Business Legislation Study Notes Complaw

Companies Act Study Notes
The main text book Business Legislation by M C Kuchhal will have to be read thoroughly. The following study notes read along with the above mentioned book will help in understanding the concepts. The study notes are the basic bullet points and do not mention the relevant section numbers of the Act. It is necessary that the relevant section numbers of the provisions of the Act are also mentioned while answering the examination questions.
A Company is defined as a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organisational, financial, managerial and all the relevant aspects of a company. A company is an artificial legal person with a separate legal identity with a perpetual succession having a common seal having a share capital with limited liability.
Salomon vs. Salomon case Salomon set up a company Salomon & Co. Ltd with seven members (self, wife, daughter, 4 sons) which took over business assets of Salomon 38,782 and in return Salomon got shares worth 20,000, debentures secured against the assets of the company worth 10,000 and one share each of 1 for other 6 members. Company goes into liquidation; unsecured creditors claimed that their claim should be given preference over Salomons debenture as he is not separate from the company being the one man owner of the company. Court gave the judgment that the company has a separate legal identity distinct from its members and payment of debenture gets a preference.
Kinds of Companies
Private Limited company: Minimum 2 members and maximum 50 members (excluding those who are in and/or were in employment), minimum share capital of Rs. 1 lakh, restriction on transfer of shares, cannot offer shares to public, prohibits acceptance of deposit from public. Public Limited Company: Which is not a private company. Minimum 7 members, minimum share capital of Rs. 5 lakh, a private limited company which is a subsidiary of a public limited company. Government company: Any company with minimum 51% shareholding by Government, auditors appointed by CAG, annual reports presented to Parliament, State Assembly. Foreign company: Incorporated outside India, having place of business in India. Holding & subsidiary company: a company will be a subsidiary of another if it (a) controls the compositions of Board of directors of the other; or (b) holds 1

more than half in nominal value of equity share capital of the other; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary, e.g. B is a subsidiary of A, and C is a subsidiary of B, then C is a subsidiary of A. So A will be a subsi of B if (a) B controls the compositions of Board of directors of A i.e. As directors cannot be appointed without Bs consent or As directorship follow from the fact that they are holding the position of a director, manager or any office in B or As directorship is held by B or any of its subsidiary ; or (b i) B controls more than half of voting power in A; A being an existing company where preference shareholders (shares issued prior to Co Amendment Act 1960) has same voting rights as that of equity shareholders. (b ii) B holds more than half in nominal value of equity share capital of A; here shares are to be held in its own right and not in a fiduciary capacity; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary, e.g. B is a subsidiary of A, and C is a subsidiary of B, then C is a subsidiary of A. The crux of the matter is that B has some powers which it can exercise, at its own discretion and without any consent of a third party, to appoint or remove majority of As directors, i.e. to control the management of the subsidiary.
Private Limited company Its Privileges:
1) It can be formed with 2 members. 2) It is not necessary to get certificate of commencement of business. 3) Can allot shares without issuing a prospectus or a statement in lieu of prospectus. 4) Need not hold statutory meeting or file statutory report. 5) Not required to offer further shares to existing shareholders (rights issue). 6) Not necessary to file with ROC consent of directors to act as directors and to take qualification shares. 7) No restriction on managerial remuneration. 8) Central Government permission not required to increase directors remuneration. 9) Directorship of a private limited company not to be considered in calculating the maximum number of director post one can hold. 10) Central Government permission not required to grant loans to directors. 11)No restriction in powers of directors. 12)Central Government cannot prevent change in Board Of Directors which may affect company prejudicially. 13)Can advance loans to purchase own shares. 14)Can increase number of directors beyond the number specified in Articles without Central Government permission. 15)Director can vote in a contract in which he is interested. 16) No limitation on period of holding director post. 17)Company need not follow but can frame its own procedures for holding general meetings.
Conversion to a Public Limited Company Automatic conversion under law: when it fails to follow the four restrictive conditions i.e. restriction on membership to 50, restriction on free transfer of shares, restriction on issue of shares and debentures to public, restriction on acceptance of deposits from public. If it can be proved that such failure was not deliberate or it was for justified reasons, CLB may relieve the company from such consequence. Voluntary or deliberate conversion: company can by a special resolution change its Articles and remove the four restrictive conditions from it, files with ROC within 30 days of change a copy of the resolution, copy of altered Articles, copy of prospectus or a statement in lieu of prospectus containing necessary details. It will increase its minimum number of members to seven and the minimum number of directors to three, enhance its paid up capital to Rs. 5 lakhs. 2

