
immaterial to the proceedings or not detrimental to the interests of the company.
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(l) If any Director has participated only for a part of the Meeting, the Agenda items in which he did not participate.
(m) The fact of the dissent and the name of the Director who dissented from the Resolution or abstained from
voting thereon.
(n) Ratification by Independent Director or majority of Directors, as the case may be, in case of Meetings held
at a shorter Notice.
(o) Consideration of any item other than those included in the Agenda with the consent of majority of the
Directors present at the Meeting and ratification of the decision taken in respect of such item by a majority of
Directors of the company.
(p) The time of commencement and conclusion of the Meeting.
7.2.2.2Apart from the Resolution or the decision, Minutes shall mention the brief background of all proposals and
summarize the deliberations thereof. In case of major decisions, the rationale thereof shall also be mentioned.
The decisions shall be recorded in the form of Resolutions, where it is statutorily or otherwise required. In other
cases, the decisions can be recorded in a narrative form.
Where a Resolution was passed pursuant to the Chairman of the Meeting exercising his second or casting vote, the
Minutes shall record such fact.
7.3 Recording of Minutes
7.3.1 Minutes shall contain a fair and correct summary of the proceedings of the Meeting.
The Company Secretary shall record the proceedings of the Meetings. Where there is no Company Secretary, any
other person duly authorized by the Board or by the Chairman in this behalf shall record the proceedings.
The Chairman shall ensure that the proceedings of the Meeting are correctly recorded.
The Chairman has absolute discretion to exclude from the Minutes, matters which in his opinion are or could
reasonably be regarded as defamatory of any person, irrelevant or immaterial to the proceedings or which are
detrimental to the interests of the company.
7.3.2 Minutes shall be written in clear, concise and plain language.
Minutes shall be written in third person and past tense. Resolutions shall however be written in present tense.
Minutes need not be an exact transcript of the proceedings at the Meeting.
In case any Director requires his views or opinion on a particular item to be recorded verbatim in the Minutes, the
decision of the Chairman whether or not to do so shall be final.
7.3.3 Wherever the decision of the Board is based on any unsigned documents including reports or notes or
presentations tabled or presented at the Meeting, which were not part of the Notes on Agenda and are referred
to in the Minutes, shall be identified by initialing of such documents by the Company Secretary or the Chairman.
7.3.4 Where any earlier Resolution(s) or decision is superseded or modified, Minutes shall contain a specific
reference to such earlier Resolution(s) or decision or state that the Resolution is in supersession of all earlier
Resolutions passed in that regard.
7.3.5 Minutes of the preceding Meeting shall be noted at a Meeting of the Board held immediately following the
date of entry of such Minutes in the Minutes Book.
Minutes of the Meetings of any Committee shall be noted at a Meeting of the Board held immediately following
the date of entry of such Minutes in the Minutes Book.
7.4. Finalization of Minutes
Within fifteen days from the date of the conclusion of the Meeting of the Board or the Committee, the draft
Minutes thereof shall be circulated by hand or by speed post or by registered post or by courier or by e-mail or by
any other recognized electronic means to all the members of the Board or the Committee, as on the date of the
Meeting, for their comments.
Where a Director specifies a particular means of delivery of draft Minutes, these shall be sent to him by such
means. Proof of sending draft Minutes and its delivery shall be maintained by the company for such period as
decided by the Board, which shall not be less than three years from the date of the Meeting.
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The Directors, whether present at the Meeting or not, shall communicate their comments, if any, in writing on the
draft Minutes within seven days from the date of circulation thereof, so that the Minutes are finalized and entered
in the Minutes Book within the specified time limit of thirty days.
If any Director communicates his comments after the expiry of the said period of seven days, the Chairman, if so
authorized by the Board, shall have the discretion to consider such comments.
In the event a Director does not comment on the draft Minutes, the draft Minutes shall be deemed to have been
approved by such Director.
A Director, who ceases to be a Director after a Meeting of the Board is entitled to receive the draft Minutes of that
particular Meeting and to offer comments thereon, irrespective of whether he attended such Meeting or not.
7.5 Entry in the Minutes Book
7.5.1 Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting.
In case a Meeting is adjourned, the Minutes in respect of the original Meeting as well as the adjourned Meeting
shall be entered in the Minutes Book within thirty days from the date of the respective Meetings.
7.5.2 The date of entry of the Minutes in the Minutes Book shall be recorded by the Company Secretary.
Where there is no Company Secretary, it shall be entered by any other person duly authorized by the Board or by
the Chairman.
7.5.3 Minutes, once entered in the Minutes Book, shall not be altered.
Any alteration in the Minutes as entered shall be made only by way of express approval of the Board at its
subsequent Meeting at which the Minutes are noted by the Board and the fact of such alteration shall be recorded
in the Minutes of such subsequent Meeting.
7.6 Signing and Dating of Minutes
7.6.1 Minutes of the Meeting of the Board shall be signed and dated by the Chairman of the Meeting or by the
Chairman of the next Meeting.
Minutes of the previous Meeting may be signed either by the Chairman of such Meeting at any time before the
next Meeting is held or by the Chairman of the next Meeting at the next Meeting.
7.6.2 The Chairman shall initial each page of the Minutes, sign the last page and append to such signature the date
on which and the place where he has signed the Minutes.
Any blank space in a page between the conclusion of the Minutes and signature of the Chairman shall be scored
out.
If the Minutes are maintained in electronic form, the Chairman shall sign the Minutes digitally.
7.6.3 Minutes, once signed by the Chairman, shall not be altered, save as mentioned in this Standard.
7.6.4 Within fifteen days of signing of the Minutes, a copy of the said signed Minutes, certified by the Company
Secretary or where there is no Company Secretary by any Director authorized by the Board, shall be circulated to
all the Directors, as on the date of the Meeting and appointed thereafter, except to those Directors who have
waived their right to receive the same either in writing or such waiver is recorded in the Minutes.
Proof of sending signed Minutes and its delivery shall be maintained by the company for such period as decided
by the Board, which shall not be less than three years from the date of the Meeting.
7.7 Inspection and Extracts of Minutes
7.7.1 The Minutes of Meetings of the Board and any Committee thereof can be inspected by the Directors.
A Director is entitled to inspect the Minutes of a Meeting held before the period of his Directorship.
A Director is entitled to inspect the Minutes of the Meetings held during the period of his Directorship, even after
he ceases to be a Director.
The Company Secretary in Practice appointed by the company, the Secretarial Auditor, the Statutory Auditor, the
Cost Auditor or the Internal Auditor of the company can inspect the Minutes as he may consider necessary for the
performance of his duties.
Inspection of Minutes Book may be provided in physical or in electronic form.
484
While providing inspection of Minutes Book, the Company Secretary or the official of the company authorised by
the Company Secretary to facilitate inspection shall take all precautions to ensure that the Minutes Book is not
mutilated or in any way tampered with by the person inspecting.
A Member of the company is not entitled to inspect the Minutes of Meetings of the Board.
7.7.2 Extracts of the Minutes shall be given only after the Minutes have been duly entered in the Minutes Book.
However, certified copies of any Resolution passed at a Meeting may be issued even earlier, if the text of that
Resolution had been placed at the Meeting.
A Director is entitled to receive, a copy of the Minutes of a Meeting held before the period of his Directorship.
A Director is entitled to receive a copy of the signed Minutes of a Meeting held during the period of his Directorship,
even if he ceases to be a Director.
Extracts of the duly signed Minutes may be provided in physical or electronic form.
8. Preservation of Minutes and other Records
8.1 Minutes of all Meetings shall be preserved permanently in physical or in electronic form with Timestamp.
Where, under a scheme of arrangement, a company has been merged or amalgamated with another company,
Minutes of all Meetings of the transferor company, as handed over to the transferee company, shall be preserved
permanently by the transferee company, notwithstanding that the transferor company might have been dissolved.
8.2 Office copies of Notices, Agenda, Notes on Agenda and other related papers shall be preserved in good order
in physical or in electronic form for as long as they remain current or for eight financial years, whichever is later
and may be destroyed thereafter with the approval of the Board.
Office copies of Notices, Agenda, Notes on Agenda and other related papers of the transferor company, as handed
over to the transferee company, shall be preserved in good order in physical or electronic form for as long as they
remain current or for eight financial years, whichever is later and may be destroyed thereafter with the approval
of the Board and permission of the Central Government, where applicable.
8.3 Minutes Books shall be in the custody of the Company Secretary.
Where there is no Company Secretary, Minutes Books shall be in the custody of any Director duly authorized for
the purpose by the Board.
9. Disclosure
The Report of the Board of Directors shall include a statement on compliances of applicable Secretarial Standards.
Effective Date: This Standard shall come into effect from 1st October, 2017.
Annexure 'A' (Para 1.3.8)
Illustrative list of items of business which shall not be passed by circulation and shall be placed before the Board
at its Meeting General Business Items
♦ Noting Minutes of Meetings of Audit Committee and other Committees.
♦ Approving financial statements and the Board's Report.
♦ Considering the Compliance Certificate to ensure compliance with the provisions of all the laws applicable
to the company.
♦ Specifying list of laws applicable specifically to the company.
♦ Appointment of Secretarial Auditors and Internal Auditors.
Specific Items
♦ Borrowing money otherwise than by issue of debentures.
♦ Investing the funds of the company.
♦ Granting loans or giving guarantee or providing security in respect of loans.
♦ Making political contributions.
♦ Making calls on shareholders in respect of money unpaid on their shares.
♦ Approving Remuneration of Managing Director, Whole-time Director and Manager.
485
♦ Appointment or Removal of Key Managerial Personnel.
♦ Appointment of a person as a Managing Director/Manager in more than one company.
♦ In case of a public company, the appointment of Director(s) in casual vacancy subject to the provisions in the
Articles of the company.
♦ According sanction for related party transactions which are not in the ordinary course of business or which
are not on arm's length basis.
♦ Sale of subsidiaries.
♦ Purchase and Sale of material tangible/ intangible assets not in the ordinary course of business.
♦ Approve Payment to Director for loss of office.
♦ Items arising out of separate Meeting of the Independent Directors if so decided by the Independent
Directors. Corporate Actions
♦ Authorize Buy-Back of securities.
♦ Issue of securities, including debentures, whether in or outside India.
♦ Approving amalgamation, merger or reconstruction.
♦ Diversify the business.
♦ Takeover another company or acquiring controlling or substantial stake in another company.
Additional list of items in case of listed companies
♦ Approving Annual operating plans and budgets.
♦ Capital budgets and any updates.
♦ Information on remuneration of Key Managerial Personnel.
♦ Show cause, demand, prosecution notices and penalty notices which are materially important.
♦ Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.
♦ Any material default in financial obligations to and by the company, or substantial non-payment for goods
sold by the company.
♦ Any issue, which involves possible public or product liability claims of substantial nature, including any
judgment or order which, may have passed strictures on the conduct of the company or taken an adverse view
regarding another enterprise that can have negative imnlirations on the company.
♦ Details of any joint venture or collaboration agreement.
♦ Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.
♦ Significant labour problems and their proposed solutions. Any significant development in Human
Resources/Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement
Scheme etc.
♦ Quarterly details of foreign exchange exposures and the steps taken
♦ by management to limit the risks of adverse exchange rate movement, if material.
♦ Non-compliance of any regulatory, statutory or listing requirements and shareholder services such as non-
payment of dividend, delay in share transfer etc.
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Annexure 'B'
(Para 1.3.8)
Illustrative list of items of business for the Agenda for the First Meeting of the Board of the company
1. To appoint the Chairman of the Meeting.
2. To note the Certificate of Incorporation of the company, issued by the Registrar of Companies.
3. To take note of the Memorandum and Articles of Association of the company, as registered.
4. To note the situation of the Registered Office of the company and ratify the registered document of the title
of the premises of the registered office in the name of the company or a Notarized copy of lease/rent agreement
in the name of the company.
5. To note the first Directors of the company.
6. To read and record the Notices of disclosure of interest given by the Directors.
7. To consider appointment of Additional Directors.
8. To consider appointment of the Chairman of the Board.
9. To consider appointment of the first Auditors.
10. To adopt the Common Seal of the company, if any.
11. To appoint Bankers and to open bank accounts of the company.
12. To authorize printing of share certificates and correspondence with the depositories, if any.
13. To authorize the issue of share certificates to the subscribers to the Memorandum and Articles of Association
of the company.
14. To approve and ratify preliminary expenses and preliminary agreements.
15. To approve the appointment of the Key Managerial Personnel, if applicable and other senior officers.
■ ■■ SECRETARIAL STANDARD-2: GENERAL MEETINGS
Introduction: This Standard seeks to prescribe a set of principles for the convening and conducting of General
Meetings and matters related thereto. This Standard also deals with conduct of e-voting and postal ballot.
Scope: This Standard is applicable to all types of General Meetings of all companies incorporated under the Act
except One Person Company (OPC) and a company licensed under Section 8 of the Companies Act, 2013 or
corresponding provisions of any previous enactment thereof.
However, Section 8 companies need to comply with the applicable provisions of the Act relating to General
Meetings.
The principles enunciated in this Standard for General Meetings of Members are applicable mutatis-mutandis to
Meetings of debenture-holders and creditors. A Meeting of the Members or class of Members or debenture-
holders or creditors of a company under the directions of the Court or the Company Law Board (CLB) or the
National Company Law Tribunal (NCLT) or any other prescribed authority shall be governed by this Standard
without prejudice to any rules, regulations and directions prescribed for and orders of, such courts, judicial forums
and other authorities with respect to the conduct of such Meetings.
This Standard is in conformity with the provisions of the Act. However, if, due to subsequent changes in the Act, a
particular Standard or any part thereof becomes inconsistent with the Act, the provisions of the Act shall prevail.
1. Convening a Meeting
1.1 Authority
A General Meeting shall be convened by or on the authority of the Board.
The Board shall, every year, convene or authorize convening of a Meeting of its Members called the Annual General
Meeting to transact items of Ordinary Business specifically required to be transacted at an Annual General Meeting
as well as Special Business, if any. If the Board fails to convene its Annual General Meeting in any year, any Member
of the company may approach the prescribed authority, which may then direct the calling of the Annual General
Meeting of the company.
487
The Board may also, whenever it deems fit, call an Extraordinary General Meeting of the company.
The Board shall, on the requisition of Members who hold, as on the date of the receipt of a valid requisition,
(a) in the case of company having a share capital, not less than one-tenth of the paid-up share capital carrying
Voting Rights or (b) in the case of a company not having share capital, not less than one-tenth of total voting power
of the company, call an Extraordinary General Meeting of the company.
If, on receipt of a valid requisition having been made in this behalf, the Board, within twenty-one days from the
date of such receipt, fails to call a Meeting on any day within forty-five days from the date of receipt of such
requisition, the requisitionists may themselves call and hold the Meeting within three months from the date of
requisition, in the same manner in which the Board should have called and held the Meeting.
Explanatory statement need not be annexed to the Notice of an Extraordinary General Meeting convened by the
requisitionists and the requisitionists may disclose the reasons for the Resolution(s) which they propose to move
at the Meeting.
Such requisition shall not pertain to any item of business that is required to be transacted mandatorily through
postal ballot.
1.2 Notice
1.2.1 Notice in writing of every Meeting shall be given to every Member of the company. Such Notice shall also be
given to the Directors and Auditors of the company, to the Secretarial Auditor, to Debenture Trustees, if any, and,
wherever applicable or so required, to other specified persons.
In case of a Nidhi, Notice may be served individually only on Members who hold shares of more than one thousand
rupees in face value or more than one per cent of the total paid-up share capital of the company, whichever is less.
For other Members, Notice may be served by a public notice in newspaper circulated in the district where the
Registered Office of the company is situated and by displaying the same on the Notice Board of the company.
In the case of Members, Notice shall be given at the address registered with the company or depository. In the
case of shares or other securities held jointly by two or more persons, the Notice shall be given to the person whose
name appears first as per records of the company or the depository, as the case may be. In the case of any other
person who is entitled to receive Notice, the same shall be given to such person at the address provided by him.
Where the company has received intimation of death of a Member, the Notice of Meeting shall be sent as und'er:
(a) where securities are held singly, to the Nominee of the single holder;
(b) where securities are held by more than one person jointly and any joint holder dies, to the surviving first
joint holder;
(c) where securities are held by more than one person jointly and all the joint holders die, to the Nominee
appointed by all the joint holders;
In the absence of a Nominee, the Notice shall be sent to the legal representative of the deceased Member.
In case of insolvency of a Member, the Notice shall be sent to the assignee of the insolvent Member.
In case the Member is a company or body corporate which is being wound up, Notice shall be sent to the liquidator.
1.2.2 Notice shall be sent by hand or by ordinary post or by speed post or by registered post or by courier or by
facsimile or by e-mail or by any other electronic means. 'Electronic means' means any communication sent by a
company through its authorized and secured computer programme which is capable of producing confirmation
and keeping record of such communication addressed to the person entitled to receive such communication at the
last electronic mail address provided by the Member.
In case the Notice and accompanying documents are given by e-mail, these shall be sent at the Members' e-mail
addresses, registered with the company or provided by the depository, in the manner prescribed under the Act.
The company shall ensure that it uses a system which produces confirmation of the total number of recipients e-
mailed and a record of each recipient to whom the Notice has been sent and copy of such record and any Notices
of any failed transmissions and subsequent re-sending shall be retained by or on behalf of the company as "proof
of sending" for such period as decided by the Board, which shall not be less than three years from the date of the
Meeting.
488
In case of the Directors, Auditors, Secretarial Auditors and others, if any, the Notice and accompanying documents
shall be sent at the e-mail addresses provided by them to the company, if being sent by electronic means.
Notice shall be sent to Members by registered post or speed post or courier or e-mail and not by ordinary post in
the following cases:
(a) if the company provides the facility of e-voting;
(b) if the item of business is being transacted through postal ballot.
If a Member requests for delivery of Notice through a particular mode, other than the one followed by the
company, he shall pay such fees as may be determined by the company in its Annual General Meeting and the
Notice shall be sent to him in such mode.
Notice shall be sent to Members by registered post or speed post or e-mail if the Meeting is called by the
requisitionists themselves where the Board had not proceeded to call the Meeting.
1.2.3 In case of companies having a website, the Notice shall simultaneously be hosted on the website till the
conclusion of the Meeting.
In case of a private company, the Notice shall be hosted on the website of the company, if any, unless otherwise
provided in the Articles.
1.2.4 Notice shall specify the day, date, time and full address of the venue of the Meeting.
Notice of Annual General Meeting shall also specify the serial number of the Meeting.
Notice shall contain complete particulars of the venue of the Meeting including route map and prominent land
mark, if any, for easy location, except in case of -
(i) a company in which only its directors and their relatives are members;
(ii) a wholly owned subsidiary.
An Annual General Meeting and a Meeting called by the requisitionists shall be called during business hours, i.e.,
between 9 a.m. and 6 p.m., on a day that is not a National Holiday.
Annual General Meetings shall be held either at the registered office of the company or at some other place within
the city, town or village in which the registered office of the company is situated, whereas other General Meetings
may be held at any place within India. A Meeting called by the requisitionists shall be held either at the registered
office of the company or at some other place within the city, town or village in which the registered office of the
company is situated.
In case of a Government company, the Annual General Meeting shall be held at its registered office or any other
place with the approval of the Central Government, as may be required in this behalf.
Notice of a company which has a share capital or the Articles of which provide for voting at a Meeting by Proxy,
shall prominently contain a statement that a Member entitled to attend and vote is entitled to appoint a Proxy, or
where that is allowed, one or more Proxies, to attend and vote instead of himself and that a Proxy need not be a
Member.
In case of a private company, the Notice shall specify the entitlement of a member to appoint Proxy in accordance
with this para, unless otherwise provided in the Articles.
1.2.5 Notice shall clearly specify the nature of the Meeting and the business to be transacted thereat. In respect
of items of Special Business, each such item shall be in the form of a Resolution and shall be accompanied by an
explanatory statement which shall set out all such facts as would enable a Member to understand the meaning,
scope and implications of the item of business and to take a decision thereon. In respect of items of Ordinary
Business, Resolutions are not required to be stated in the Notice.
The nature of the concern or interest (financial or otherwise), if any, of the following persons, in any special item
of business or in a proposed Resolution, shall be disclosed in the explanatory statement:
(a) Directors and Manager;
(b) Other Key Managerial Personnel; and
(c) Relatives of the persons mentioned above.
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In case any item of Special Business to be transacted at a Meeting of the company relates to or affects any other
company, the extent of shareholding interest in that other company of every Promoter, Director, Manager and of
every other Key Managerial Personnel of the first mentioned company shall, if the extent of such shareholding is
not less than two per cent of the paid-up share capital of that company, also be stated in the explanatory
statement.
Where reference is made to any document, contract, agreement, the Memorandum of Association or Articles of
Association, the relevant explanatory statement shall state that such documents are available for inspection and
such documents shall be so made available for inspection in physical or in electronic form during specified business
hours at the Registered Office of the company and copies thereof shall also be made available for inspection in
physical or electronic form at the Head Office as well as Corporate Office of the company, if any, if such office is
situated elsewhere, and also at the Meeting.
In case of a private company, explanatory statement shall comply with the above requirements, unless otherwise
In all cases relating to the appointment or re-appointment and/ or fixation of remuneration of Directors including
Managing Director or Executive Director or Whole - time Director or of Manager or variation of the terms of
remuneration, details of each such Director or Manager, including age, qualifications, experience, terms and
conditions of appointment or reappointment along with details of remuneration sought to be paid and the
remuneration last drawn by such person, if applicable, date of first appointment on the Board, shareholding in the
company, relationship with other Directors, Manager
and other Key Managerial Personnel of the company, the number of Meetings of the Board attended during the
year and other Directorships, Membership/ Chairmanship of Committees of other Boards shall be given in the
explanatory statement.
In case of appointment of Independent Directors, the justification for choosing the appointees for appointment as
Independent Directors shall be disclosed and in case of re-appointment of Independent Directors, performance
evaluation report of such Director or summary thereof shall be included in the explanatory statement.
1.2.6 Notice and accompanying documents shall be given at least twenty-one clear days in advance of the Meeting.
For the purpose of reckoning twenty-one days clear Notice, the day of sending the Notice and the day of Meeting
shall not be counted. Further in case the company sends the Notice by post or courier, an additional two days shall
be provided for the service of Notice.
In case of a private company, the period of sending Notice including accompanying documents shall be as stated
above, unless otherwise provided in the Articles.
In case a valid special Notice under the Act has been received from Member(s), the company shall give Notice of
the Resolution to all its Members at least seven days before the Meeting, exclusive of the day of dispatch of Notice
and day of the Meeting, in the same manner as a Notice of any General Meeting is to be given.
Where this is not practicable, the Notice shall be published in a vernacular newspaper in the principal vernacular
language of the district in which the registered office of the company is situated, and in an English newspaper in
English language, both having a wide circulation in that district, at least seven days before the Meeting, exclusive
of the day of publication of the Notice and day of the Meeting. In case of companies having a website, such Notice
shall simultaneously be hosted on the website.
1.2.7 Notice and accompanying documents may be given at a shorter period of time if consent in writing is given
thereto, by physical or electronic means, by not less than ninety-five per cent of the Members entitled to vote at
such Meeting.
The request for consenting to shorter Notice and accompanying documents shall be sent together with the Notice
and the Meeting shall be held only if the consent is received prior to the time fixed for the Meeting from not less
than ninety-five per cent of the Members entitled to vote at such Meeting.
The company shall ensure compliance of provisions relating to appointment of Proxy unless all the Members
entitled to vote at such Meeting, consent to holding of the General Meeting at shorter Notice.
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In case of a private company, consent for shorter Notice shall be obtained from such number of members as
specified in this para, unless otherwise provided in the Articles.
1.2.8 No business shall be transacted at a Meeting if Notice in accordance with this Standard has not been given.
However, any accidental omission to give Notice to, or the non-receipt of such Notice by any Member or other
person who is entitled to such Notice for any Meeting shall not invalidate the proceedings of the Meeting.
1.2.9 No items of business other than those specified in the Notice and those specifically permitted under the Act
shall be taken up at the Meeting.
A Resolution shall be valid only if it is passed in respect of an item of business contained in the Notice convening
the Meeting or it is specifically permitted under the Act.
Items specifically permitted under the Act which may be taken up for consideration at the Meeting are:
(a) Proposed Resolutions, the Notice of which has been given by Members;
(b) Resolutions requiring special Notice, if received with the intention to move;
(c) Candidature for Directorship, if any such Notice has been received.
Where special Notice is required of any Resolution and Notice of the intention to move such Resolution is received
by the company from the prescribed number of Members, such item of business shall be placed for consideration
at the Meeting after giving Notice of the Resolution to Members in the manner prescribed under the Act.
Any amendment to the Notice, including the addition of any item of business, can be made provided the Notice of
amendment is given to all persons entitled to receive the Notice of the Meeting at least twenty-one clear days
before the Meeting.
1.2.10Notice shall be accompanied, by an attendance slip and a Proxy form with clear instructions for filling,
stamping, signing and/or depositing the Proxy form.
1.2.11 A Meeting convened upon due Notice shall not be postponed or cancelled.
If, for reasons beyond the control of the Board, a Meeting cannot be held on the date originally fixed, the Board
may reconvene the Meeting, to transact the same business as specified in the original Notice, after giving not less