Once the above steps are complete, it will become a public company, the words Private will be deleted from its name. Conversion of a Public Company to Private Voluntary or deliberate conversion: company can by a special resolution include in its Articles the four restrictive conditions, files with ROC within 30 days of change a copy of the resolution. It will reduce its number of members to required level. Apply to Central Government for its sanction. Once the sanction is received file it along with a copy of altered Articles with ROC.
Company - formation & registration
An idea is conceived by the Promoter. Promoter can be a person, an association of person, a company. He has fiduciary capacity towards the company and original allot tees. He must disclose all transaction he undertakes in details including any profit he makes. He can be liable to the extent of imprisonment if he makes a misstatement in the prospectus. An application with requisite fees for name sanction is made to ROC. LOI to be converted into an industrial license. Memorandum & Articles of Association printed, stamped, signed by people concerned and witnessed. Agreements if any with people to be appointed as MD, whole time directors, managers. Consent from directors to act as directors and to subscribe necessary qualification shares (not necessary for private company, company without share capital, a company which was a private before becoming public). A declaration that all the requirements of this Act and the rules there under have been complied with in respect of registration and matters precedent and incidental thereto and duly signed by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a secretary, or a chartered accountant, in whole-time practice in India, who is engaged in the formation of a company, or by a person named in the articles as a director, manager or secretary of the company. Notice of registered office location. All the above shall be filed with the Registrar for issue of Incorporation Certificate.
Capital subscription (public company)
*SEBI Guidelines for disclosure and investor protection. *File prospectus with ROC, circulate it to invite public to subscribe shares. *Where no prospectus issued, Statement in lieu of prospectus to be filed with ROC at least 3 days before allotment. *Share application received with application money. *Minimum subscription of 90% received (including from underwriters). Minimum subscription not received within 60 days of closure, money to be refunded and allotment cant be made. *Shares allotted, allotment letters sent, return of allotment filed with ROC, shares certificate issued To get Commencement of Business certificate (public company) one has to file with ROC that shares payable in cash have been allotted up to minimum subscription amount. all money paid by directors towards their shares in proportion as others. no liability to refund to applicants due to a failure to apply or not getting permission from Stock Exchange for listing. 3

declaration in prescribed form duly signed by one of the directors or secretary (or a practicing secretary) that all the above have been complied with Fine @ Rs. 5,000/day for contravention.
Memorandum and Articles of Association Memorandum of Association
Name clause: The name of the company followed by Private Limited or Limited (in case of public limited) is to be mentioned here. In case of a charitable company set up with limited liability under a license from CGOI need not mention the words limited with the name Registered Office clause: The state in which the office will be situated is to be mentioned here. Object clause: Objects must be legal, not against public policy, not for purpose like buying its own shares, declaring dividend out of capital. Object clause is divided into the following: Main objects, i.e. the core objects the company will pursue Ancillary Objects, i.e. the objects which are necessary to pursue the Main Objects Other Objects are objects that are not included above and which can be pursued by the company if the same are authorized by a special resolution or an ordinary resolution & duly sanctioned by CGOI. The Doctrine of Ultra Vires Ultra Vires means beyond the powers. The company cannot act beyond the object clause defined by the MOA. Any act done which is ultra vires the object of the company is totally null and void, cannot be enforced, and cannot be subsequently ratified in any way even by all the shareholders. MOA is a public document and accordingly every person entering into a transaction with the company is supposed to be aware what the company can do. The liability clause: To mention that the liability of members are limited to the extent of any unpaid amount on their shares. MOA can also provide that the liability of directors is unlimited. In case of a company limited by guarantee, it will mention the amount which each member undertakes to contribute to the assets of the company in case of winding up. Capital clause: Every company with a share capital mentions here the total share capital, with which a company is to be registered. There is no upper limit for this. It should be sufficiently high enough so as to facilitate in smooth running of business. In case of an unlimited company having a share capital, this clause is not required in MOA. The Articles of the company has to mention the total share capital, with which a company is to be registered. Association clause: Here the signatories to the memorandum makes the following statement duly signed by them and attested by witness. We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of the MOA and we agree to take the number of shares in the capital of the company shown against our name. In case of a public limited company there must be at least seven such signatories and at least two in case of a private limited company. Alteration of Memorandum: 4

First approved in BOD meeting and the placed to members for approval. Name change: By special resolution and Central GOI permission. CGOI permission not needed for addition/deletion of the word private If CGOI feels the name to be changed then it can instruct, ordinary resolution is ok. File resolution with ROC within 30 days. CGOI approval to be filed within three months Change of Registered Office from one city to another within the State by special resolution; copy of resolution filed with ROC within 30 days. New office address to be intimated to ROC within 30 days. If change within the same city Board resolution is ok. Change of Registered Office within the State but under different ROC jurisdiction (Tamil Nadu & Maharashtra) by special resolution; copy of resolution filed with ROC within 30 days, approval of Regional director also required. Change of Registered Office from one State to another State by special resolution and sanction by CLB; copy of resolution filed with ROC within 30 days. Such changes only when it is necessary for the following: (a) to carry on its business more economically or more efficiently; (b) to attain its main purpose by new or improved means; (c) to enlarge or change the local area of its operations' (d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company; (e) to restrict or abandon any of the objects specified in the memorandum; (f) to sell or dispose of the whole, or any part, f the under taking, or of any of the undertaking, of the company; or (g) to amalgamate with any other company or body of persons. CLB before confirmation order of change ensures that notice in two newspapers, notice to creditors and obtaining their assent, or pay off all creditors. Notice to State Government. Notice to existing ROC to present their objections. Certified copy of CLB confirmation order along with altered MOA to be filed with both ROC within 3 months. Present ROC will transfer all records to new ROC. Got registration Certificates of transfer from both ROC. New office address intimated to new ROC within 30 days. Change of Object clause: Change is possible if the purpose can be justified as in the case of change in registered office from one state to other. Change by special resolution; copy of resolution along with altered MOA filed with ROC within 30 days. ROC to issue certificate within 30 days if everything is ok. Change in Liability clause: Limited liability can be made unlimited only when it is agreed by each & every member. In case of companies with unlimited liability, liability can be made limited by special resolution and sanction by court; copy of resolution , courts order respectively to be filed with ROC within 30 days, three months. Change of Capital clause clause: Change is possible by ordinary resolution if is covered by Articles; otherwise make changes in Articles by special resolution; copy of resolution along with altered MOA filed with ROC within 30 days. . However such resolution not required if the company is ordered by CGOI to convert loans, debentures into shares and thus increase the capital. ROC to be intimated within 30 days.
Articles of Association
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Articles of Association specify the rules and regulations for internal management of the company. It defines the duties, rights and powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made. In case of a private limited company the Articles are registered along with the MOA. In case of a public limited company it may be registered. In case it is not registered, the Table A (given at the end of the Companies Act) will automatically apply.
For detailed contents of an Articles of Association please refer to page 211 of the text book Business Legislation by M C Kuchhal.
Articles of Association can be altered by special resolution -- provided they are subject to the provisions of this Act and to the conditions contained in its memorandum, any alteration made in the articles to effect converting a public company into a private company requires approval by the CGOI. CGOI permission is also required in case of a public company where any change leads to change in directorship by rotation, change in directors remuneration. any alteration so made shall, subject to the provisions of this Act, be as valid as if originally contained in the articles. Retrospective effect is also possible, provided it does not affect things already done. change has to be legal, in broader interest of the company. change cannot lead to defrauding or oppression of minority members. Change effected by CLB to take care of oppression and mismanagement of minorities cannot be further changed without CLBs permission. change cannot lead to change in the rights of anyone under a contract, e.g. payment of salary to director as per an independent contract. change cannot lead to change increase in liability of a member without his consent. MOA & AOA once registered - binds the company and its members. Company is bound to its members & vice a versa. it is a constructive notice to all outsider dealing with the company; but outsiders cannot bind the company or its members i.e. Articles does not create any contract with outsiders ( a member is also an outsider). Here it is understood that all the internal management is done in accordance with law, delegation of authority and what is provided in MOA & AOA, i.e. The Doctrine Of Indoor Management. Exceptions to The Doctrine Of Indoor Management. *Where one has knowledge of irregularity, e.g. a director also having a separate contract with the company. *Where the outsider failed to make enquiries which would have revealed the irregularities; e.g. cheque drawn in favor of a company is deposited by the principal shareholder and the director into his own bank account this is not usual and the bank should have enquired. *Where the outsider relied upon a forged document.
Prospectus
Prospectus" means any prospectus, notice, circular, advertisement or other document inviting offers from the public for the subscription on purchase of any shares in, or debentures of, a body corporate. It is an invitation to offer for sale. (Issue House) It has to be in writing. Invitation to public means an invitation to any section of the public. 6