than three days intimation to the Members. The intimation shall be either sent individually in the manner stated
in this Standard or published in a vernacular newspaper in the principal vernacular language of the district in which
the registered office of the company is situated, and in an English newspaper in English language, both having a
wide circulation in that district.
2. Frequency of Meetings
2.1 Annual General Meeting
Every company shall, in each Calendar Year, hold a General Meeting called the Annual General Meeting.
Every company shall hold its first Annual General Meeting within nine months from the date of closing of the first
financial year of the company and thereafter in each Calendar Year within six months of the close of the financial
year, with an interval of not more than fifteen months between two successive Annual General Meetings. The
aforesaid period of six months or interval of fifteen months may be extended by a period not exceeding three
months with the prior approval of the Registrar of Companies, in case of any Annual General Meeting other than
the first Annual General Meeting. If a company holds its first Annual General Meeting, as aforesaid, it shall not be
necessary for the company to hold any Annual General Meeting in the Calendar Year of its incorporation.
2.2 Extraordinary General Meeting
Items of business other than Ordinary Business may be considered at an Extraordinary General Meeting or by
means of a postal ballot, if thought fit by the Board.
3. Quorum
3.1 Quorum shall be present throughout the Meeting.
Quorum shall be present not only at the time of commencement of the Meeting but also while transacting
business. Unless the Articles provide for a larger number, the Quorum for a General Meeting shall be:
(a) in case of a public company, -
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(i) five Members personally present if the number of Members as on the date of Meeting is not more than one
thousand;
(ii) fifteen Members personally present if the number of Members as on the date of Meeting is more than one
thousand but up to five thousand;
(fix) thirty Members personally present if the number of Members as on the date of the Meeting exceeds five
thousand;
(b) in the case of a private company, two Members personally present.
Where the Quorum provided in the Articles is higher than that provided under the Act, the Quorum shall conform
to such higher requirement.
Members need to be personally present at a Meeting to constitute the Quorum.
Proxies shall be excluded for determining the Quorum.
3.2 A duly authorized representative of a body corporate or the representative of the President of India or the
Governor of a State is deemed to be a Member personally present and enjoys all the rights of a Member present
in person.
One person can be an authorized representative of more than one body corporate. In such a case, he is treated as
more than one Member present in person for the purpose of Quorum. However, to constitute a Meeting, at least
two individuals shall be present in person. Thus, in case of a public company having not more than 1000 members
with a Quorum requirement of five Members, an authorized representative of five bodies corporate cannot form
a Quorum bv himself but can do so if at least one more Member is personally present.
Members who have voted by Remote e-voting have the right to attend the General Meeting and accordingly their
presence shall be counted for the purpose of Quorum.
A Member who is not entitled to vote on any particular item of business being a related party, if present, shall be
counted for the purpose of Quorum.
The stipulation regarding the presence of a Quorum does not apply with respect to items of business transacted
through postal ballot.
4. Presence of Directors and Auditors
4.1 Directors
4.1.1 If any Director is unable to attend the Meeting, the Chairman shall explain such absence at the Meeting.
The Chairman of the Audit Committee, Nomination and Remuneration Committee and the Stakeholders
Relationship Committee, or any other Member of any such Committee authorized by the Chairman of the
respective Committee to attend on his behalf, shall attend the General Meeting.
4.1.2 Directors who attend General Meetings of the company and the Company Secretary shall be seated with
the Chairman.
The Company Secretary shall assist the Chairman in conducting the Meeting.
4.2 Auditors
The Auditors, unless exempted by the company, shall, either by themselves or through their authorized
representative, attend the General Meetings of the company and shall have the right to be heard at such Meetings
on that part of the business which concerns them as Auditors.
The authorized representative who attends the General Meeting of the company shall also be qualified to be an
Auditor.
4.3 Secretarial Auditor
The Secretarial Auditor, unless exempted by the company shall, either by himself or through his authorized
representative, attend the Annual General Meeting and shall have the right to be heard at such Meeting on that
part of the business which concerns him as Secretarial Auditor.
The Chairman may invite the Secretarial Auditor or his authorized representative to attend any other General
Meeting, if he considers it necessary.
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The authorized representative who attends the General Meeting of the company shall also be qualified to be a
Secretarial Auditor.
5. Chairman
5.1 Appointment
The Chairman of the Board shall take the Chair and conduct the Meeting.
If the Chairman is not present within fifteen minutes after the time appointed for holding the Meeting, or if he is
unwilling to act as Chairman of the Meeting, or if no Director has been so designated, the Directors present at the
Meeting shall elect one of themselves to be the Chairman of the Meeting. If no Director is present within fifteen
Minutes after the time appointed for holding the Meeting, or if no Director is willing to take the Chair, the Members
present shall elect, on a show of hands, one of themselves to be the Chairman of the Meeting, unless otherwise
If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with the provisions
of the Act and the Chairman elected on a show of hands shall continue to be the Chairman of the Meeting until
some other person is elected as Chairman as a result of the poll, and such other person shall be the Chairman for
the rest of the Meeting.
In case of a private company, appointment of the Chairman shall be in accordance with this para, unless otherwise
The Chairman shall ensure that the Meeting is duly constituted in accordance with the Act and the Articles or any
other applicable laws, before it proceeds to transact business. The Chairman shall then conduct the Meeting in a
fair and impartial manner and ensure that only such business as has been set out in the Notice is transacted. The
Chairman shall regulate the manner in which voting is conducted at the Meeting keeping in view the provisions of
the Act.
5.2 The Chairman shall explain the objective and implications of the Resolutions before they are put to vote at
the Meeting.
The Chairman shall provide a fair opportunity to Members who are entitled to vote to seek clarifications and/or
offer comments related to any item of business and address the same, as warranted.
5.3 In case of public companies, the Chairman shall not propose any Resolution in which he is deemed to be
concerned or interested nor shall he conduct the proceedings for that item of business.
If the Chairman is interested in any item of business, without prejudice to his Voting Rights on Resolutions, he shall
entrust the conduct of the proceedings in respect of such item to any Non-Interested Director or to a Member,
with the consent of the Members present, and resume the Chair after that item of business has been transacted.
6. Proxies
6.1 Right to Appoint
A Member entitled to attend and vote is entitled to appoint a Proxy, or where that is allowed, one or more Proxies,
to attend and vote instead of himself and a Proxy need not be a Member.
A Proxy can act on behalf of Members not exceeding fifty and holding in the aggregate not more than ten per cent
of the total share capital of the company carrying Voting Rights.
However, a Member holding more than ten per cent of the total share capital of the company carrying Voting
Rights may appoint a single person as Proxy for his entire shareholding and such person shall not act as a Proxy for
another person or shareholder.
If a Proxy is appointed for more than fifty Members, he shall choose any fifty Members and confirm the same to
the company before the commencement of specified period for inspection. In case, the Proxy fails to do so, the
company shall consider only the first fifty Proxies received as valid.
In case of a private company, the Proxy shall be appointed in accordance with this para, unless otherwise provided
in the Articles.
6.2 Form of Proxy
6.2.1 An instrument appointing a Proxy shall be in the Form prescribed under the Act.
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Such instrument shall not be questioned on the ground that it fails to comply with any special requirements
specified by the Articles of a company.
The instrument of Proxy shall be signed by the appointer or his attorney duly authorized in writing, or if the
appointer is a body corporate, be under its seal or be signed by an officer or an attorney duly authorized by it.
6.2.2 An instrument of Proxy duly filled, stamped and signed, is valid only for the Meeting to which it relates
including any adjournment thereof.
6.3 Stamping of Proxies
An instrument of Proxy is valid only if it is properly stamped as per the applicable law. Unstamped or inadequately
stamped Proxies or Proxies upon which the stamps have not been cancelled are invalid.
6.4 Execution of Proxies
6.4.1 The Proxy-holder shall prove his identity at the time of attending the Meeting.
6.4.2 An authorized representative of a body corporate or of the President of India or of the Governor of a State,
holding shares in a company, may appoint a Proxy under his signature.
6.5 Proxies in Blank and Incomplete Proxies
6.5.1 A Proxy form which does not state the name of the Proxy shall not be considered valid.
6.5.2 Undated Proxy shall not be considered valid.
6.5.3 If a company receives multiple Proxies for the same holdings of a Member, the Proxy which is dated last shall
be considered valid; if they are not dated or bear the same date without specific mention of time, all such multiple
Proxies shall be treated as invalid.
6.6 Deposit of Proxies and Authorizations
6.6.1 Proxies shall be deposited with the company either in person or through post not later than forty-eight hours
before the commencement of the Meeting in relation to which they are deposited and a Proxy shall be accepted
even on a holiday if the last date by which it could be accepted is a holiday.
Any provision in the Articles of a company which specifies or requires a longer period for deposit of Proxy than
forty- eight hours before a Meeting of the company shall have effect as if a period of forty-eight hours had been
specified in or required for such deposit.
In case of a private company, the Proxy shall be deposited with the company in accordance with this para, unless
otherwise provided in the Articles.
6.6.2 If the Articles so provide, a Member who has not appointed a Proxy to attend and vote on his behalf at a
Meeting may appoint a Proxy for any adjourned Meeting, not later than forty-eight hours before the time of such
adjourned Meeting.
6.6.3 In case of remote e-voting:
(i) the letter of appointment of representative(s) of the President of India or the Governor of a State; or (ii) the
authorization in respect of representative(s) of the Corporations; shall be received by the scrutinizer/company on
or before close of e-voting.
In case of postal ballot such letter of appointment/authorization shall be submitted to the scrutinizer along with
physical ballot form.
If the representative attends the Meeting in person to vote thereat, the letter of appointment/authorization, as
the case may be, shall be submitted before the commencement of Meeting.
6.7 Revocation of Proxies
6.7.1 If a Proxy had been appointed for the original Meeting and such Meeting is adjourned, any Proxy given for
the adjourned Meeting revokes the Proxy given for the original Meeting.
6.7.2 A Proxy later in date revokes any Proxy/Proxies dated prior to such Proxy.
6.7.3 A Proxy is valid until written notice of revocation has been received by the company before the
commencement of the Meeting or adjourned Meeting, as the case may be.
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An undated notice of revocation of Proxy shall not be accepted. A notice of revocation shall be signed by the same
Member
(s) who had signed the Proxy, in the case of joint Membership.
6.7.4 When a Member appoints a Proxy and both the Member and Proxy attend the Meeting, the Proxy stands
automatically revoked.
6.8 Inspection of Proxies
6.8.1 Requisitions, if any, for inspection of Proxies shall be received in writing from a Member entitled to vote on
any Resolution at least three days before the commencement of the Meeting.
6.8.2 Proxies shall be made available for inspection during the period beginning twenty-four hours before the time
fixed for the commencement of the Meeting and ending with the conclusion of the Meeting.
Inspection shall be allowed between 9 a.m. and 6 p.m. during such period.
In case of a private company, inspection of Proxies shall be as stated above, unless otherwise provided in the
Articles.
6.8.3 A fresh requisition, conforming to the above requirements, shall be given for inspection of Proxies in case
the original Meeting is adjourned.
6.9 Record of Proxies
6.9.1 All Proxies received by the company shall be recorded chronologically in a register kept for that purpose.
6.9.2 In case any Proxy entered in the register is rejected, the reasons therefore shall be entered in the remarks
column.
7. Voting
7.1 Proposing a Resolution at a Meeting Every Resolution, except a Resolution which has been put to vote
through Remote e-Voting or on which a poll has been demanded, shall be proposed by a Member and seconded
by another Member.
7.2 E-voting
7.2.1 Every company having its equity shares listed on a recognized stock exchange other than companies whose
equity shares are listed on SME Exchange or on the Institutional Trading Platform and other companies as
prescribed shall provide e-voting facility to their Members to exercise their Voting Rights.
Other companies presently prescribed are companies having not less than one thousand Members.
Nidhis are not required to provide e-voting facility to their Members.
The facility of Remote e-voting does not dispense with the requirement of holding a General Meeting by the
company.
7.2.2 Voting at the Meeting
Every company, which has provided e-voting facility to its Members, shall also put every Resolution to vote through
a ballot process at the Meeting.
Ballot process may be carried out by distributing ballot/poll slips or by making arrangement for voting through
computer or secure electronic systems.
Any Member, who has already exercised his votes through Remote e-voting, may attend the Meeting but is
prohibited to vote at the Meeting and his vote, if any, cast at the Meeting shall be treated as invalid.
A Proxy can vote in the ballot process.
7.3 Show of Hands
Every company shall, at the Meeting, put every Resolution, except a Resolution which has been put to Remote e-
voting, to vote on a show of hands at the first instance, unless a poll is validly demanded.
A Proxy cannot vote on a show of hands.
In case of a private company, the voting by show of hands shall be in accordance with this para, unless otherwise
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7.4 Poll
The Chairman shall order a poll upon receipt of a valid demand for poll either before or on the declaration of the
result of the voting on any Resolution on show of hands.
Poll in such cases shall be through a Ballot process.
While a Proxy cannot speak at the Meeting, he has the right to demand or join in the demand for a poll.
The poll may be taken by the Chairman, on his own motion also.
In case of a private company, the poll shall be conducted in accordance with this para, unless otherwise provided
in the Articles.
7.5 Voting Rights
7.5.1 Every Member holding equity shares and, in certain cases as prescribed in the Act, every Member holding
preference shares, shall be entitled to vote on a Resolution.
Every Member entitled to vote on a Resolution and present in person shall, on a show of hands, have only one vote
irrespective of the number of shares held by him.
A Member present in person or by Proxy shall, on a poll or ballot, have votes in proportion to his share in the paid
up equity share capital of the company, subject to differential rights as to voting, if any, attached to certain shares
as stipulated in the Articles or by the terms of issue of such shares.
Preference shareholders have a right to vote only in certain cases as prescribed under the Act.
In case of a private company, the Voting Rights shall be reckoned in accordance with this para, unless otherwise
provided in the Memorandum or Articles of the company.
In case of a Nidhi, no Member shall exercise Voting Rights on poll in excess of five per cent of total Voting Rights
of equity shareholders.
7.5.2 A Member who is a related party is not entitled to vote on a Resolution relating to approval of any contract
or arrangement in which such Member is a related party.
In case of a private company, a member who is a related party is entitled to vote on such Resolution.
A member who is a related party is entitled to vote on a Resolution pertaining to approval of any contract or
arrangement to be entered into by:
(a) A Government company with any other Government company; or
(b) An unlisted Government company with the prior approval of competent authority, other than those contract
or arrangements referred in clause (a).
7.6 Second or Casting Vote
Unless otherwise provided in the Articles, in the event of equality of votes, whether on show of hands or
electronically or on a poll, the Chairman of the Meeting shall have a second or casting vote.
Where the Chairman has entrusted the conduct of proceedings in respect of an item in which he is interested to
any Non- Interested Director or to a Member, a person who so takes the Chair shall have a second or casting vote.
8. Conduct of e-voting
8.1 Every company that is required or opts to provide e-voting facility to its Members shall comply with the
provisions in this regard.
8.2 Every company providing e-voting facility shall offer such facility to all Members, irrespective of whether
they hold shares in physical form or in dematerialized form.
8.3 The facility for Remote e-voting shall remain open for not less than three days.
The voting period shall close a` 5 p.m. on the day preceding the date of the General Meeting.
8.4 Board Approval The Board shall:
(a) appoint one or more scrutinizers for e-voting or the ballot process;
The scrutinizer(s) may be a Company Secretary in Practice, a Chartered Accountant in Practice, a Cost Accountant
in Practice, or an Advocate or any other person of repute who is not in the employment of the company and who
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can, in the opinion of the Board, scrutinize the e-voting process or the ballot process, as the case may be, in a fair
and transparent manner.
The scrutinizer(s) so appointed may take assistance of a person who is not in employment of the company and
who is well-versed with the e-voting system.
Prior consent to act as a scrutinizer(s) shall be obtained from the scrutinizer(s) and placed before the Board for
noting.
(b) appoint an Agency;
(c) decide the cut-off date for the purpose of reckoning the names of Members who are entitled to Voting
Rights;
The cut-off date for determining the Members who are entitled to vote through Remote e-voting or voting at the
meeting shall be a date not earlier than seven days prior to the date fixed for the Meeting.
Only Members as on the cut-off date, who have not exercised their Voting Rights through Remote e-voting, shall
be entitled to vote at the Meeting.
8.5 Notice
8.5.1 Notice of the Meeting, wherein the facility of e-voting is provided, shall be sent either by registered post or
speed post or by courier or by e-mail or by any other electronic means.
An advertisement containing prescribed details shall be published, immediately on completion of dispatch of
Notices for Meeting but at least twenty one days before the date of the General Meeting, at least once in a
vernacular newspaper in the principal vernacular language of the district in which the registered office of the
company is situated and having a wide
circulation in that district and at least once in English language in an English newspaper, having country-wide
circulation, and specifying therein, inter alia the following matters, namely:
(a) A statement to the effect that the business may be transacted by e-voting;
(b) The date and time of commencement of Remote e-voting;
(c) The date and time of end of Remote e-voting;
(d) The cut-off date as on which the right of voting of the Members shall be reckoned;
(e) The manner in which persons who have acquired shares and become Members after the dispatch of Notice
may obtain the login ID and password;
(f) The manner in which company shall provide for voting by Members present at the Meeting;
(g) The statement that:
(i) Remote e-voting shall not be allowed beyond the said date and time;
(ii) a Member may participate in the General Meeting even after exercising his right to vote through Remote e-
voting but shall not be entitled to vote again; and
(iii) a Member as on the cut-off date shall only be entitled for availing the Remote e-voting facility or vote, as the
case may be, in the General Meeting;
(h) Website address of the company, in case of companies having a website and Agency where Notice is
displayed; and
(i) Name, designation, address, e-mail ID and phone number of the person responsible to address the
grievances connected with the e-voting.
Advertisement shall simultaneously be placed on the website of the company till the conclusion of Meeting, in case
of companies having a website and of the Agency.
8.5.2 Notice shall simultaneously be placed on the website of the company, in case of companies having a website,
and of the Agency.
Such Notice shall remain on the website till the date of General Meeting.
8.5.3 Notice shall inform the Members about procedure of Remote e-voting, availability of such facility and provide
necessary information thereof to enable them to access such facility.
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Notice shall clearly state that the company is providing e-voting facility and that the business may be transacted
through such voting.
Notice shall describe clearly the Remote e-voting procedure and the procedure of voting at the General Meeting
by Members who do not vote by Remote e-voting.
Notice shall also clearly specify the date and time of commencement and end of Remote e-voting and contain a
statement that at the end of Remote e-voting period, the facility shall forthwith be blocked.
Notice shall also contain contact details of the official responsible to address the grievances connected with voting
by electronic means.
Notice shall clearly specify that any Member, who has voted by Remote e-voting, cannot vote at the Meeting.
Notice shall also specify the mode of declaration of the results of e-voting.
Notice shall also clearly mention the cut-off date as on which the right of voting of the Members shall be reckoned
and state that a person who is not a Member as on the cut off date should treat this Notice for information
purposes only.
Notice shall provide the details about the login ID and the process and manner for generating or receiving the
password and for casting of vote in a secure manner.
8.6 Declaration of results
8.6.1 The scrutinizer(s) shall submit his report within three days from the date of the Meeting to the Chairman or
a person authorized by him, who shall countersign the same and declare the result of the voting forthwith with
details of the number of votes cast for and against the Resolution, invalid votes and whether the Resolution has
been carried or not.
8.6.2 The result of the voting, with details of the number of votes cast for and against the Resolution, invalid votes
and whether the Resolution has been carried or not shall be displayed for at least three days on the Notice Board
of the company at its Registered Office and its Head Office as well as Corporate Office, if any, if such office is
situated elsewhere. Further, the results of voting along with the scrutinizer's report shall also be placed on the
website of the company, in case of companies having a website and of the Agency, immediately after the results
are declared.
8.6.3 The Resolution, if passed by a requisite majority, shall be deemed to have been passed on the date of the
relevant General Meeting.
8.7 Custody of scrutinizers' register, report and other related papers The scrutinizer's register, report and other
related papers received from the scrutinizer(s) shall be kept in the custody of the Company Secretary or any other
person authorized by the Board for this purpose.
9. Conduct of Poll
9.1 When a poll is demanded on any Resolution, the Chairman shall get the validity of the demand verified and,
if the demand is valid, shall order the poll forthwith if it is demanded on the question of appointment of the
Chairman or adjournment of the Meeting and, in any other case, within forty-eight hours of the demand for poll.
9.2 In the case of a poll, which is not taken forthwith, the Chairman shall announce the date, venue and time of
taking the poll to enable Members to have adequate and convenient opportunity to exercise their vote. The
Chairman may permit any Member who so desires to be present at the time of counting of votes.
If the date, venue and time of taking the poll cannot be announced at the Meeting, the Chairman shall inform the
Members, the modes and the time of such communication, which shall in any case be within twenty four hours of
closure of the Meeting.
A Member who did not attend the Meeting can participate and vote in the poll in such cases.
In case of a private company, the demand and conduct of poll shall be as stated above, unless otherwise provided
in the Articles.
9.3 Each Resolution put to vote by poll shall be put to vote separately.
One ballot paper may be used for more than one item.
9.4 Appointment of scrutinizers
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The Chairman shall appoint such number of scrutinizers, as he deems necessary, who may include a Company
Secretary in Practice, a Chartered Accountant in Practice, a Cost Accountant in Practice, an Advocate or any other
person of repute who is not in the employment of the company, to ensure that the scrutiny of the votes cast on a
poll is done in a fair and transparent manner.
In case of a private company, the appointment of scrutinizer(s) shall be in accordance with this para, unless
9.5.1 The scrutinizer(s) shall submit his report within seven days from the last date of the poll to the Chairman
who shall countersign the same and declare the result of the poll within two days of the submission of report by
the scrutinizer, with details of the number of votes cast for and against the Resolution, invalid votes and whether
the Resolution has been carried or not.
In case Chairman is not available, for such purpose, the report by the scrutinizer shall be submitted to a person
authorized by the Chairman to receive such report, who shall countersign the scrutinizer's report on behalf of the
Chairman.
The result shall be announced by the Chairman or any other person authorized by the Chairman in writing for this
purpose.
The Chairman of the Meeting shall have the power to regulate the manner in which the poll shall be taken and
shall ensure that the poll is scrutinized in the manner prescribed under the Act.
In case of a private company, the declaration of result of poll shall be in accordance with this para, unless otherwise
9.5.2 The result of the poll with details of the number of votes cast for and against the Resolution, invalid votes
and whether the Resolution has been carried or not shall be displayed for at least three days on the Notice Board
of the company at its Registered Office and its Head Office as well as Corporate Office, if any, if such office is
situated elsewhere, and in case of companies having a website, shall also be placed on the website.
9.5.3 The result of the poll shall be deemed to be the decision of the Meeting on the Resolution on which the poll
was taken.
10. Prohibition on Withdrawal of Resolutions
Resolutions for items of business which are likely to affect the market price of the securities of the company shall
not be withdrawn. Further, any resolution proposed for consideration through e-voting shall not be withdrawn.
11. Rescinding of Resolutions
A Resolution passed at a Meeting shall not be rescinded otherwise than by a Resolution passed at a subsequent
Meeting.
12. Modifications to Resolutions
Modifications to any Resolution which do not change the purpose of the Resolution materially may be proposed,
seconded and adopted by the requisite majority at the Meeting and, thereafter, the modified Resolution shall be
duly proposed, seconded and put to vote.
No modification to any proposed text of the Resolution shall be made if it in any way alters the substance of the
Resolution as set out in the Notice. Grammatical, clerical, factual and typographical errors, if any, may be corrected
as deemed fit by the Chairman.
No modification shall be made to any Resolution which has already been put to vote by Remote e-voting before
the Meeting.
13. Reading of Reports
13.1 The qualifications, observations or comments or other remarks, if any, mentioned in the Auditor's Report on
the financial transactions, which have any adverse effect on the functioning of the company shall be read at the
Annual General Meeting and attention of the Members present shall be drawn to the explanations/comments
given by the Board of Directors in their report.
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13.2 The qualifications, observations or comments or other remarks if any, mentioned in the Secretarial Audit
Report issued by the Company Secretary in Practice, which have any material adverse effect on the functioning of
the company, shall be read at the Annual General Meeting and attention of Members present shall be drawn to
the explanations/ comments given by the Board of Directors in their report.
14. Distribution of Gifts
No gifts, gift coupons, or cash in lieu of gifts shall be distributed to Members at or in connection with the Meeting,
15. Adjournment of Meetings
15.1 A duly convened Meeting shall not be adjourned unless circumstances so warrant. The Chairman may
adjourn a Meeting with the consent of the Members, at which a Quorum is present, and shall adjourn a Meeting if
so directed by the Members.
Meetings shall stand adjourned for want of requisite Quorum.
The Chairman may also adjourn a Meeting in the event of disorder or other like causes, when it becomes impossible
to conduct the Meeting and complete its business.
15.2 If a Meeting is adjourned sine-die or for a period of thirty days or more, a Notice of the adjourned Meeting
shall be given in accordance with the provisions contained hereinabove relating to Notice.
15.3 If a Meeting is adjourned for a period of less than thirty days, the company shall give not less than three days'
Notice specifying the day, date, time and venue of the Meeting, to the Members either individually or by publishing
an advertisement in a vernacular newspaper in the principal vernacular language of the district in which the
registered office of the company is situated, and in an English newspaper in English language, both having a wide
circulation in that district.
However, if a Meeting is adjourned for a period not exceeding three days and where an announcement of
adjournment has been made at the Meeting itself, giving in the details of day, date, time, venue and business to
be transacted at the adjourned Meeting, the company may also opt to give Notice of such adjourned Meeting
either individually or by publishing an advertisement, as stated above.
15.4 If a Meeting, other than an Annual General Meeting and a requisitioned Meeting, stands adjourned for want
of Quorum, the adjourned Meeting shall be held on the same day, in the next week at the same time and place or
on such other day or at such other time and place as may be determined by the Board.
If a Meeting is adjourned for want of a Quorum to the same day on the next week, at the same time and place or
with a change of day, time or place, the company shall give not less than three days' Notice specifying the day,
date, time and venue of the Meeting, to the Members either individually or by publishing an advertisement in a
vernacular newspaper in the principal vernacular language of the district in which the registered office of the
company is situated, and in an English newspaper in English language, both having a wide circulation in that district.
If, at an adjourned Meeting, Quorum is not present within half an hour from the time appointed, the Members
present, being not less than two in number, will constitute the Quorum.
An adjourned Annual General Meeting, adjourned for want of quorum or otherwise, shall not be held on a National
Holiday, only if any item relating to filling up of vacancy of a director retiring by rotation is included in the agenda
of such adjourned Meeting.
The company shall ensure compliance of the provisions of holding the Annual General Meeting every year,
including adjournment thereof within a gap of not exceeding 15 months from the date of the previous Annual
General Meeting or within such extended period permitted by the Registrar of Companies.
In case of a private company, the adjournment of Meeting for want of quorum shall be in accordance with this
para, unless otherwise provided in the Articles.
15.5 If, within half an hour from the time appointed for holding a Meeting called by requisitionists, a Quorum is
not present, the Meeting shall stand cancelled.
In case of a private company, the requisitioned meeting shall stand cancelled in accordance with this para, unless
15.6 At an adjourned Meeting, only the unfinished business of the original Meeting shall be considered.
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Any Resolution passed at an adjourned Meeting would be deemed to have been passed on the date of the
adjourned Meeting and not on any earlier date.
16. Passing of Resolutions by postal ballot
16.1 Every company, except a company having less than or equal to two hundred Members, shall transact items
of business as prescribed, only by means of postal ballot instead of transacting such business at a General Meeting.
The list of items of businesses requiring to be transacted only by means of a postal ballot is given at Annexure.
The Board may however opt to transact any other item of special business, not being any business in respect of
which Directors or Auditors have a right to be heard at the Meeting, by means of postal ballot.
Ordinary Business shall not be transacted by means of a postal ballot.
16.2 Every company having its equity shares listed on a recognized stock exchange other than companies whose
equity shares are listed on SME Exchange or on the Institutional Trading Platform and other companies which are
required to provide e-voting facility shall provide such facility to its Members in respect of those items, which are
required to be transacted through postal ballot.
Other companies presently prescribed are companies having not less than one thousand Members.
Nidhis are not required to provide e-voting facility to their Members.
16.3 Board Approval The Board shall:
(a) identify the businesses to be transacted through postal ballot;
(b) approve the Notice of postal ballot incorporating proposed Resolution(s) and explanatory statement thereto;
(c) authorize the Company Secretary or where there is no Company Secretary, any Director of the company to
conduct postal ballot process and sign and send the Notice along with other documents;
(d) appoint one scrutinizer for the postal ballot;
The scrutinizer may be a Company Secretary in Practice, a Chartered Accountant in Practice, a Cost Accountant in
Practice, an Advocate or any other person of repute who is not in the employment of the company and, who can
in the opinion of the Board, scrutinize the postal ballot process in a fair and transparent manner.
The scrutinizer shall however not be an officer or employee of the company.
The scrutinizer so appointed may take assistance of a person who is not in employment of the company and who
is well-versed with the e-voting system.
Prior consent to act as a scrutinizer shall be obtained from the scrutinizer and placed before the Board for noting.
(e) appoint an Agency in respect of e-voting for the postal ballot;
(f) decide the cut-off date for reckoning Voting Rights and ascertaining those Members to whom the Notice and
postal ballot forms shall be sent.
Only Members as on the cut-off date shall be entitled to vote on the proposed Resolution by postal ballot.
16.4 Notice
16.4.1Notice of the postal ballot shall be given in writing to every Member of the company. Such Notice shall be
sent either by registered post or speed post, or by courier or by e-mail or by any other electronic means at the
address registered with the company.
The Notice shall be accompanied by the postal ballot form with the necessary instructions for filling, signing and
returning the same. .
In case the Notice and accompanying documents are sent to Members by e-mail, these shall be sent to the
Members' e-mail addresses, registered with the company or provided by the depository, in the manner prescribed
under the Act.
Such Notice shall also be given to the Directors and Auditors of the company, to the Secretarial Auditor, to
Debenture Trustees, if any, and, wherever applicable or so required, to other specified recipients.
An advertisement containing prescribed details shall be published at least once in a vernacular newspaper in the
principal vernacular language of the district in which the registered office of the company is situated, and having a
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wide circulation in that district, and at least once in English language in an English newspaper having a wide
circulation in that district, about having dispatched the Notice and the ballot papers.
16.4.2In case of companies having a website, Notice of the postal ballot shall simultaneously be placed on the
website. Such Notice shall remain on the website till the last date for receipt of the postal ballot forms from the
Members.
16.4.3Notice shall specify the day, date, time and venue where the results of the voting by postal ballot will be
announced and the link of the website where such results will be displayed.
Notice shall also specify the mode of declaration of the results of the voting by postal ballot.
16.4.4Notice of the postal ballot shall inform the Members about availability of e-voting facility, if any, and provide
necessary information thereof to enable them to access such facility.
In case the facility of e-voting has been made available, the provisions relating to conduct of e-voting shall apply,
mutatis mutandis, as far as applicable.
Notice shall describe clearly the e-voting procedure.
Notice shall also clearly specify the date and time of commencement and end of e-voting, if any and contain a
statement that voting shall not be allowed beyond the said date and time. Notice shall also contain contact details
of the official responsible to address the grievances connected with the e-voting for postal ballot.
Notice shall clearly specify that any Member cannot vote both by post and e-voting and if he votes both by post
and e-voting, his vote by post shall be treated as invalid.
The advertisement shall, inter alia, state the following matters:
(a) a statement to the effect that the business is to be transacted by postal ballot which may include voting by
electronic means;
(b) the date of completion of dispatch of Notices;
(c) the date of commencement of voting (postal and e-voting);
(d) the date of end of voting (postal and e-voting);
(e) the statement that any postal ballot form received from the Member after thirty days from the date of
dispatch of Notice will not be valid;
(f) a statement to the effect that Member who has not received postal ballot form may apply to the company and
obtain a duplicate thereof;
(g) contact details of the person responsible to address the queries/grievances connected with the voting by
postal ballot including voting by electronic means, if any; and
(h) day, date, time and venue of declaration of results and the link of the website where such results Will be
displayed.
Notice and the advertisement shall clearly mention the cut-off date as on which the right of voting of the Members
shall be reckoned and state that a person who is not a Member as on the cut-off date should treat this Notice for
information purposes only.
16.4.5Each item proposed to be passed through postal ballot shall be in the form of a Resolution and shall be
accompanied by an explanatory statement which shall set out all such facts as would enable a Member to
understand the meaning, scope and implications of the item of business and to take a decision thereon.
16.5 Postal ballot forms
16.5.1The postal ballot form shall be accompanied by a postage prepaid reply envelope addressed to the
scrutinizer.
A single postal ballot form may provide for multiple items of business to be transacted.
16.5.2The postal ballot form shall contain instructions as to the manner in which the form is to be completed,
assent or dissent is to be recorded and its return to the scrutinizer.
The postal ballot form may specify instances in which such form shall be treated as invalid or rejected and
procedure for issue of duplicate postal ballot forms.
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16.5.3 A postal ballot form shall be considered invalid if:
(a) A form other than one issued by the company has been used;
(b) It has not been signed by or on behalf of the Member;
(c) Signature on the postal ballot form doesn't match the specimen signatures with the company;
(d) It is not possible to determine without any doubt the assent or dissent of the Member;
(e) Neither assent nor dissent is mentioned;
(f) Any competent authority has given directions in writing to the company to freeze the Voting Rights of the
Member;
(g) The envelope containing the postal ballot form is received after the last date prescribed;
(h) The postal ballot form, signed in a representative capacity, is not accompanied by a certified copy of the
relevant specific authority;
(i) It is received from a Member who is in arrears of payment of calls;
(j) It is defaced or mutilated in such a way that its identity as a genuine form cannot be established;
(k) Member has made any amendment to the Resolution or imposed any condition while exercising his vote.
A postal ballot form which is otherwise complete in all respects and is lodged within the prescribed time limit but
is undated shall be considered valid.
16.6.1The scrutinizer shall submit his report within seven days from the last date of receipt of postal ballot forms
to the Chairman or a person authorized by him, who shall countersign the same and declare the result of the postal
ballot on the date, time and venue specified in the Notice, with details of the number of votes cast for and against
the Resolution, invalid votes and the final result as to whether the Resolution has been carried or not.
16.6.2The result of the voting with details of the number of votes tast for and against the Resolution, invalid votes
and whether the Resolution has been carried or not, along with the scrutinizer's report shall be displayed for at
least three days on the Notice Board of the company at its Registered Office and its Head Office as well as Corporate
Office, if any, if such office is situated elsewhere, and also be placed on the website of the company, in case of
companies having a website.
16.6.3The Resolution, if passed by requisite majority, shall be deemed to have been passed on the last date
specified by the company for receipt of duly completed postal ballot forms or e-voting.
16.7 Custody of scrutinizer's registers, report and other related papers The postal ballot forms, other related
papers, register and scrutinizer's report received from the scrutinizer shall be kept in the custody of the Company
Secretary or any other person authorized by the Board for this purpose.
16.8 Rescinding the Resolution
A Resolution passed by postal ballot shall not be rescinded otherwise than by a Resolution passed subsequently
through postal ballot.
16.9 Modification to the Resolution
No amendment or modification shall be made to any Resolution circulated to the Members for passing by means
of postal ballot.
17. Minutes
Every company shall keep Minutes of all Meetings. Minutes kept in accordance with the provisions of the Act
evidence the proceedings recorded therein.
Minutes help in understanding the deliberations and decisions taken at the Meeting.
17.1 Maintenance of Minutes
17.1.1 Minutes shall be recorded in books maintained for that purpose.
17.1.2A distinct Minutes Book shall be maintained for Meetings of the Members of the company, creditors and
others as may be required under the Act.
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Resolutions passed by postal ballot shall be recorded in the Minutes book of General Meetings.
17.1.3 A company may maintain its Minutes in physical or in electronic form.
Minutes may be maintained in electronic form in such manner as prescribed under the Act and as may be decided
by the Board. Minutes in electronic form shall be maintained with Timestamp.
A company shall, however, follow a uniform and consistent form of maintaining the Minutes. Any deviation in such
form of maintenance shall be authorized by the Board.
17.1.4 The pages of the Minutes Books shall be consecutively numbered.
This shall be followed irrespective of a break in the Book arising out of periodical binding in case the Minutes are
maintained in physical form. This shall be equally applicable for maintenance of Minutes Book in electronic form
with Timestamp.
In the event any page or part thereof in the Minutes Book is left blank, it shall be scored out and initialed by the
Chairman who signs the Minutes.
17.1.5 Minutes shall not be pasted or attached to the Minutes Book, or tampered with in any manner.
17.1.6Minutes of Meetings, if maintained in loose-leaf form, shall be bound periodically at least once in every
three years. There shall be a proper locking device to ensure security and proper control to prevent removal or
manipulation of the loose leaves.
17.1.7 Minutes Books shall be kept at the Registered Office of the company.
17.2 Contents of Minutes
17.2.1 General Contents
17.2.1.1Minutes shall state, at the beginning the Meeting, name of the.company, day, date, venue and time of
commencement of the Meeting.
Minutes of Annual General Meeting shall also state the serial number of the Meeting.
In Case a Meeting is adjourned, the Minutes shall be entered in respect of the original Meeting as well as the
adjourned Meeting. In respect of a Meeting convened but adjourned for want of Quorum a statement to that
effect shall be recorded by the Chairman or any Director present at the Meeting in the Minutes.
17.2.1.2 Minutes shall record the names of the Directors and the Company Secretary present at the Meeting.
The names of the Directors shall be listed in alphabetical order or in any other logical manner, but in either case
starting with the name of the person in the Chair.
17.2.2 Specific Contents
17.2.2.1 Minutes shall, inter alia, contain:
(a) The Record of election, if any, of the Chairman of the Meeting.
(b) The fact that certain registers, documents, the Auditor's Report and Secretarial Audit Report, as prescribed
under the Act were available for inspection.
(c) The Record of presence of Quorum.
(d) The number of Members present in person including representatives.
(e) The number of Proxies and the number of shares represented by them.
(f) The presence of the Chairmen of the Audit Committee, Nomination and Remuneration Committee and
Stakeholders Relationship Committee or their authorized representatives.
(g) The presence if any, of the Secretarial Auditor, the Auditors, or their authorized representatives, the
Court/Tribunal appointed observers or scrutinizers.
(h) Summary of the opening remarks of the Chairman.
(i) Reading of qualifications, observations or comments or other remarks on the financial transactions, which
have any adverse effect on the functioning of the company, as mentioned in the report of the Auditors.
(j) Reading of qualifications, observations or comments or other remarks, which have any material adverse effect
on the functioning of the company, as mentioned in the report of the Secretarial Auditor.
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(k) Summary of the clarifications provided on various Agenda Items.
(l) In respect of each Resolution, the type of the Resolution, the names of the persons who proposed and seconded
and the majority with which such Resolution was passed.
Where a motion is moved to modify a proposed Resolution, the result of voting on such motion shall be mentioned.
If a Resolution proposed undergoes modification pursuant to a motion by shareholders, the Minutes shall contain
the details of voting for the modified Resolution.
(m) In the case of poll, the names of scrutinizers appointed and the number of votes cast in favour and against
the Resolution and invalid votes.
(n) If the Chairman vacates the Chair in respect of any specific item, the fact that he did so and in his place some
other Director or Member took the Chair.
(o) The time of commencement and conclusion of the Meeting.
17.2.2.2In respect of Resolutions passed by e-voting or postal ballot, a brief report on the e-voting or postal ballot
conducted including the Resolution proposed, the result of the voting thereon and the summary of the scrutiniser's
report shall be recorded in the Minutes Book and signed by the Chairman or in the event of death or inability of
the Chairman, by any Director duly authorised by the Board for the purpose, within thirty days from the date of
passing of Resolution by e-voting or postal ballot.
17.3 Recording of Minutes
17.3.1 Minutes shall contain a fair and correct summary of the proceedings of the Meeting.
The Company Secretary shall record the proceedings of the Meetings. Where there is no Company Secretary, any
other person authorized by the Board or by the Chairman in this behalf shall record the proceedings.
The Chairman shall ensure that the proceedings of the Meeting are correctly recorded.
The Chairman has absolute discretion to exclude from the Minutes, matters which in his opinion are or could
reasonably be regarded as defamatory of any person, irrelevant or immaterial to the proceedings or which are
detrimental to the interests of the company.
17.3.2 Minutes shall be written in clear, concise and plain language.
Minutes shall be written in third person and past tense. Resolutions shall however be written in present tense.
Minutes need not be an exact transcript of the proceedings at the Meeting.
17.3.3 Each item of business taken up at the Meeting shall be numbered.
Numbering shall be in a manner which would enable ease of reference or cross-reference.
17.4 Entry in the Minutes Book
17.4.1Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting.
In case a Meeting is adjourned, the Minutes in respect of the original Meeting as well as the adjourned Meeting
shall be entered in the Minutes Book within thirty days from the date of the respective Meetings.
17.4.2 The date of entry of the Minutes in the Minutes Book shall be recorded by the Company Secretary.
Where there is no Company Secretary, it shall be entered by any other person authorised by the Board or the
Chairman.
17.4.3 Minutes, once entered in the Minutes Book, shall not be altered.
17.5 Signing and Dating of Minutes
17.5.1Minutes of a General Meeting shall be signed and dated by the Chairman of the Meeting or in the event of
death or inability of that Chairman, by any Director who was present in the Meeting and duly authorized by the
Board for the purpose, within thirty days of the General Meeting.
17.5.2The Chairman shall initial each page of the Minutes, sign the last page and append to such signature the date
on which and the place where he has signed the Minutes.
Any blank space in a page between the conclusion of the Minutes and signature of the Chairman shall be scored
out.
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If the Minutes are maintained in electronic form, the Chairman shall sign the Minutes digitally.
17.6 Inspection and Extracts of Minutes
17.6.1Directors and Members are entitled to inspect the Minutes of all General Meetings including Resolutions
passed by postal ballot.
Minutes of all General Meetings shall be open for inspection by any Member during business hours of the company,
without charge, subject to such reasonable restrictions as the company may, by its Articles or in General Meeting,
impose so, however, that not less than two hours in each business day are allowed for inspection.
The Company Secretary in Practice appointed by the company, the Secretarial Auditor, the Statutory Auditor, the
Cost Auditor or the Internal Auditor of the company can inspect the Minutes as he may consider necessary for the
performance of his duties.
Inspection of Minutes Book may be provided in physical or in electronic form.
While providing inspection of Minutes Book, the Company Secretary or the official of the company authorized by
the Company Secretary to facilitate inspection shall take all precautions to ensure that the Minutes Book is not
mutilated or in any way tampered with by the person inspecting.
17.6.2Extract of the Minutes shall be given only after the Minutes have been duly signed. However, any Resolution
passed at a Meeting may be issued even pending signing of the Minutes, provided the same is certified by the
Chairman or any Director or the Company Secretary.
When a Member requests in writing for a copy of any Minutes, which he is entitled to inspect, the company shall
furnish the same within seven working days of receipt of his request, subject to payment of such fee as may be
specified in the Articles of the company. In case a Member requests for the copy of the Minutes in electronic form,
in respect of any previous General Meetings held during a period immediately preceding three financial years, the
company shall furnish the same on payment of such fee as prescribed under the Act.
Copies of the Minutes or the extracts thereof as requisitioned by the Member, duly certified by the Company
Secretary or where there is no Company Secretary, an officer duly authorized by the Board in this behalf, may be
provided in physical or electronic form.
18. Preservation of Minutes and other Records
18.1 Minutes of all Meetings shall be preserved permanently in physical or in electronic form with Timestamp.
Where, under a scheme of arrangement, a company has been merged or amalgamated with another company,
Minutes of all Meetings of the transferor company, as handed over to the transferee company, shall be preserved
permanently by the transferee company, notwithstanding that the transferor company might have been dissolved.
18.2 Office copies of Notices, scrutinizer's report and related papers shall be preserved in good order in physical
or in electronic form for as long as they remain current or for eight financial years, whichever is later and may be
destroyed thereafter with the approval of the Board.
Office copies of Notices, scrutiniser's report and related papers of the transferor company, as handed over to the
transferee company, shall be preserved in good order in physical or electronic form for as long as they remain
current or for eight financial years, whichever is later and may be destroyed thereafter with the approval of the
Board and permission of the Central Government, where applicable.
18.3 Minutes Books shall be kept in the custody of the Company Secretary.
Where there is no Company Secretary, Minutes shall be kept in the custody of any Director duly authorised for the
purpose by the Board.
19. Report on Annual General Meeting
Every listed public company shall prepare a report on Annual General Meeting in the prescribed form, including a
confirmation that the Meeting was convened, held and conducted as per the provisions of the Act.
Such report which shall be a fair and correct summary of the proceedings of the Meeting shall contain:
(a) the day, date, time and venue of the Annual General Meeting;
(b) confirmation with respect to appointment of Chairman of the Meeting;
(c) number of Members attending the Meeting;
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(d) confirmation of Quorum;
(e) confirmation with respect to compliance of the Act and Standards with respect to calling, convening and
conducting the Meeting;
(f) business transacted at the Meeting and result thereof with a brief summary of the discussions;
(g) particulars with respect to any adjournment, postponement of Meeting, change in venue; and
(h) any other points relevant for inclusion in the report.
Such report shall be filed with the Registrar of Companies within thirty days of the conclusion of the Annual General
Meeting.
20. Disclosure
The Annual Return of a company shall disclose the date of Annual General Meeting held during the financial year.
Effective Date: This Standard shall come into effect from 1st October, 2017.
Annexure (Para 16.1)
Items of business which shall be passed only by postal ballot:
1. Alteration of the objects clause of the Memorandum and in the case of the company in existence
immediately before the commencement of the Act, alteration of the Main Objects of the Memorandum
2. Alteration of Articles of Association in relation to insertion or removal of provisions which are required to be
included in the Articles of a company in order to constitute it a private company
3. Change in place of Registered Office outside the local limits of any city, town or village
4. Change in objects for which a company has raised money from public through prospectus and still has any
unutilized amount out of the money so raised
5. Issue of shares with differential rights as to voting or dividend or otherwise
6. Variation in the rights attached to a class of shares or debentures or other securities
7. Buy-back of shares by a company
8. Appointment of a Director elected by Small Shareholders
9. Sale of the whole or substantially the whole of an undertaking of a company or where the company owns
more than one undertaking, of whole or substantially the whole of any of such undertakings
10. Giving loans or extending guarantee or providing security in excess of the limit specified
11. Any other Resolution prescribed under any applicable law, rules or regulations
■ ■■ QUESTIONS & ANSWERS ON SECRETARIAL STANDARDS
Ans.: Compliance with Secretarial Standard relating to general and board meeting [Section 118(10)]: Every
company shall observe secretarial standards with respect to General & Board Meetings specified by the ICSI
constituted u/s 3 of the Company Secretaries Act, 1980, and approved by the Central Government.
In the context of this provision, observance of Secretarial Standard issued by the ICSI on 23rd April, 2015 assumes
special relevance and companies will have to ensure that there is compliance with these standards on their part.
The ICSI has already issued the Secretarial Standard relating to Board and General Meeting, which are effective
from 1st June 2015.
Que. No. 2] Introduction of Secretarial Standards by the Institute of Company Secretaries of India (ICSI) is a
unique and pioneering effort towards attainment of good Corporate Governance. Do you agree? Explain briefly.
Ans.: The formulation of Secretarial Standards by the Secretarial Standards Board (SSB) of the ICSI is a unique and
pioneering step towards standardization of diverse secretarial practices prevalent in the corporate sector.
Companies follow diverse secretarial practices and, therefore, there is a need to integrate, harmonize and
standardize such practices so as to promote uniformity and consistency.
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The SSB formulates Secretarial Standards taking into consideration the applicable laws, business environment and
the best secretarial practices prevalent.
Secretarial Standards are developed:
- in a transparent manner;
- after extensive deliberations, analysis, research; and
- after taking views of corporates, regulators and the public at large.
SSB was constituted in the year 2000. The SSB comprises of eminent members of the profession holding responsible
positions in well-known companies and as senior members in practice, as well as representatives of regulatory
authorities such as the Ministry of Corporate Affairs, SEBI, the Department of Economic Affairs, RBI, Department
of Public Enterprises, Chamber of Commerce and the sister professional bodies viz. the ICAI and the ICWA. The
ICSI-CCGRT (Centre for Corporate Governance Research & Training) provides technical support to SSB.
The adoption of the Secretarial Standards by the corporate sector will have a substantial impact on the quality of
secretarial practices being followed by companies, making them comparable with the best practices in the world.
Many companies today are voluntarily adopting the Secretarial Standards in their functioning. The annual reports
of several companies released during the last few years include a disclosure with regard to the compliance of the
Secretarial Standards.
Que. No. 3] Mrs. Rukmini is the statutory auditor of Energies Ltd. Free reserves of the company are four times
more than the paid-up share capital. The company has Rohit, as secretarial auditor. There is a. cost auditor,
Amit, and an internal auditor, Sunil. Examining the provisions of the Companies Act, 2013 read with the
secretarial standards, advise the company as to who is/are required to be present at the forthcoming annual
general meeting of the company.
Ans.: Presence of Directors and Auditors at AGM:
Directors: If any Director is unable to attend the Meeting, the Chairman shall explain such absence at the Meeting.
The Chairman of the Audit Committee, Nomination and Remuneration Committee and the Stakeholders
respective Committee to attend on his behalf, shall attend the General Meeting.
Auditors: The Auditors, unless exempted by the company, shall, either by themselves or through their authorized
representative, attend the General Meetings of the company and shall have the right to be heard at such Meetings
on that part of the business which concerns them as Auditors.
The authorized representative who attends the General Meeting of the company shall also be qualified to be an
Auditor.
Secretarial Auditor: The Secretarial Auditor, unless exempted by the company shall, either by himself or through
his authorized representative, attend the Annual General Meeting and shall have the right to be heard at such
Meeting on that part of the business which concerns him as Secretarial Auditor.
The Chairman may invite the Secretarial Auditor or his authorized representative to attend any other General
Meeting, if he considers it necessary.
The authorized representative who attends the General Meeting of the company shall also be qualified to be a
Secretarial Auditor.
This Standard is applicable to all types of General Meetings of all companies incorporated under the Act except One
Person Company (OPC) and a company licensed under Section 8 of the Companies Act, 2013 or corresponding
provisions of any previous enactment thereof.
Considering the provisions of SS-2, following person should be present at the AGM:
(1) Chairman
(2) All directors
(3) Mrs. Rukmini - Statutory Auditor
(4) Rohit - Secretarial Auditor
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(5) Amit - Cost Auditor
(6) Sunil - Internal Auditor
(7) Chairman of the Audit Committee, Nomination and Remuneration Committee and the Stakeholders
Committee
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Solved Paper :
CS Executive - June 2018
[As per Old Syllabusl
Q.1. Comment on the following :