SEBI guidelines for disclosure and investors protection are complied with. A draft has to be approved by Lead Managers, Stock exchange and Financial Institutions underwriting the issue. It is signed by all directors, dated and along with following documents filed with ROC for registration. An independent experts consent in writing. Copy of all contracts for appointment & remuneration of managerial personnel. Any adjustment made by auditors in their reports in P&L, B/S and rates of dividend. Consent from auditors, bankers, brokers, solicitors etc. to act in that capacity. It must be issued within 90 days of ROC registration. Fine upto Rs. 50,000 for non registration.
Contents of a Prospectus (Sch II) Name, registered office address, objects of the company. Names, address, background of promoters, MD and other directors, details of other director posts they are holding. Size of present issue, pref allotment if any, amounts to be paid with application & allotment, Date of opening, closing. Names, address of auditor, company secretary, banker, legal advisors, lead managers, brokers, stock exchange. Details of underwriters with directors declaration. Consent from people (mentioned above), CRISIL etc, rating Contents of Articles/contracts for managerial personnel appointment, remuneration, compensation for loss of office. Time and procedure for allotment, issue of certificates. Min subscription details. Project details with SWOT analysis with risk perception. How long in business, last 5 years financials, any asset revaluation done, any tax/duty benefit to members company Defaults if any so far. Public issue made and market performance of the share in the last 3 years (if applicable). Particulars of properties to be acquired out of the issue. Issue costs. One person can make one application; application in fictitious name punishable with up to 5 years imprisonment Abridged prospectus to accompany all application forms. Exceptions: Underwriting, when not offered to public, offer to existing members, issue exactly similar to previous one and dealt with in recognized SE. Liabilities in case of issue of Prospectus *In case the subscriber depended on the prospectus and there were any material misrepresentation of facts (and not of law or opinion), contract can be rescinded; damages by way of interests, in case of fraud, claimed against the company. Application to be made within reasonable time. *Even the director at the time of issue of prospectus, any person who has authorized himself to be named as director or future director, promoter or any other person who has authorized the issue of prospectus can be, for material misrepresentation of facts & fraud, held liable for damages for loss, criminal liability. *In case the subscriber depended on the prospectus and there were any material misrepresentation of facts and he was deceived. Directors can defend themselves if they can prove that they were not aware or it was without their knowledge, or once they got to know about misrepresentation, withdrew their consent before issue of prospectus. 7

Any person who induces others, through misrepresentation fraud, concealment, dishonest , to enter into agreement for purchase of shares, make profit out of price fluctuation etc. can be punished with jail up to 5 years, fine up to Rs. 50k or both. Shelf Prospectus Public Financial Institutions, Public Sector or scheduled banks can also file Shelf Prospectus with ROC. A Shelf Prospectus has a validity of 1 year from the date of opening of the first issue of securities under the prospectus; which means that it will not be required to file a fresh prospectus in case of any new issue during this period of one year. However, every time a new issue of securities is made during the aforesaid period of 1 year, an Information Memorandum, providing the details of all changes during the intervening period, is to be filed. Information Memorandum can also be filed by Public cos prior to issue of prospectus to assess the marketability of the offer. A prospectus, as a Red-herring prospectus is to be filed at least 3 days before opening of the offer. Red-herring does not contain complete particulars on the price and the quantum of securities offered. Any variation between the Information Memorandum and the Red-herring prospectus are to be highlighted. Any advance money received cannot be used till the offer is open, and people should have the option to withdraw. Misrepresentation in Information Memorandum and the Red-herring prospectus will be have similar liabilities to that of prospectus. Once the offer is closed, the Final Prospectus with details of share raised, final price to be filed with ROC and also SEBI (in case of listed companies).
Allotment Of Shares
Allotment to follow the provision of law of contract. Before first allotment made one needs to ensure: Prospectus, statement in lieu filed. Application money at least 5% received and banked. This money cannot be used till allotment is complete. Subscription list opened (kept open min 3 days) Minimum subscription received within 60 days from close of offer. Otherwise money to be refunded within7 days, beyond 7 days with interest @15% In case securities to be dealt with in a Stock Exchange, allotment will not be valid if application for enlistment not made of application refused. All money to be repaid. Initial offer of Rs 10 crore or more, allotment in demat form. Return of Allotment to be filed with ROC within 30 days of allotment providing details of allotee, money received in case of allotment made for cash, and for consideration otherwise than cash details of the contract, details of bonus shares, copy of the resolution along with details of shares issued at discount. For default in filing, fine @ 5,000 per day of default for every officer in deault.
Share Capital
Shares Stock is a bundle of fully paid shares. Authorized Capital 100,000 of Rs 10 each Rs. 1000,000/Issued Capital 97,000 Rs. 970,000/Subscribed Capital 95,000 Rs. 950,000/Called Capital Rs. 8 per share Rs. 760,000/Reserve Capital Rs. 2 per share = Rs. 190,000, which can be called up in the event of winding up. 8