(a) A private limited company can accept deposit from its members under the provisions of the Companies Act,
2013.
(b) Appointment and rotation of statutory auditor is mandatory for one person company and small company.
(c) International Financial Service Centre (IFSC) companies are attractive for foreign investment.
(d) Secretarial Standard does not empower Company Secretary of a company to call a meeting of Board of
Directors on its own. (5 marks each)
Ans. 1:
(a) As per Section 2(68) of the Companies Act, 2013, a private company means a company, which has a minimum
paid-up capital as may be prescribed, and by its articles:
(a) Restricts the right to transfer its shares;
(b) Limits the number of its members to 200 excluding past and present employee:,
(c) Prohibits any invitation to the public to subscribe for any securities.
A private company may issue debentures to any number of persons. The only condition being that an invitation to
the public to subscribe for debentures is prohibited.
Deposits: A private company can only accept deposit from its members only and not from public.
(b) As per Section 139(2) of the Companies Act, 2013, a listed company or a company belonging to such class or
classes of companies as may be prescribed, shall not appoint or re-appoint -
(a) An individual as auditor for more than one term of 5 consecutive years and
(b) An audit firm as auditor for more than two terms of 5 consecutive years.
As per Rule 5 of the Companies (Audit & Auditors) Rules, 2014 for the purposes of Section 139(2), the class of
companies shall mean the following classes of companies excluding one person companies and small companies :-
(a) All unlisted public companies having paid up share capital of ` 10 Crore or more;
(b) All private limited companies having paid up share capital of ` 20 Crore or more;
(c) All companies having public borrowings from financial institutions, banks or public deposits of ` 50 Crore or
more.
Thus, Section 139(2) read with Rule 5 of Companies (Audit & Auditors) Rules, 2014 does not cover one person
companies and small companies and hence provisions relating to rotation of auditor are not applicable to such
companies.
(c) Meaning: An International Financial Service Centre (IFSC) caters to customers outside the jurisdiction of the
domestic economy. IFSCs are set up in special economic zones as a unit of SEZ or as a special economic zone after
approval from Central Government, and deal with flows of finance, financial products and services across borders.
Specified IFSC Public Company: It is an unlisted public company which is licensed to operate by the RBI or the SEBI
or the IRDA from the International Financial Services Centre located in an approved multi services SEZ set-up under
the Special Economic Zones Act, 2005.
Specified IFSC Private Company: It is a private company which is licensed to operate by the RBI or the SEBI or the
IRDA from the International Financial Services Centre located in an approved multi services SEZ set-up under the
Special Economic Zones Act, 2005.
Services offered by IFSC(s):
1. Fund raising services for individuals, corporations and Governments.
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2. Asset management and global portfolio diversification undertaken by pension funds, insurance companies
and mutual funds.
3. Wealth management.
4. Global tax management and cross-border tax liability optimization, which provides a business opportunity
for financial intermediaries, accountants and law firms.
5. Global and regional corporate treasury management operations that involve fundraising, liquidity
investment and management and asset liability matching.
6. Risk management operations such as insurance and reinsurance.
7. Merger and acquisition activities among transnational corporations.
In exercise of powers under section 462(1) of Companies Act, 2013, the MCA has exempted several exemptions to
such International Financial Services Centre companies.
(d) As per SS-1: Meetings of the Board of Directors issued by ICSI, any Director of a company may, at any time,
summon a Meeting of the Board, and the Company Secretary or where there is no Company Secretary, any person
authorized by the Board in this behalf, on the requisition of a Director, shall convene a Meeting of the Board, in
consultation with the Chairman or in his absence, the Managing Director or in his absence, the Whole-time
Director, where there is any, unless otherwise provided in the Articles.
Thus, Secretarial Standard-1 does not authorize Company Secretary to call meeting of board of directors on its
own. He can send the notice of board meeting if authorized the board of directors of the company.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Q.2. Distinguish between the following :
(a) Oppression and mismanagement application and Class action suits.
(b) Chief Executive Officer and Managing Director.
(c) Redemption of shares and Redemption of debentures.
(d) XBRL tags and XBRL taxonomies. (4 marks each)
Ans. 2:
(a) Following are the main points of distinctions between oppression and mismanagement & class action suit:
Points Oppression & Mismanagement Class action suit
Meaning The term ‘oppression’ is not defined in the In case of large companies many investors
Companies Act, 2013. Oppression, according to and depositors are small and they do not have
the dictionary meaning of the word, is any act time, money and energy to fight for their
exercised in a manner burdensome, harsh and rights. In such cases, some of investors and
wrongful. depositors can take action on behalf all those
The term ‘Mismanagement’ is also not defined who are affected. This is known as class
in the Companies Act, 2013. Normally action*
mismanagement means gross misconduct of
affairs of the company or misuse of powers
given to directors or members under the
When such Members of a company as specified in Section Such number of member(s) or depositors) as
action can be 244 may apply to the Tribunal for relief in cases are indicated in Section 245(3), if they are of
taken of oppression & mismanagement. Such the opinion that the management or conduct
application can be made in following cases: of the affairs of the company are being
(a) Where the affairs of the company have conducted in a manner prejudicial to the
been or are being conducted in a manner interests of the company or its members or
prejudicial to public interest or in a manner
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prejudicial or oppressive to him or any other depositors, may file an application before the
member or members or in a manner prejudicial Tribunal for seeking following orders, namely:
to the interests of the company; or (a) To restrain the company from
(b) The material change has taken place in committing ultra vires acts and breach of any
the management or control of the company and provision of the company’s MOA or AOA
that by reason of such change, it is likely that (b) To declare a resolution altering the
the affairs of the company will be conducted in MOA or AOA as void if the resolution was
a manner prejudicial to its interests or its passed by suppression of material facts or
members or any class of members. obtained by mis-statement
Such change may relate to alteration in the (c) To restrain the company and its
Board of Directors, or manager, or in the directors from acting on such resolution
ownership of the company’s shares, or if it has
(d) To restrain the company from doing an
no share capital, in its membership, or in any
act which is contrary to the provisions of the
other manner whatsoever.
Act or any other law
(e) To restrain the company from taking
action contrary to any resolution passed by
the members
(/) To claim damages or compensation or
demand any other suitable action from or
against -
Points Oppression & Mismanagement Class action suit
• - The company or its directors for any

fraudulent, unlawful or wrongful act or
omission
- The auditor for any improper or
misleading statement of particulars made in
his audit report or for any fraudulent,
unlawful or wrongful act or conduct or
- Any expert or advisor or consultant or
any other person for any incorrect or
misleading statement or for any fraudulent,
unlawful or wrongful act or conduct
(g) To seek any other appropriate remedy.
Who can The following members of a company shall have The requisite number of members provided
apply the right to apply u/s 241, namely: in Section 245(1) shall be as under:
Tribunal (a) In the case of a company having a share (a) In the case of a company having a
capital: 100 members of the company or 10% of share capital: 100 members or prescribed
the total number of members, whichever is less. percentage of the total members, whichever
(The applicants must have paid all calls and is less. (The applicants must have paid all calls
other sums due on their shares. Thus, holders of and other sums due on their shares. Thus,
partly paid-up shares cannot apply) holders of partly paid-up shares cannot apply)
(b) In the case of a company not having a (b) In the case of a company not having a
share capital: 20% of the total number of share capital: 20% of
members the total number of its members.
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However, the Tribunal may, on an application, In case of depositors class action can be taken
waive all or any of the above requirements so as by 100 depositors or prescribed percentage
to enable the members to apply u/s 241. of the total number of depositors, whichever
is less.
Reimbursemen There is no specific provision for Legal expenses incurred in pursing the class
t of legal reimbursement of legal expenses incurred in action can be reimbursed from Investor
expenses case of oppression or mismanagement though Education & Protection Fund, if sanctioned by
tribunal is competent to pass such order. Tribunal. [Section 125(3)(d)]
(b) Following are the main points of difference between ‘Managing Director’ and ‘Chief Executive Officer’:
Points Managing Director Chief Executive Officer
Meaning As per Section 2(54), Managing director means As per Section 2(18), Chief Executive Officer
a director who, by virtue of the articles of a means an officer of a company, who has been
company or an agreement with the company or designated as such by it.
a resolution passed in its general meeting, or by
its Board of Directors, is entrusted with
substantial powers of management of the
affairs of the company and includes a director
occupying the position of managing director, by
whatever name called.
Power Managing director has substantial powers of Chief Executive Officer exercise the powers
management of the affairs of the company. delegated by the board of directors.
Director Managing director is essentially a director. If Chief Executive Officer need not be a director.
person appointed as ‘managing director’ cease
to be ‘director’ he also ceases to be managing
director.
Procedure for In case of appointment of MD in addition to Chief Executive Ofhcer is appointed by the
appointment approval of board at its meeting, approval of board at its meeting.
shareholders at general meeting is also
necessary.
(c) Following are the main points of difference between ‘Managing Director’ and ‘Chief Executive Officer’:
Points Redemption of shares Redemption of debentures
Meaning When preference shareholders of the company When debenture shareholders of the
are paid back their capital balances it is known company are paid back their capital balances
as redemption of preference shares. it is known as redemption of debentures.
To whom Redemption of preference shares is payment to Redemption of debentures amount to