Share Capital Reduction *Allowed for legitimate reasons. *Articles must permit, otherwise do the needful. *Pass a Special resolution, file with ROC within 30 days. *Apply to court. Court will ensure that interest of all creditors shareholders not affected; all are given adequate notice; in case creditors objecting, consent received or have been fully paid up; it is fair and equitable to all shareholders. *Court order with changed MOA to be filed with ROC within 3 months. ROC will issue the certificate within 30 days. *Reduction can be carried in any manner e.g. reduce the unpaid amount on shares, write off lost capital, pay off excess capital. *Liability of members get reduced. In case a creditor, entitled to object reduction, got missed out and company after reduction is unable to pay his debt, then court may order members to contribute sums they would have done before reduction. *Reduction of Reserve Capital not permitted. *Redemption of Preference Shares and Forfeiture of Shares not considered as reduction. *Reduction can also happen in case of (a) Purchase of own shares specifically allowed under law and (b) in case it is done to relieve oppressed members as part of prevention of oppression. Share Capital Reduction - Buyback of own shares Buyback of own shares is a strategy followed by corporate for the following reasons: ** as long as it does not affect the future earning capability of the company, it will help in reducing the number of shares outstanding and thus the Earning per Share (EPS) of the company. ** in case of a cash rich company buying back shares at the market rate amounts to good investment. ** it will reduce the floating stock from the market and consequently prevent any hostile takeover bid and thereby maintaining the control over the organization. Buyback of own shares is allowed as per provisions of Sec. 77A Sec. 77B and subject to strict guidelines of CGOI for unlisted & private companies and SEBI guidelines for listed companies. Out of free reserves security premium account, proceeds of shares & specified securities. Transfer an amount = nominal value to Capital Redemption Reserve It is allowed by Articles. Max 25% of paid up capital + free reserves; 25% of paid up capital in case of buyback of equity shares Special resolution. Can be done by Board resolution only for buyback up to 10% of paid up capital + free reserves and one such offer in a year. Debt Equity ratio = < 2:1. CGOI can allow otherwise. Shares and securities sought to be bought are fully paid. The whole process to be completed within 12 months. Solvency declaration filed with ROC, SEBI ( for listed co). Buy back from existing shareholders, open market, odd lots, ESOPs. Securities extinguished, physically destroyed. No further issue of same kind within 6 months. Exceptions: Bonus issue; conversion of share warrants, debentures, preference shares, ESOPs. Register maintained and return filed with ROC, SEBI. Default on compliance will lead to fine up to Rs. 50k or imprisonment or both. Cannot buyback in case of default in deposit payments, redemption of debentures & preference shares, repayment of bank/financial institutions loans. Cannot buyback through subsidiary companies, investment companies. 9

Cannot buyback in case of default in (a) payment of dividend, (b) preparation of accounts in Schedule VI format, and (c) Annual Return filing. Various Types of Shares Preference Shares: Preference as to payment of dividend at a fixed rate, and as to return of capital on winding up. They do not have any voting right except in cases of winding up and unpaid dividends. Cumulative Preference Shares Non Cumulative Preference Shares Participating Preference Shares Non Participating Preference Shares Convertible Preference Shares Non Convertible Preference Shares Redeemable Preference Shares; share are ordinarily redeemed on winding up. Shares redeemable within 20 yrs can be issued. Equity Shares Equity Shares with differential rights to dividend, voting. CGOI as per notified rules can allow up to 25% of total share capital provided the company had distributable profits in 3 preceding years and no default in repayment of deposits. allowed by Articles and shareholders in general meeting by ordinary resolution specifying the differential rights. conversion of equity shares with normal rights to shares with differential rights and vice a versa not allowed. shares with differential rights are entitled to bonus shares and other rights also. Variation of such rights Shares issued at premium there is no restriction. However premium amount received can only be used for issue of bonus shares, to meet expenses on discount or commission on issue of shares & debentures, to write off prelim expenses, to pay any premium on redemption of preference shares, for buyback of own shares. Shares issued at a discount can be done only after one year of commencement of business, authorized by ordinary resolution stating the max discount (normally not beyond 10%), sanctioned by CLB and issue made within 2 months. SWEAT Equity ESOPs follow similar procedure as above, but needs to be passed by special resolution and as per SEBI guidelines. Rights Issue Further issue of shares, Rights issue - Authorized by Articles, otherwise by special resolution alter Articles. Authorized capital to be increased if needed. Can be done after expiry of two years from incorporation or after one year after first allotment. Compliance of CGOI, FEMA (wherever applicable) SEBI guidelines, Stock exchange guidelines. Offer first to existing members in proportion to their holding; notice of at least 15 days given to accept, renounce (unless otherwise mentioned in articles) in favor of others or reject the offer; directors in case of rejection can issue the shares in appropriate manner. Company may not require rights issue if agreed by special resolution or ordinary resolution & CGOI sanction, and in the best interest of the company. Must follow almost all the procedures required in first issue. Exceptions: Private company Conversion of debentures, loan. 10