owner of the company. repayment of loan as debenture holders are
creditors of the company.
Redemption Preference shares can be issued for maximum Companies can issue redeemable as well as
period of 20 years after which such preference irredeemable debentures. Redeemable
debentures are required to be redeemed
within period specified in offer document
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shares must be redeemed as provided in Section while irredeemable debentures are redeemed
55. only at the time of liquidation of the company.
Proceeds at As Section 55, preference shares shall be Debentures can be redeemed only out of the
the time of redeemed: profit of the company and not out of proceeds
redemption - Out of the profits available for dividend or of a fresh issue of shares.
- Out of the proceeds of a fresh issue of
shares.
Transfer to Where preference shares are proposed to be When debentures are redeemed then amount
reserve redeemed out of the profits a sum equal to the equal to nominal value of debentures are
nominal amount of the shares should be transferred to General Reserve as sound
transferred to the Capital Redemption Reserve accounting policy.
A/c. If sinking fund is created then balance of
sinking fund is transferred to general reserve.
(d) XBRL tagging is the process by which any financial data is tagged with the most appropriate element in an
accounting taxonomy (a dictionary of accounting terms) that best represents the data in addition to tags that
facilitate identification/classification (such as enterprise, reporting period, reporting currency, unit of
measurement etc). Since all XBRL reports use the same taxonomy, numbers associated with the same element are
comparable irrespective of how they are described by those releasing the financial statements.
XBRL taxonomy is a dictionary of widely accepted accounting terms that conform to a GAAP (US GAAP, UK GAAP,
IFRS etc.).
OR (.Alternate question to Q. No. 2)
Q. 2A.
(i) The Board of Directors of Peculiar Ltd. proposes to recommend a final dividend of ` 25 each to all the equity
shareholders of the company. The company seeks your opinion on the following:
(1) The company wants to deposit the dividend amount to co-operative bank.
(2) The company is a defaulter in the repayment of deposits and proposes to repay its all deposit after the
payment of dividend within 10 days.
(3) Dividend will be declared out of the capital reserves of the company.
(4) The company wants to pay such dividend through the cash counter by way of cash voucher.
(4 marks)
(ii) Perfect Pvt. Ltd. wishes to appoint its Secretary, Satish, as an internal auditor. Referring to the provisions of the
Companies Act, 2013 advise the company.
(4 marks)
(iii) Nice Ltd. proposes to alter its liability clause of Memorandum of Association. Referring to the provisions of the
Companies Act, 2013 advise the company.
(4 marks)
(iv) Fabulous Ltd. is in the process of finalisation of its annual return. It is a listed company with paid-up capital ` 1
crore. The company seeks your advice on the following :
(1) Who will sign the return on behalf of the company ?
(2) What are the requirements of certification of annual return by a practising Company Secretary ?
(4 marks)
Ans. 2A:
(i) Keeping in view the provisions of the Companies Act, 2013 advice to the board of directors of Peculiar Ltd. is as
follows:
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(1) As. per Section 123(4) of the Companies Act, 2013, the amount of the dividend, including interim dividend,
shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such
dividend. Thus, the board of directors of Peculiar Ltd. cannot deposit such amount in co-operative bank.
(2) As per Section 123(6) of the Companies Act, 2013, if a company fails to comply with the provisions of Section
73 (Prohibition of acceptance of deposits from public) & Section 74 (Repayment of deposits, etc., accepted before
the commencement of
this Act) shall not declare any dividend on its equity shares so long as such failure continues.
Thus, during the continuance of default in repayment of deposit the Peculiar Ltd. cannot declare dividend. The
company is advised to make good the default of repayment of deposit first and then to declare the dividend.
(3) The term capital profits may be defined to mean those profits which arise otherwise than in the normal
course of the business and earned out of capital transactions.
The Act does not mention specifically whether capital profits ie. profits which arise where a company sells part of
its fixed assets at a price higher than the original cost of such asset, can be distributed as dividend. However, in the
two important cases Lubbock vs. British Bank of South America (1892) 2 Ch. 198 and Foster vs. The New Trinidad
Lake Asphalt Co. Ltd. (1901) 1 Ch.208, the Courts have held that capital profits cannot be considered as available
for distribution as dividend unless-.
(a) The AOA authorize such a distribution and
(b) The surplus is realized and remains after a valuation of the whole of the assets and liabilities.
(4) A dividend payable may be paid by cheque or warrant or in any electronic mode to the shareholder entitled
to the payment of the dividend. Thus, Peculiar Ltd. cannot pay dividend through cash counter by way of cash
voucher.
(ii) As per Section 138 of the Companies Act, 2013, such class or classes of companies as may be prescribed shall
be required to appoint an internal auditor, who shall either be a Chartered Accountant or a Cost Accountant, or
such other professional as may be decided by the Board to conduct internal audit of the functions and activities of
the company.
Thus, Perfect Pvt. Ltd. can appoint secretary, Satish, as an internal auditor of the company.
(iii) As per Section 13 of the Companies Act, 2013, a company may, by a special resolution and after complying
with the specified procedure, alter the provisions of its memorandum. It means that a company can change the
liability clause of its MOA by passing a special resolution. A company shall, in relation to any alteration of its
memorandum, file with the Registrar the special resolution in Form No. MGT-14 passed by the company.
(iv) As per Section 92(1) of the Companies Act, 2013, Annual Return has to be and signed by a director and the
Company Secretary, or where there is no Company Secretary, by Practicing Company Secretary.
In case of OPC and small company, the annual return shall be signed by the Company Secretary, or where there is
no Company Secretary, by the director of the company.
The Central Government may prescribe abridged form of annual return for OPC, small company and such other
Annual return in case of bigger companies [Section 92(2)]: The annual return, filed by a listed company or, by a
company having prescribed paid-up capital or turnover, shall be certified by a Practicing Company Secretary [PCS]
in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the
company has complied with all the provisions of the Companies Act, 2013.
The annual return, filed by a listed company or a company having paid-up share capital of` 10 Crore or more or
turnover of ` 50 Crore or more, shall be certified by Practicing Company Secretary and the certificate shall be in
Form MGT-8. [Rule 7(2) of the Companies (Management & Administration) Rules, 2014]
Attempt all parts of either Q. No. 3 or X). No. 3A
Q. 3.
(a) RS Ltd. has incurred ` 5 lakh for the fulfilment of Labour Law, Land Acquisition Act and Food Safety &
Standards Act in the month of May, 2018. The company has accounted for this ` 5 lakh as Corporate Social
515
Responsibility (CSR) expenditure. Explaining the provisions of the Companies Act, 2013 discuss whether the
company has rightly accounted for the amount in CSR. (4 marks)
(b) Enkebee Ltd. wants to purchase its own 1,00,000 equity shares @ ` 10 each out of the following:
(a) Unsecured loan ` 5 lakh (h) Balance of depreciation reserve for ` 3 lakh
(c) Securities premium account ` 4 lakh.
Examine the legality of the above transactions for the buy-back of securities of the company under the provisions
of the Companies Act, 2013. (4 marks)
(c) Who will appoint Secretarial Auditor of the company : Board of Directors or Shareholders ? What is the duty
of Board of Directors towards secretarial auditor and audit report ? (4 marks)
(d) Mohan has been appointed as a passive partner in the Limited Liability Partnership (LLP). He seeks your
advice on the responsibilities of designated partner where the LLP has contravened the provisions of LLP Act.
Referring to the provisions of the LLP Act, 2008 advise him in the matter. Can he sign cheques on behalf of the LLP
? (4 marks)
Ans. 3:
(a) As per Section 135(5) of the Companies Act, 2013, the Board of every company shall ensure that the company
spends, in every financial year, at leas` 2% of the average net profits of the company made during the 3
immediately preceding financial years, in pursuance of its CSR Policy.
The company shall give preference to the local area and areas around it where it operates, for spending the amount
earmarked for CSR activities.
If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the
amount.
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities are
specified in Schedule VII of the Companies Act, 2013.
Amount incurred by RS Ltd. ` 5 lakh for the fulfilment of Labour Laws, Land Acquisition Act and Food Safety &
Standard Act are not covered in Schedule VII of the Companies Act, 2013. Thus, the company has defaulted in
provisions relating to Corporate Social Responsibility.
(b) As per Section 68 of the Companies Act, 2013, a company may buy-back its own shares or other specified
securities out of:
- Free reserves or
- Securities premium account or
- Proceeds of the issue of any shares or other specified securities.
Keeping in view above provisions, answer to case is as follows:
(a) Enkebee Ltd. can avail unsecured loan of ` 5 lakh but it cannot be used for buy back of equity shares.
(b) Enkebee Ltd. cannot use depreciation reserve of ` 3 lakh for buy back of equity shares.
(c) Enkebee Ltd. can use balance of ` 4 lakh in securities premium account buy back of equity shares.
(c) As per Section 204 of the Companies Act, 2013, every listed company and a company belonging to prescribed
class shall annex with its Board’s report, a secretarial audit report, given by Practicing Company Secretary (PCS) in
prescribed form.
As per Rule 8 of the Companies (Meetings of Board & its Powers) Rules, 2014, secretarial auditor is required to
be appointed by means of resolution at a duly convened board meeting.
It shall be the duty of the company to give all assistance and facilities to the PCS, for auditing the secretarial and
related records of the company.
The Board of Directors, in their report shall explain in full any qualification or observation or other remarks made
by the PCS.
If a company or any officer or PCS, contravenes the provisions of this section, they shall be punishable with fine
which shall not be less than ` 1,00,000 but which may extend to ` 5,00,000.
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Secretarial Audit Report [Rule 9 of the Companies (Appointment & Remuneration of Managerial Personnel)
Rules, 2014]: For the purposes Section 204(1), the other class of companies shall be as under-
(a) Every public company having a paid-up share capital of ` 50 Crore or more or
(b) Every public company having a turnover of ` 200 Crore or more.
The format of the Secretarial Audit Report shall be in Form MR-3.
(d) Liabilities of designated partners [Section 8 of the LLP Act, 2008]: A designated partner shall be—
(a) Responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of
compliance of the provisions of the Act including filing of any document, return, statement and the reports and
(b) Liable to all penalties imposed on the LLP for any contravention of those provisions.
Responsibilities of Designated Partner - Where the LLP has contravened the provisions of LLP Act: The designated
partner would be liable to all penalties imposed on the LLP for the contravention of the provisions of the Act and
as such the designated partner would be required to pay all the monetary fines imposed on the LLP. There is no
provision in the Act providing for the reimbursement of such monetary penalties to him by the LLP. Further in the
following instances apart from the LLP, the designated partner would also be imposed monetary penalties under
the Act -
♦ For non-compliance with the directions of the Central Government for change of name.
♦ For non-maintenance of books of account, non-filing of accounts, duly audited where such an audit is
mandatory.
♦ For non-filing of the annual return of the LLP.
Mohan is not designated partner and hence cannot sign the cheques on behalf of LLP.
OR (Alternate question to Q. No. 3)
Q. 3A.
(i) Aniket has fraudulently sold his shares to two different transferees. Who will be entitled to the shares in priority
? (4 marks)
(ii) The authorised share capital of Shine Ltd. is ` 50 lakh. The paid-up capital of the company is ` 20 lakh. The Board
of Directors at its 100th meeting held in the residence of Managing Director of the company resolved to create
charge on uncalled share capital of ` 30 lakh. With reference to the provisions of the Companies Act, 2013 ascertain
if the resolution is valid. (4 marks)
(iii) R Systems Ltd. is holding 4096 of paid-up share capital of ATC Aviation Pvt. Ltd. R Systems appointed
representative director in ATC Aviation Pvt. Ltd. to safeguard its interest. Board of Directors of R Systems Ltd.
wishes to know whether the director appointed by them shall be treated as nominee director. Advise the Board.
(4 marks)
(iv) Sand Ltd. wants to appoint River as Managing Director of the company for a period of three years with effect
from 1st August, 2018. River has given a written statement to the company that he has paid rupees one thousand
to the prescribed authorities for a conviction of an offence under the Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act, 1974 on 30th June, 2018. State whether River can be appointed as Managing
Director of the company under the Companies Act, 2013.
(4 marks)
Ans. 3A:
(i) It was held in Society General De Paris v. Jonet Walker and other (1886) 11 Ac 20 that where a shareholder has
fraudulently sold his shares to two different transferees, the first purchaser will, on the ground of time alone, be
entitled to the shares in priority to the second.
For example, C assigned all his property to P as trustee for his creditors. The property included some shares. P
asked for the share certificates but was unable to obtain them from C. He then gave notice of the assignment to
the company. C, after the date of the assignment to P, sold the shares to X, who applied for registration. Held, P
having the equitable title which was prior in time, was entitled to registration. [Peat v. Clayton (1906) 1 Ch. 659]
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(ii) A company does not have implied power of charging its uncalled share capital and a company may charge its
uncalled capital if its MOA or AOA authorize it to charge it. The memorandum may give an express power to charge
uncalled capital, or the power may be so wide that it can be inferred by implication.
In Newton vs. Debenture holders of Anglo-Australian Investment Co. (1895) A.C. 224, the MOA authorized the
company to borrow upon any security of the company. It was held
that the power was wide enough to include a charge on uncalled capital. However, a company cannot mortgage
or charge any part of its “reserve capital” Le. such portion of its uncalled capital as is incapable of being called up
except in the event of winding-up of the company.
Keeping in view above discussion, the board of directors of Shine Ltd. cannot create charge on its uncalled capital
unless there is provision their AOA to create charge on uncalled capital, as company does not have implied
authority in this regard.
(iii) Nominee director means a director appointed by a third parties e.g. a director appointed by a financial
institutions or a bank which has provided financial assistance to the company.
Nominee Director [Section 161(3)]: Subject to the articles of a company, the Board may appoint following types
of nominee director:
- Person nominated by any institution in pursuance of any law for the time being in force.
- Person nominated by any institution in pursuance of any agreement.
- Person nominated by the Central or State Government by virtue of its shareholding in a Government
company.
For the purpose of Section 149, nominee director means a director nominated by any financial institution in
pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any
Government, or any other person to represent its interests. [Explanation to Section 149(7)]
The difference between Section 161(3) and Explanation to Section 149(7) is as follows:
(A) The word used in Section 161(3) is ‘institution’, while the word used in Explanation to Section 149(7) is
‘financial institution’.
(B) Explanation to Section 149(7) makes provision for director nominated by ‘any other person’ but there is no
corresponding provision in Section 161(3).
Directors nominated by collaborators/major investor: Section 161(3) does not make any specific provisions for
nominating a director by collaborators/major investor. However, such directors can be appointed if there is
provision in the Articles of the Company.
As facts given in case R System Ltd. is holding 40% share capital of the ATC Aviation Pvt. Ltd. and thus R System Ltd.
can appoint nominee director in ATC Aviation Pvt. Ltd. if there is provision in Articles of the ATC Aviation Pvt. Ltd.
(iv) Conditions to be fulfilled for the appointment of a managing or whole-time director or a manager without
the approval of the Central Government appointments [Part I of the Schedule V]: A person shall be eligible for
appointment as a managing or whole-time director or a manager of a company only if satisfies the following
conditions, namely:
(a) He had not been sentenced to imprisonment for any period, or to a fine exceeding ` 1,000, for the conviction
of an offence under any of the following Acts, namely -
- The Indian Stamp Act, 1899
- The Central Excise Act, 1944
- The Industries (Development & Regulation) Act, 1951
- The Prevention of Food Adulteration Act, 1954
- The Essential Commodities Act, 1955
- The Companies Act, 2013 or any previous company law
- The Securities Contracts (Regulation) Act, 1956
- The Wealth-tax Act, 1957
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- The Income-tax Act, 1961
- The Customs Act, 1962
- The Competition Act, 2002
- The Foreign Exchange Management Act, 1999
- The Sick Industrial Companies (Special Provisions) Act, 1985
- The Securities and Exchange Board of India Act, 1992
- The Foreign Trade (Development and Regulation) Act, 1922
- The Prevention of Money-Laundering Act, 2002 (15 of 2003);
(b) He had not been detained for any period under the Conservation of Foreign Exchange & Prevention of
Smuggling Activities Act, 1974.
However, where the Central Government has given its approval to the appointment of a person convicted or
detained under clauses (a) & (b) no further approval of the Central Government shall be necessary for the
subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.
As per facts given in case, River has paid only fine of ` 1,000 for conviction under Foreign Exchange & Prevention
of Smuggling Activities Act, 1974; he has not detained for any period under the same Act and thus he is not
disqualified and previous approval of Central Government is not necessary for his appointment as Managing
Director.
Q. 4.
(a) Fun and Frolic Ltd. has received ` 5 lakh from its Promoters as unsecured loan in pursuance of the stipulation
of credit facilities from Bank. Can the company accept the unsecured loan ? What would be your answer if the
company has repaid in full its amount of credit facilities and after such repayment, company continues this
unsecured loan ? Referring to the provisions of the Companies Act, 2013 advise the company.
(4 marks)
(b) South Village Farmers’ Producer Company Ltd. wants to give loan to its Directors for ` 5 lakh. The company
seeks your advice regarding the loan to Directors. Explain the provisions with reference to the Companies Act.
What would be your answer if loan is being given to its members ?
(4 marks)
(c) Phosphate Ltd. has suffered a major loss of ` 100 crore in May, 2018 on the dealing of commodity exchange.
The annual accounts and Board's report for the year 2017-18 are under finalization. The Chief Financial Officer
(CFO) of the company does not want to disclose this loss in the Board's report for year 2017-18 because this loss
does not pertain to said financial year. Is the view of CFO correct ? The Board of Directors seek your advice in this
matter.
(4 marks)
(d) Confident Ltd. has forfeited 50,000 equity shares of the company @ ` 10 each and same were re-issued. After
the filing of the annual return, the Registrar of Companies (ROC) has issued show cause notice to the company for
default of provisions of section 39 of the Companies Act, 2013. Is the action of the ROC tenable under the provisions
of the Companies Act, 2013 ? Discuss with relevant case law, if any.
(a) As per Rule 2(l)(c)(xiii) of the Companies (Acceptance of Deposits) Rules, 2014, deposit does not include any
amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of
any lending financial institution or a bank subject to fulfilment of the following conditions:
(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to
contribute such finance and
(b) The loan is provided by the promoters themselves or by their relatives or by both.
The exemption shall be available only till the loans of financial institution or bank are repaid and not thereafter.
As per facts given in case, Fun & Frolic received ` 5 lakh from its promoters as unsecured loan in pursuance of
stipulation of credit facility from the bank. Such unsecured loan will not be treated as deposit as per Rule 2(l)(c)(xiii)
519
of the Companies (Acceptance of Deposits) Rules, 2014. However, after repayment of credit facility if the company
continues the unsecured loan of its promoter then it will be treated as deposit.
(b) As per Section 581ZK of the Companies Act, 1956, the Board may, subject to the provisions made in articles,
provide financial assistance to the members of the producer company by way of -
(a) Credit facility, to any member, in connection with the business of the producer company, for a period not
exceeding 6 months
(b) Loans and advances, against security specified in articles to any member, repayable within a period
exceeding 3 months but not exceeding 7 years from the date of disbursement of such loan or advances.
However, any loan or advance to any director or his relative shall be granted only after the approval by the
members in general meeting.
Thus, South Village Farmers Producer Ltd. can give loan of ` 5 lakh to its director only after obtaining the approval
by the members in general meeting.
South Village Farmers Producer Ltd. can give loan of ` 5 lakh .to its member subject fulfilment, of conditions
specified in Section 581ZK of the Companies Act, 1956.
(c) According to Section 128(1) of the Companies Act, 2013, every company shall prepare and keep at its
registered office books of account and other relevant books and papers and financial statement for every financial
year which gives a true and fair view of the state of the affairs of the company.
The books and papers and financial statement are said to be give a true and fair view if the financial statements
comply with the accounting standards.
As per AS-4, events occurring after the balance sheet date are those significant events that occur between:
- The balance sheet date and
- The date on which the financial statements are approved by appropriate authority (e.g. board of directors in
the case of a company)
AS-4 requires disclosure in respect of events occurring after the balance sheet date representing unusual changes
affecting the existence or substratum of the enterprise after the date of the balance sheet. In the present event,
the loss of ` 100 Crore on dealing in commodity exchange can be considered to be an event affecting the substratum
of the enterprise. Hence, an appropriate disclosure should be made in the report of the board of directors.
(d) As per Section 39 of the Companies Act, 2013 read with Rule 12 of the Companies (Prospectus & Allotment
of Securities) Rules, 2014, whenever a company having a share capital makes any allotment of its securities, the
company shall file with the ROC a return of allotment in Form PAS-3 within 30 days.
The Supreme Court held that no return of allotment is required to be filed for forfeited shares when the same were
re-issued. The Court observed that when a share is forfeited and re-issued, there is no allotment, in the sense of
appropriation of shares out of the authorized and un-appropriated capital. [Sri GopalJalan & Co. v. Calcutta Stock
Exchange Association Ltd. 1963-(033)-Com Cases-0862- SC]
Thus, Confident Ltd. need not to file return of allotment for reissue of forfeiture of 50,000 shares and action taken
by the ROC is not tenable under the law.
Q. 5.
(a) Spectacular Ltd. wants to make an application to Registrar of Companies (ROC) for removal of its name under
section 248(2) of the Companies Act, 2013 from register. It is understood that the application, inter alia, shall be
accompanied by an ‘affidavit’ by every' director of the company. You are a practising Company Secretary. The
company has approached you to draft such an affidavit. Help the company.
(8 marks)
(b) In the 25th Annual General Meeting (AGM) of Lazy Ltd. some shareholders demanded that a poll be taken in
respect of one of the resolution proposed in the notice of AGM on which voting was yet to be taken on a show of
hands. Prepare the announcement to be made by the Chairman of the meeting in connection with the poll.
(8 marks)
Ans. 5:
520
(a)
FORM No. STK - 4 AFFIDAVIT
(To be given individually by every Director)
[Pursuant to Section 248(2) read with clause (iii) of sub-rule (3) of Rule 4]
1.1 .................. Director of .................. (hereinafter called “the Company”), incorporated on ..................
under the Companies Act, 2013 or the Companies Act, 1956 having its registered office at ..................
and having CIN .................. do solemnly affirm and state as under:
(i) I .................. S /o Shri .................. Holder of DIN /.Income Tax PAN / Passport number .................. , (copy of
Income Tax PAN/Passport duly attested by a Company Secretary) am Director of the Company stated above since
.................. (mention date of appointment).
(ii) My present residential address is .................. (copy of documentary evidence duly attested by
Company Secretary) is enclosed.
(iii) My permanent address is .................. (copy of documentary evidence duly attested by a Company
Secretary) is enclosed.
(iv) The Company does not maintain any bank account as on date.
(v) The Company .................. (mention name of the Company) does not have any assets and liabil
ities as on date.
(vi) The Company has been inoperative from the date of its incorporation/The Company commenced
business/operations/commercial activity after incorporation but has been inoperative for the past ..................
year(s) due to following reasons .................. :
(Give the reasons here)
(vii) As on date, the Company does not have any dues towards Income Tax/Sales Tax/Central Ex- cise/Banks and
Financial Institutions; and other Central or State Government Departments/ Authorities or any Local Authorities.
(viii) I further affirm that -
(i) No inquiry, technical scrutiny, inspection or investigation is ordered or pending against the company;
(ii) No prosecution or any compounding application for any offence under the Act dr under any of the other Acts is
pending against the company or against the undersigned;
(iii) The company is neither listed nor delisted for non-compliance of listing agreement;
(iv) The company is not a company incorporated for charitable purposes under section 8 of the Companies Act,
2013 or Section 25 of the Companies Act, 1956;
(v) The company does not have any management disputes or there is no litigation pending with regard to
management or shareholding of the company;
(vi) No order is in operation staying filing of the documents by a court or tribunal or any other competent authority;
(vii) The company is not prevented from making the applications for strike off as mentioned in Section 249 of the
I solemnly state that the contents of this affidavit are true to the best of my knowledge and belief and
that it conceals nothing and that no part of it is false.
Signature: ..................
(Deponent)
Verification:
I verify that the contents of this affidavit are true to the best of my knowledge and belief.
Place: .................. Signature: .................. ..................
(Deponent)
Date: ..................
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Note: Attention is also drawn to provisions of Section 449 which provide for punishment for false
evidence. ..................
(b) Voting by show of hands [Section 107]: At any general meeting, a resolution put to the
vote of the meeting shall in the first instance be decided on a show of hands.
A declaration by the Chairman of the meeting of the passing of a resolution by show of hands shall be conclusive
evidence of the fact of passing of such resolution, unless a poll is demanded before or immediately on declaration
by Chairman.
Demand for Poll [Section 109]: Before or on the declaration of the result of the voting on any resolution on show
of hands, a poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall be
ordered to be taken by him on a demand made in that behalf by the following persons:
(a) In the case a company having a share capital: By the members present in person or by proxy, and having
not less than 1/10th of the total voting power or holding shares on which an aggregate sum of not less than Rs.
5,00,000 or such higher amount as may be prescribed, has been paid-up and
(b) In the case of any other company: By any member or members present in person or by proxy, where
allowed, and having not less than 1/10th of the total voting power.
The demand for a poll may be withdrawn at any time by the persons who made the demand.
Time for taking poll and declaring the result: A poll shall be taken forthwith, if it is demanded for adjournment of
the meeting or appointment of Chairman of the meeting.
A poll shall be taken at such time, not being later than 48 hours from the time when the demand was made on any
other question.
Where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons, as he deems
necessary, to scrutinize the poll process and votes given on the poll and to report thereon to him in the manner as
may be prescribed.
The result of the poll shall be deemed to be the decision of the meeting oil the resolution on which the poll was
taken.
Announcement by chairman
As per Section 109 of the Companies Act, 2013 a poll has to be taken before or on the declaration of the result of
the voting on any resolution on show of hands.
As some shareholder holding requisite shares as stated in Section 109 of the Companies
Act, 2013 requested to take poll on Item No. .................. listed in notice of the meeting and in
line with best practice, poll voting at the meeting will be conducted at the end of meeting using the electronic
system provided by .................. , the Company's Registrar.
I believe that voting on a poll will result in the most accurate reflection of the views of shareholders by ensuring
that every vote is recognized, including all votes of proxies.
On a poll, each shareholder has one vote for every share held.
Poll voting will conducted at the end of meeting as discussed I request all the members and proxies to cast their
valuable votes and help the company to conduct voting in fair and transparent manner.
Q. 6.
(a) Semon Ltd., a strategic investor was introduced in Raybon Pvt. Ltd. to bring a new technology or investment.
Such strategic investor wishes to protect its interests in the company. Advise how he can safeguard its interests
through Articles of Association of the company.
(4 marks)
(b) Serious Ltd. is having three factories in Chennai. The company wants to sell one of the factory. Can the
company sell its factory ? Further, assuming that the company has also borrowed credit facilities from the bank,
explain the statutory provisions under the Companies Act, 2013.
(4 marks)
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(c) The Mumbai Bench of National Company Law Tribunal has received a petition for winding up of Presentable
Commodities Ltd. Pramod, Manager (Human Resource) of the company wants to know from you, Secretary of the
company, what orders can be passed by the Tribunal in this regard. Advise Pramod, under the relevant provisions
of the Companies Act, 2013.
(4 marks)
(d) In a scheme of amalgamation, it was proposed that name of the transferor company shall be deemed to be
name of transferee company. The Regional Director (RD), Ministry of Company Affairs, objected to the same on
the ground that proposed name is undesirable if it is identical with or too nearly resembling name of an existing
company. Decide if the stand taken by the RD is valid under the Companies Act, 2013. Reference may be made of
decided case laws.
(a) As per Section 2(5) of the Companies Act, 2013, Article means the articles of association of a company as
originally framed or as altered from time to time or applied in pursuance of any previous company law or of this
Act.
The articles of association of a company are its by-laws or rules and regulations that govern the management of its
internal affairs and the conduct of its business. The articles play a very important role in the affairs of a company.
It deals with the rights of the members of the company inter se.
The Companies Act, 2013 recognizes an interesting concept of entrenchment. The entrenchment provisions allow
for certain clauses in the articles to be amended upon satisfaction of greater conditions or restrictions than those
prescribed under the Act. (such as obtaining a 100% consent)
This provision acts as a protection to the minority shareholders. This shall empower the enforcement of any pre-
agreed rights and provide greater certainty to investors, especially in joint ventures and strategic investors.
Thus, by making entrenchment provisions the article may be altered only if conditions or procedures that are more
restrictive than those applicable in the case of a special resolution, are met or complied with. [Section 5(3)]
The provisions for entrenchment shall be made either on formation of a company, or by an amendment in the
articles agreed to by all the members of the company in the case of a private company and by a special resolution
in the case of a public company. [Section 5(4)]
Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the
company shall give notice to the Registrar of such provisions in prescribed form. [Section 5(5)]
Keeping in view above discussion, Semon Ltd. is advised to bring necessary amendments by incorporating
entrenchment provisions in the article of association of Ray bon Ltd. to protect its interest.
(b) As per Section 180( 1) of the Companies Act, 2013, the board of directors of a public company shall exercise
the following powers only with the consent of company by a special resolution:
(a) Sell, lease or dispose of the whole of the undertaking of the company;
(b) Invest the amount of compensation received by it as a result of any merger or amalgamation;
(c) Borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves and securities premium; (however, if
amount borrowed is temporary loan from the company’s bankers in the ordinary course of business then this clause
is not applicable, hence members consent by way of special resolution is not required)
(d) Remit, or give time for the repayment of, any debt due from a director.
Undertaking shall mean an undertaking in which the investment of the company exceeds 20% of its net worth as
per the audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total
income of the company during the previous financial year.
Substantially the whole of the undertaking in any financial year shall mean 20% or more of the value of the
undertaking as per the audited balance sheet of the preceding financial year.
Keeping in view above provisions answer to given case is as follows:
523
(i) Serious Ltd. can dispose of its undertaking by passing special resolution if the investment in its undertaking
which it proposed to sell exceeds 20% of its net worth as per the audited balance sheet of the preceding financial
year or if such undertaking generates 20% of the total income of the company during the previous financial year.
However, if the undertaking proposed to be sold does not fulfil the criteria stated above then such undertaking
can be sold by passing resolution at the board meeting subject to compliance of provisions of the article of
association of the company.
(ii) If Serious Ltd. also has borrowed facilities from the bank then prior approval of bank should also be taken if
the loan agreement contains a provision regarding disposal of any assets or undertaking subject to prior approval
of the bank.
(c) Powers of Tribunal [Section 273]: The Tribunal may, on receipt of a petition for winding up under section
272 pass any of the following orders, namely:
(a) dismiss it, with or without costs;
(b) make any interim order as it thinks fit;
(c) appoint a provisional liquidator of the company till the making of a winding up order;
(d) make an order for the winding up of the company with or without costs; or
(e) any other order as it thinks fit.
An order shall be made within 90 days from the date of presentation of the petition.
Before appointing a provisional liquidator, the Tribunal shall give notice to the company and afford a reasonable
opportunity to it to make its representations, if any, unless for special reasons to be recorded in writing, the
Tribunal thinks fit to dispense with such notice.
The Tribunal shall not refuse to make a winding up order on the ground only that the assets of the company have
been mortgaged for an amount equal to or in excess of those assets, or that the company has no assets.
Where a petition is presented on the ground that it is just and equitable that the company should be wound up,
the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other remedy is available
to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of
pursuing the other remedy.
Power to Order Costs [Section 298]: The Tribunal may, in the event of the assets of a company being insufficient
to satisfy its liabilities, make an order for the payment out of the assets, of the costs, charges and expenses incurred
in the winding up, in such order of priority inter se as the Tribunal thinks just and proper
(d) In Re: Michelin India Private Limited [MANU/TN/0817/2015] Madras High Court:
In a scheme of amalgamation, it was proposed that name of the transferor company shall be deemed to be name
of the transferee company. The Regional Director, Ministry of Company Affairs (MCA), objected to the same on
the ground that as per General Circular of MCA on Name Availability Guidelines, 2011, a proposed name is
considered to be
undesirable if it is identical with or too nearly resembling with name of the company in existence and names
already approved by the Registrar of Companies. The Transferee Company shall follow the Procedures and Rules
laid down for such change of name.
Madras High Court held that General Circular of MCA does not have any mandatory effect and it is merely advisory
in character. High Court also considered section 13 of the Companies Act, 2013 and observed that Chapter XV of
Companies Act, 2013 is a complete code by itself on the subject of arrangement/compromise and reconstruction
comprehensive enough to include a change in the name consequent on the amalgamation or arrangement.
Thus, objections raised by Regional Director is not valid.
524
Solved Paper:
CS Executive - December 2018
[As per New Syllabus]
PART-I
Q-1. Comment on the following :
(a) Raman Pvt. Ltd. has only two shareholders, X and Y. All shares were fully paid-up. X sold all his shares to Y
and the company carries on its business activities thereafter.
(b) Every company is required to disclose the details of vigil mechanism in the Board Report.
(c) A public company may issue secured irredeemable debentures.
(d) Chief Financial Officer is responsible to maintain books of account of the company.
(5 marks each)
Ans. 1:
(a) Please refer to Answer of Question No. 34 in Chapter No. 1: Introduction to Company Law.
(b) Please refer to Answer of Question No. 84 in Chapter No. 13: Accounts, Audit & Auditors.
(c) Please refer to Answer of Question No. 16 in Chapter No. 8: Debt Capital.
[Point (a) in Answer]
Secured debentures can be issued for a certain period. Unsecured debentures amounts to deposit and will have to
be paid back after 36 months.
Considering above discussion it can be concluded that irredeemable debentures cannot be issued.
(d) Please refer to Answer of Question No. 17 in Chapter No. 13: Accounts, Audit & Auditors.
Attempt all parts of either 0 No. 2 or No. 2A
Q.2
(a) Any expenditure incurred for the benefit of the society will be considered as expenditure
in pursuance of corporate social responsibility policy. Comment with reference to the provisions of the Companies
Act, 2013. (3 marks)
(b) Minutes of the meetings of the company shall be preserved for a period of not less than eight years.
Comment with reference to the provisions of the Companies Act, 2013.
(3 marks)
(c) If a company has appointed a Company Secretary then his signature is mandatory on the share certificate
issued by the company. Analyse with reference to the provisions of the Companies Act, 2013.
(3 marks)
(d) The concept of treasury shares in United Kingdom is same as buy-back of shares in India. Examine.
(3 marks)
(e) Filing of financial statements in XBRL mode and by using XBRL Taxonomy is mandatory to certain companies.
Discuss, referring to the provisions of the Companies Act, 2013.
(3 marks)
Ans. 2:
(a) Please refer to Answer of Question Nos. 1 & 6 in Chapter No. 12: Corporate Social Responsibility.
(b) Please refer to Answer of Question No. 75 in Chapter No. 14: Meetings.
(c) Please refer to Answer of Question No. 4 in Chapter No. 5: Allotment & Issue of Certificates.
(d) Share repurchases, the technical name of share buyback, is a mechanism by which a company buy-back its own
shares from its existing shareholders primarily because it intends to correct any perceived undervaluation of the
company’s shares by the market in comparison to its true or intrinsic value. There are a number of other reasons
525
as to why companies might buy-back own shares like making small adjustments in capital structure, boosting
earnings per share and operating profit preventing an impending takeover bid, arresting downward trend in share
prices, serving as the means of distributing excess cash of the company when there are no other profitable
investment opportunities etc. In view of these benefits, the introduction of buy-back in the corporate sector in
India has found favour with both the regulatory authorities and the captains of industry. Accordingly, buy-back
provisions have been introduced in India in the year 1998.
Although the concept of a company buying back its own shares is relatively new in so far as the Indian capital
market operations are concerned, the practice has prevailed in the developed markets of the West like the U.S.A.
and the U.K. since long ago.
Treasury Shares (Section 724 of UK Companies Act)
Where qualifying shares are purchased by a company out of distributable profits, the company may:
(a) hold shares (or any of them) or
(b) deal with any of them, at any time, in accordance with section 727 or 729 for disposal and cancellation of
treasury shares.
When shares are held under (a) above, then the name of the company must be entered in the register as the
member holding those shares.
For the purpose of the Act, references to a company holding shares as treasury shares are references to the
company holding shares which -
(a) were (or are treated as having been) purchased by it in circumstances in which this section applies, and
(b) have been held by the company continuously since they were so purchased (or treated as purchase).
Where a company has shares of only one class, the aggregate nominal value of shares held as treasury shares must
not at any time exceed 10% of the nominal value of the issued share capital of the company at that time.
(e) Please refer to Answer of Question No. 44 in Chapter No. 13: Accounts, Audit & Auditors.
Q. 2A
(i) On 3rd December, 2018 the Registrar of Companies applied to the Regional Director for seeking sanction to file
a winding up application against a company. On next day Le. on 4th December, 2018 the Regional Director granted
its sanction. Examine the validity of Regional Director’s action.
(3 marks)
(ii) A company declared dividend on 21st November, 2018. It reports on 22nd December, 2018 that it could not
pay dividend to 46 members as they are not traceable for last three years. Advise the company with regard to
unpaid dividend under the provisions of the Companies Act, 2013.
(3 marks)
(iii) A member of an incorporated company becomes insolvent. He claimed right to vote and receive dividend from
the company. Referring to the provisions of the Companies Act, 2013 discuss whether his claim is valid.
(3 marks)
(iv) In a case pertaining to oppression and mismanagement, the respondents pleaded that the legal heirs of a
deceased member whose name is still on the register of members are not entitled to apply before Tribunal, as only
member of the company can complain about oppression and mismanagement. Thus legal heirs have no locus
standi Examine this argument in the light of decided cases.
(3 marks;
(v) The Board of Directors of Wood Ltd. are authorised to borrow money upto ` 2 crore. The Board of directors
got sanctioned a loan of ` 30 lakh from a Bank for payment of debt liabilities of the company. But the Board of
directors used this amount towards payment of their travelling & tour expenses. Will Wood Ltd. be held liable for
repayment of the loan ? Discuss.
(3 marks)
526
Ans. 2A:
(i) As per Section 272(3) of the Companies Act, 2013, the Registrar shall be entitled to present a petition for
winding-up as per Section 271, except on the grounds specified in clause (a) or clause (e). However, the Registrar
shall obtain the previous sanction of the Central Government to the presentation of a petition. The Central
Government shall not accord its sanction unless the company has been given a reasonable opportunity of making
representations.
Powers of Central Government u/s 272 has been delegated to Regional Directors.
Thus, Registrar shall obtain the previous sanction of the Regional Director and the Regional Director shall not
accord its sanction unless the company has been given a reasonable opportunity of making representations.
As per facts given in case, the Registrar of Company applied to the Regional Director for seeking sanction to file a
winding-up application against a company and on the next day
the Regional Director granted its sanction which shows that reasonable opportunity of making representations to
the company is not given by the Regional Director and hence sanction of Regional Director is not valid.
(ii) Please refer to Answer of Question No. 18 in Chapter No. 11: Divisible Profits & Dividends.
(iii) Please refer to Answer of Question No. 6 [Point No. 7]in Chapter No. 7: Membership in a company.
(iv) The legal representatives of a deceased member whose name is still on the register of members are entitled
to file a petition u/s 241 of the Companies Act, 2013, for relief against oppression or mismanagement [Worldwide
Agencies Pvt. Ltd. andAnotherv. Mrs. Margaret T. Desor and Others, Com Cases Vol. 67 (1990), 807 (SC)]
Thus the contention of the respondent that legal representative of a deceased member whose name is still on the
register of members are not entitled to file a petition u/s 241 of the Companies Act, 2013, for relief against
oppression or mismanagement is not correct.
Such legal representative can file petition for relief against oppression or mismanagement. (v) Please refer to
Answer of Question No. 6 in Chapter No. 6: Debt Capital.
Q. 3.
(a) Ram is a practising Chartered Accountant and partner of two audit firms namely PYMG and YE. In the
immediately preceding financial year, PYMG has completed its two terms of five consecutive years in Gayatri Pvt.
Ltd. having paid-up share capital of ` 60 crore. Now Gayatri Pvt. Ltd. is considering appointing YE firm as its statutory
auditors. Can Gayatri Pvt. Ltd. appoint. YE firm as its auditors ?
What will be your answer in the following cases ?
(i) If appointing company is a one person company?
(ii) If appointing company is a small company? ‘
(5 marks)
(b) Premium Ltd. is considering buy-back of its shares without using any proceeds of shares or other specified
securities. The balance sheet of Premium. Ltd. shows the following status as on 31st March, 2018:
Asset / Liabilities Amount
Share Capital: .
1,00,000 Equity shares of ` 10 each (fully paid) t 10,00,000
Free reserves ` 5,00,000
Unsecured debt ` 7,00,000
Secured debt ` 15,00,000
Determine the maximum quantum of buy-back of shares with the shareholders’ approval as on 1st April, 2018.
(5 marks)
527
(c) The Board of directors of XYZ Ltd. wants to delegate all or any of their powers to any of the directors of the
company or any person even not in the employment of the company for transfer of securities. Referring to the
provisions of the Companies Act, 2013 advise in the matter.
(5 marks)
Ans. 3:
(a) Please refer to Answer of Question No. 47 in Chapter No. 13: Accounts, Audit & Auditors.
(b) Please refer to Answer of Question Nos. 11 & 18 in Chapter No. 3: Alteration of Share Capital:
in that financial year. [` 10,00,000 x 25% = ` 2,50,000]
(2) 25% of the aggregate of paid-up capital and free reserves of the company. [(10,00,000 + 5,00,000) x 25% = `
3,75,000]
Buy-back price = `10
Let the nominal of amount shares to be buy-back be ‘x\ (equal amount will be transferred to CRR)
Secured + Unsecured Debts/Paid-up Capital + Free Reserves <2
7,00,000+ 15,00,000/ 10,00,000 - x + (5,00,000 - x) = 2
22,00,000/15,00,000 -2x = 2
22,00,000 = 30,00,000 - 4x
- 8,00,000 =-4x
x = 2,00,000
Since, out of the above three calculation minimum amount is ` 2,00,000; hence buy-back is possible to the extent
of ` 2,00,000 ie. 20,000 shares.
(c) Delegation of powers for transfer: It is the articles of the company which authorize the Board of directors
to accept or refuse transfer of securities, at their discretion. The Board further have the power to delegate all or
any of their powers to any of the directors of the company or any person even not in the employment of the
company. Therefore, the articles of association should authorize the Board of directors to delegate the powers
suitably. Only in the case of refusal to register a transfer, the directors are required to exercise their discretion.
Keeping in view above discussion, the Board of directors of XYZ Ltd. can delegate all or any their powers to any
directors of the company or any person even not in the employment of the company for transfer of securities.
(d) Please refer to Answer of Question No. 42 in Chapter No. 15: Institution of Directors.
PART-II
Q.4.
(a) Anil, a shareholder holding 9% equity shares of the company, who is not holding any directorship wants to stand
for directorship in Pritam Ltd. in its next annual general meeting.
State the procedure for appointment of Anil as per the provisions of the Companies Act 2013.
(5 marks)
(b) Articles of Reality Ltd. provides that directors participating through audio-visual means in its Board meetings
shall always be counted for quorum. Examine the validity of this provision with reference to the Companies Act,
2013.
(5 marks)
(c) Logical Solutions Ltd. a listed company, is having a Corporate Social Responsibility (CSR) committee
constituted with the following members :
Rohan Whole-time director & Chairman of CSR committee and Board
Sohan — Non-executive director Mohan — Independent director
528
Can company constitute a Nomination and Remuneration committee consisting of same three members of CSR
committee with same composition ? Discuss.
(5 marks)
(d) Draft an appropriate resolution to authorise the Board to borrow for company's business upto a limit beyond
paid-up share capital and free reserves. Assume facts and figures.
(5 marks)
Ans. 4:
(a) Please refer to Answer of Question Nos. 6 & 12 in Chapter No. 17: Meetings of Board and its Committees.
(b) Please refer to Answer of Question No. 42 in Chapter No. 16: Institution of Directors.
(c) Please refer to Answer of Question No. 34 in Chapter No. 16: Powers & Duties of Directors and Answer of
Question No. 1 in Chapter No. 12: Corporate Social Responsibility.
(d) Borrowing in excess of paid-up capital and free reserve [Section 180]
RESOLVED THAT the consent of the company be and is hereby accorded to the Board of Directors of the Company
under Section 180(l)(c) and all applicable provisions if any, of the Companies Act, 2013 read with Article 43 of the
Article of Association of the company, to borrow money for and behalf of the company from time to time as
deemed by it to be requisite and proper for the business of the company, but so that money to be borrowed
together with the money already borrowed shall not exceed ` 5,000 Crore (Five Thousand Crore) in excess of the
aggregate of its paid-up share capital and free reserve of the company as per latest audited balance sheet, apart
from temporary loan obtained from the Company’s Banker in ordinary course of business.
RESOLVED FURTHER THAT the consent of the company be and is hereby accorded to the Board of directors of the
company to create charge/provide security for the sum borrowed on such terms and conditions as the Board of
directors think fit as may be acceptable to the lenders to secure borrowing of the Company.
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, the Board of Directors be and is hereby
authorized to do such acts, deeds, things and matters as the Board of Directors may in its absolute discretion
consider necessary or appropriate for such borrowing by the Company.
[Explanatory statement to the resolution to be set out here]
Attempt all parts of either Q. No. 5 or Q. No. 5A
Q. 5.
(a) Kirti Ltd. has total paid-up share capital of ` 23 crore and its annual general meeting is scheduled on 27th
December, 2018. Ritik is holding paid-up share capital having nominal value of ` 3 crore and Sonu is holding paid-
up share capital having nominal value of ` 2.4 crore. On 24th December, 2018 both Ritik and Sonu wanted to issue
proxy in favour of Rohit to attend meeting on their behalf. Rohit is not a member of any company. Decide under
the provisions of the Companies Act, 2013 whether both Ritik and Sonu can appoint Rohit as their proxy.
(4 marks)
(b) In Pallavi Chemicals Ltd. resolution for issue of bonus shares in the general meeting was put to remote e-
voting and requisite majority has approved but quorum is not present at the general meeting. What would be the
implications ?
(4 marks)
(c) Assume yourself as Company Secretary in practice and secretarial auditor of Rama Ltd., which is having its
annual general meeting scheduled on 17th August, 2018 at its registered office in Mumbai. On 16th August, 2018
you have a business meeting fixed at Kochi and return flight to Mumbai in the evening of 16th August, 2018. But
due to bad weather conditions all flights departing from Kochi are declared cancelled. Discuss thi alternatives
available to you with regard to the annual general meeting of Rama Ltd.
529
(4 marks)
(d) A Board meeting of a listed public company was called at shorter notice to transact an urgent business. None
of the Independent directors could attend the meeting. Examine the validity of resolution(s) passed at the meeting
referring to the provisions of the Co-panies Act, 2013.
(4 marks)
(e) Fashion Ltd. holds a general meeting for passing a special resolution regarding appointment of Shyamal aged
72 years as Managing Director of the company. Out of the 50 members present in the meeting 25 voted in favour,
15 against and 10 members did not cast their vote. Can company appoint Shyamal as Managing Director of the
company? Discuss.
(4 marks)
Ans. 5:
(a) Please refer to Answer of Question No. 41 [5 th bulleted point] in Chapter No. 14: Meetings.
(b) Please refer to Appendix-I Secretarial Standard-2: General Meetings” Para No. 7.2. (last line) and Para No. 3.1
8
(second last line)
As per “Secretarial Standard-2: General Meetings”, the facility of Remote e-voting does not dispense with the
requirement of holding a General Meeting by the company.
Members need to be personally present at a Meeting to constitute the Quorum.
As per the facts given in case, Pallavi Chemicals Ltd. resolution for issue of bonus shares in the general meeting was
put to remote e-voting and requisite majority has approved but the quorum was not present at the general meeting
and hence keeping in view provisions of the “Secretarial Standard-2: General Meetings” resolution for issue of bonus
shares is not properly passed
(c) Please refer toAppendix-I “Secretarial Standard-2: General Meetings” Para No. 4.3
As per “Secretarial Standard-2: General Meetings”, the Secretarial Auditor, unless exempted by the company shall,
either by himself or through his authorized representative, attend the Annual General iMeeting and shall have the
right to be heard at such Meeting on that part of the business which concerns him as Secretarial Auditor.
Thus, Secretarial Auditor of Rama Ltd. can authorize his representative to attend theAGM if he is not able to attend
the AGM personally.
(d) Please refer to Answer of Question No. 8 in Chapter No. 17: Meetings of Board and its Committees.
(e) Please refer to Answer of Question No. 11 in Chapter No. 19: Appointment & Remuneration of Key
Managerial Personnel and Answer of Question No. 64 in Chapter No. 14: Meetings.
Q. 5A.
(i) In a general meeting, a motion was put for removal of small shareholders’ director. A small shareholder
contended that only small shareholders are entitled to vote on this motion as it is related to removal of small
shareholders' director and motion should be passed as special resolution. Is the argument valid ? Analyse with
reference to the provisions of the Companies Act, 2013.
(4 marks)
(ii) On 4th September, 2018 Varun was appointed as Managing Director of Astha Ltd. by the Board of Directors
Subject to the approval of the members at the next general meeting. On 10th September, 2018 Varun in the
capacity of managing director executed an agreement with Shabeer to purchase some machines. On 3rd October,
2018 members in the general meeting did not approve the appointment of Varun. Later on company refuses to
accept delivery of machines from Shabeer on the ground that agreement was executed by Varun whose
appointment is not approved by the members. Is refusal of company valid on the said ground? Examine.
(4 marks)
(ii) SRM Ltd. has paid ` 15 lakh as an insurance premium on behalf of its Company Secretary and Managing Director
for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty
530
or breach of trust for which they may be guilty in relation to the company. Can the company pay such insurance
premium? Discuss referring to the provisions of the Companies Act, 2013.
(4 marks)
(iv) Director, Ravi, was appointed on 1st July, 2018. On 2nd July, 2018 he wrote to Managing Director of the
company to inspect the minutes of the Board meeting held on 1st August, 2017. The Managing Director refused as
he was not a director at that time, Ravi attended a meeting held on 1st September, 2018 and resigned on 3rd
October, 2018. On 4th October, 2018 he wrote to the Managing Director to send him a copy of the signed minutes
of the meeting held on 1st September, 2018. Again, the Managing Director refused. Are the actions of Managing
Director valid under Companies Act, 2013/Secretarial Standards? Comment.
(4 marks)
(v) On 5th January, 2018 in a general meeting a motion for removal of a director was put to vote. The Chairman
declared the motion passed as ordinary resolution by show of hands. In the next general meeting held on 28th
September, 2018, a member questioned the validity of the said resolution which was declared as passed by the
Chairman alleging that majority votes were against the motion and asked the Chairman to disclose number of votes
cast in favour of and against the said resolution. Referring to the provisions of the Companies Act, 2013 discuss if
the demand of member is tenable.
(4 marks)
Ans. 5A:
(i) Please refer to Answer of Question No. 23 in Chapter No. 19: Appointment & Remuneration of Key Managerial
Personnel.
(ii) As per Section 196(5), where an appointment of a managing director, whole-time director or manager is not
approved by the company at a general meeting, any act done by him before such approval shall not be deemed to
be invalid.
Thus, contract of purchase of machines executed in capacity of managing director by Varun is binding on the
company even though his appointment is not approved by the company in general meeting.
(iii) Please refer to Answer of Question No. 12 [Section 197(13)]m Chapter No. 19: Appointment &
Remuneration of Key Managerial Personnel.
(iv) Please refer to Appendix-I “Secretarial Standard-1: Meetings of the Board of Directors” Para No. 7.7.1
(v) Please refer to Answer of Question No. 52 in Chapter No. 14: Meetings.
PART-III
Q. 6.
(a) Shalini, practising Company Secretary, has disclosed information acquired in the course of her professional
engagement to a person other than the client, without the consent of such client. Can she do so ? Can she retain
the digital signature of her client for uploading e-forms on MCA portal ?
(5 marks)
(b) Rakesh, practising Company Secretary, has accepted the position of Secretarial Auditor previously held by
another Company Secretary in practice by communicating through SMS. He also used designation ‘Company Law
Consultant’ in his visiting cards. Examine with reference to the relevant provisions of Company Secretaries Act,
1980 and/or Companies Act, 2013 whether these are in order.
(5 marks)
Ans. 6:
(a) Please refer to Answer of Question No. 26 [Point (l)Jin Chapter No. 29: Legal governing Company Secretary.
(b) Please refer to Answer of Question No. 22 [Points (7) & (8)] in Chapter No. 29: Legal framework governing
Company Secretary.
531