Bonus Shares Out of undistributed reserves/profit, share premium, capital redemption reserve. Allowed by Articles. Board makes a proposal to shareholders for sanction. To be effected within 6 months of Boards approval. In case of listed shares, SEBI guidelines to be followed: All convertible debentures are converted or similar benefits reserved for them. All partly paid shares have been paid up. No default in interest, principal payment on deposits, statutory dues of employees. Authorized capital to be increased if required. Certificate from company, auditor or practicing co secretary Calls on Shares Board resolution, in accordance with provisions of articles/table A. Max 25% in one call and at least one month gap between two calls. Notice given to members and are allowed at least 14 days. Directors can revoke or postpone call. Payments from members towards the unpaid amount on shares can also be received in advance, but that amount will not carry any voting rights. Directors may allow interest. Forfeiture of Shares - at least 14 days Notice to members. Members prior liability remains. If Articles provide, liable up to 3 years for the unpaid amount. Forfeited shares can be reissued by a Boards resolution at a discount not more than the forfeited amount or at a premium.
Share Certificates & Warrants
Share Certificates to be issued as an evidence to title. It cannot be transferred by mere delivery. It is to be issued within 3/2 months respectively on allotment or transfer. Under SEBI rules within 1 month of transfer request. In case a share certificate is lost, an affidavit and indemnity bond for issue of Duplicate certificate is required. In case a certificate is defaced/mutilated, the same needs to be sent for issue of Duplicate certificate. Share Warrants are just like bearer cheques; it is a negotiable instrument and can be transferred by delivery. It can be issued only by public limited companies limited by shares, if authorized by Articles and approved by CGOI. A share certificate for fully paid shares can be converted into a share warrant. On issue of the warrant, the name of the member is removed from Members Register and his rights are normally curtailed by Articles. Not considered as qualification shares for directorship. Dividend paid through coupons. In case a warrant is defaced or mutilated, the same needs to surrendered for issue of Duplicate certificate. In case a warrant is lost, duplicate is hardly issued.
Share Transfers
Transmission of shares is automatic transfer under law like death, insolvency of lunacy of the holder. Legal representative can get it registered in his name or transfer to someone else. In case of indecision, company may withhold dividends, other payments and benefits. Legal representative will file succession certificate, probate in case of a will. It is not necessary in case there is a valid nomination. Nomination can be made by individuals holding shares in their own right; body corporate, HUF, societies holding shares cannot avail of this facility. Similarly, nomination can be made only in favor of individuals; nominee cannot be a firm, body corporate, HUF, societies . 11

Nomination can also be made in favor of a minor; in such cases the date of birth of the minor and the name and address of the guardian is to be mentioned. Nominee can get it registered in his name (by filing a copy of the death certificate) or transfer it to someone else following the share transfer process along with a copy of the death certificate. In case of indecision the Board Of Directors will send a notice; in case no response is received within 90 days, the company may withhold dividends, other payments and benefits. In case of a sale of shares by one individual to another, transfer of ownership needs to happen. Such Transfer need to comply with the provisions of Articles. A Transfer form, duly stamped by the prescribed authority, needs to be filled in and submitted along with original share certificates to company (a) in the case of shares dealt in or quoted on a recognised stock exchange, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority or within 12 months from the date of such presentation, whichever is later; (b) in any other case, within two months from the date of such presentation. CGOI can allow extension of time. Following transfers need prior approval of CGOI: Transfer of shares aggregating to more than 25% of the paid up equity shares of a public company or private company which is a subsidiary of a public company. Transfer of shares, of a company in which CGOI or a corporation set up under central act or a financial institution holds not less than 51% of share capital Transfer of shares by a body corporate or bodies corporate under the same management holding, whether singly or in the aggregate, 10% or more of the nominal value of the subscribed equity share capital of (a) any other Indian company (b) a foreign company having an established place of business in India. CGOI can also intervene in case of change in prejudicial interest. A private company can, by its Articles, restrict registering of transfer of shares. BOD must give reasons for such refusal. Transferee have rights to appeal also. A transfer is complete only the company makes necessary change in the Register of Members. Till such time in the eyes of law, the transferor remains the legal owner of the shares and entitled to receive dividends and liable to pay any unpaid calls. So once the transfer deed is executed, it is a relationship of trust and equity between the transferor and transferee; subsequent to execution of transfer deed, transferor will hand over any dividends received by him and the transferee indemnifies the transferor against any future calls paid by him.
Membership
How to become a member? Every person subscribing to the MOA Every person who agrees in writing to become a member Every person holding equity shares and whose name is entered as a beneficial owners in depository records. Every person who acquires shares through transmission , transfer. Who can become a member? Every Indian individuals singly or jointly. Foreigners can also become member subject to FEMA regulations. HUF through Karta. Company, if authorized by Memorandum and Articles. Registered Society, if authorized by Memorandum and Articles. 12