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Contents

About the Author

Preface to Seventh Edition

CHAPTER 2 : Concept of Capital & Financing of Companies 32

CHAPTER 3 : Alteration of Share Capital 61

CHAPTER 5 : Allotment & Issue of Certificates 85

CHAPTER 6 : Transfer & Transmission of Securities 97

CHAPTER 7 : Membership 111

CHAPTER 8 : Debt Capital 129

CHAPTER 9 : Deposits 140

CHAPTER 10 : Creation & Registration of Charges 156

CHAPTER 11 : Divisible Profits & Dividends 165

CHAPTER 12 : Corporate Social Responsibility 179

CHAPTER 13 : Accounts & Audit 186

CHAPTER 14 : Meetings 222

CHAPTER 15 : Institution of Directors 255

CHAPTER 16 : Powers & Duties of Directors 282

CHAPTER 17 : Meetings of Board and its Committees 301

CHAPTER 18 : Virtual Meetings 312

CHAPTER 19 : Appointment & Remuneration of Key Managerial Personnel 321

CHAPTER 21 : Transparency & Disclosures 358

CHAPTER 23 : Majority Rule & Minority Rights 385

CHAPTER 24 : Offences, Penalties & Compounding 397

CHAPTER 25 : Amalgamation & Merger - Overview 405

CHAPTER 26 : Winding-up of Companies - Overview 426

CHAPTER 27 : An Introduction to E-Governance & XBRL 434

CHAPTER 28 : Drafting of Resolutions, Notices and Minutes 445

CHAPTER 29 : Legal Framework Governing Company Secretary 461

CHAPTER 30 : Secretarial Standards Board 478

APPENDIX I : Secretarial Standards 480

Points Partnership Company

Points Partnership Company

Registration Registration of partnership is not compulsory Registration of company is compulsory under

Liability of a Liability of a partner is unlimited. Liability of a member is limited up to unpaid

Points Company HUF

Members A company consists of heterogeneous HUF consist of homogeneous members since it

Points Company Club

Registration Registration of a company is compulsory. Registration of a club is not compulsory.

Points Limited Liability Partnership Company

Meaning Limited liability partnership means a Company means a company incorporated

Que. No. 20] Distinguish between: Company & Corporation

Points Public Company Private Company

No. of It must have at leas` 3 directors. It must have at leas` 2 directors.

Points Subsidiary Company Associate Company

Meaning Subsidiary company means a company in Associate company in relation to another

Que. No. 72] Write a short note on: An Investment Company

Sections Nature of Exemption/Privileges

Points Reserve Capital Capital Reserve

Points Reserve Capital Capital Reserve

Que. No. 3] Write a short note on: Nature of a share

Points Preference Share Capital Equity Share Capital

Profits of available for dividend Profits not available for dividend

- Profit & Loss Account - Securities Premium Account

Points Letter of allotment Letter of renunciation

Surrender Letter of allotment is required to be Letter of renunciation is not required to be