Insolvent. Minors through their legal guardian, in case the shares are fully paid and are acquired through transfer/transmission. Cessation of membership through transfer/transmission, forfeiture, share warrants, redemption, buy back, winding up. Rights of a member. To receive share certificates, transfer shares in accordance with Articles, get his name as member. To receive dividend, bonus shares, rights shares, apply to court to restrain Board from declaring ultra vires dividend. To receive copies of MOA & AOA, copies of Annual Report, Statutory Reports, attend meetings and receive proceeds of general meetings, resolutions, agreements. To convene EGMs To inspect documents. To remove directors. To participate in appointment of auditors. To apply to court for voluntary winding up; rights on the assets of the company after meeting creditors liabilities. Liabilities of a member. To take shares when allotted, pay for the shares on call, in case of partly paid shares contribute to the assets of the company in case of winding up. To abide by the majority of members decision. In case a companys number of members go below the statutory number and it continues in business beyond 6 months then the members are severely liable.
Borrowing
Companies can borrow in accordance with its requirement. Subject to restrictions in MOA & AOA, directors are free to borrow. In case total borrowing exceeds paid up capital + free reserve shareholders ok in general meeting is needed. Ultra vires borrowings: Company Directors Borrowings can be secured as well as unsecured. Secured borrowing are secured by a charge on assets. Fixed mortgage can be legal or equitable. Mortgage of some specific assets by registering transfer of ownership or by handing over the title documents and a memorandum of deposit; to be registered with ROC. Floating mortgage, a floating charge on a class of assets by creating a deed and needs to be registered with ROC. It becomes fixed if company goes into liquidation or cease to do business or when debenture holders exercise their rights. Creditors will then have preference in their payments after statutory liabilities like rates and taxes, wages salaries and other statutory employee dues and payment to hire purchaser. A floating charge created within 12 months immediately preceding winding is not valid, unless it is proved that company was solvent after the charge creation or company actually received cash after the charge creation. Borrowings can be in various forms, which can be short term or long term. Bank borrowings CC and OD limits, discounting of bills, term loans. Deposits from Public Issue of Debentures Borrowing Public Deposits 13

Deposits from public can be received by public companies other than banking & financial institutions, in accordance with the act and rules framed by CGOI in consultation with RBI. The company has to release an advertisement providing details of its financial position. Deposits can be received by companies who have not defaulted in repayment of deposits and interest thereon. Defaults in repayment are punishable with fine = twice the deposit amount, and every officer with imprisonment up to 5 years. Accepting deposits in contravention of law, fine Rs. 50,000 to Rs. 10 lakhs. CGOI in consultation with RBI may exempt/relax the above. In case of defaults in repayment, CLB can also direct companies to repay; if the company defaults again, then every one responsible punishable with imprisonment up to 3 years and fine of Rs. 500/day for the default period. For deposits up to Rs. 20k (small depositors) company has to provide on a monthly basis to CLB details of any default in repayment. CLB will pass its order. Company cannot accept deposits from small depositors unless each small depositors have been repaid. Every ad has to mention about such defaults. Any loan taken from bank after such default will be used first to repay the small depositors. For non compliance, punishment with imprisonment up to 3 years and fine of Rs. 500/day for the default period. Borrowing Debentures Debentures" includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. It is a certificate of loan issued under common seal of the company with the undertaking to pay back the debt at a specified date and with interest. BOD can at any time issue debentures. Procedures are almost similar to that of share issue except that it is not required to receive 5% application money and depositing the same in a bank, minimum subscription; allotment return not required to be filed with ROC. Debentures can be secured or unsecured, redeemable, registered or bearer, convertible fully or partly. Interest of debenture holders are safeguarded by *Public issue of only secured debentures *A trust deed created and trustees appointed *Creation of Debenture Redemption Reserve *Approach CLB in case of default in redemption In case of default in redemption, they like other creditors can apply for winding up by court. They can also use their rights mentioned in Trust Deed, appoint receivers, appoint managers to run the business, take possession of mortgaged properties and sell them to recover their money, approach court to appoint receiver or for an order of foreclosure.
Directors
Directors are officers of the company. Any individual of sound mind, not adjudged insolvent, not been convicted by court with imprisonment of six months or more for moral turpitude can become a director. He has to give his consent in writing to act as a director; take up qualification shares (in case of a public company). Any person, who has been a director of a public company which has defaulted in filing of annual accounts, repayment of public deposits or redemption of preference shares, cannot become a director of a public company for 5 years. Any individual willing to become a director has to apply for a DIN (Director Identification Number) with the CGOI. 14

Private company and a Public company respectively must have minimum 2 directors and 3 directors. Maximum number of directors, normally fixed by Articles. In case of a public company having a paid up capital of Rs. 5 crore or more and number of nominal shareholder (each holding less Rs. 20k) more than thousand, such shareholders can appoint a director for max 3yrs (+3yrs). First directors appointed by subscribers to MOA and their names are normally mentioned in Articles. Subsequent directors of a public company & private co subsidiary of a public company are appointed by rotation by the shareholders in AGM; for a private company as per the provisions in Articles. For a public company, private co subsi of a public company at every AGM at least 2/3rd of the Directors must retire by rotation and fresh appointment of each has to be made by an ordinary shareholders resolution in the AGM. A retiring director can also seek re-election. In case of any new person willing to be appointed as director, a 14 days notice with Rs. 500 deposit to be given to the company. In case appointments are not made, the meeting gets adjourned by 7 days; if appointments not made in the adjourned meeting, then retiring directors are reelected provided the director concerned is willing, not disqualified and he has not lost the motion for re-election, or there is no decision taken for not filling the vacancy. A public company, private co subsi of a public company, has the option to include clause in Articles for election of 2/3rd directors by proportional representation every three years. Any casual vacancy in the intervening period can be filled by the BOD for the unexpired period. Additional directors, within the limits specified in Articles, to hold office till next AGM can be filled by the BOD. Alternate director during the absence of a director for more than three months can be filled by the BOD for the unexpired period or till such time the director comes back. CGOI may, as per CLB order, appoint such number of directors in situation of oppression and mismanagement. Financial Institutions can nominate one or more directors. A person cannot at any point of time hold more than 15 posts of a director excluding the post of an alternate director, director of a private, unlimited company and an association not for profit. Apart from the condition one has to fulfill to become a director, a director will also have to vacate office in case - he absents from 3 consecutive BOD meetings or for 3 months continuously - he, his firm or his company takes a loan from the company without CGOI approval - he fails to disclose to BOD his interest in any co contract - he ceases to hold the post that qualified him to be a director - he or his associate takes up a place of profit in the company without a special resolution of shareholders - he is removed by shareholders - he is removed by CGOI for fraud, misfeasance, breach of trust he is removed by CLB for prevention of oppression, mismanagement he has been convicted. - he resigns, if allowed by Articles. A director can be removed by: 15

# shareholders by giving special notice, ordinary resolution; director is to be informed and given an opportunity to make representation in writing to be circulated to shareholders, except in case where CLB orders otherwise; directors can claim compensation for wrongful removal; vacated position can be filled up in the same meeting for the unexpired term. This action is not possible in cases of directors appointed by CGOI, a private company director, a director appointed by special representation, proportional representation. # by CGOI on order of CLB for alleged fraud etc. # by CLB for oppression, mismanagement. In cases where directors are removed by CGOI, CLB, they cannot hold office for 5 yrs. Can be pardoned. Directors remuneration are required to be provided in Articles or allowed by shareholders in a general meeting. Total remuneration for all directors, managers (of a public company) for a financial year not >11% of net profit. Whole time director, MD may be paid max 5% of net profit, max 10% together in case of more than 2 whole time directors. A director not in whole time employment, can be paid monthly, quarterly, annual payment with CGOI approval, or a commission approved by special resolution subject to max 1% in case company has full time directors otherwise 3% of net profit. CGOI approval required for any payment in excess of the above limits or in case of inadequacy of profit. For appointment of managerial personnel of a public company without CGOI approval, the following Sch XIII conditions must also be met by the person concerned to be appointed: a) Resident in India and age limit between 25 70 years. b) Not imprisoned or paid fine exceeding Rs. 1,000 for any violation of law. c) Not convicted under COFFEPOSA. d) In case a person holds more than one director post, then total remuneration must not exceed the max limit. For payment of remuneration to MD, whole time director or manager without CGOI approval, it has to be approved by shareholder resolution and compliance certificate by auditor, secretary or practicing CS . In case of loss or inadequacy of profits, without CGOI ok (A) a remuneration between Rs. 75,000 Rs 200,000 p.m. (depending on effective share capital) can be paid if it is approved by remuneration committee resolution, and the company, in the last financial year before making such appointments, did not default in repayment of any debts for a continuous period of 30 days. (B) Limit of Rs. 75,000 Rs 200,000 p.m. mentioned above, can be increased to Rs. 150,000 Rs 400,000 p.m. if in addition to above conditions being met, it is approved also by a special resolution for payment for not more than 3 years and a note sent with notice giving remuneration details and reasons for inadequacy of profit. CGR of BOD mentions the above. (C) Limit of Rs. 150,000 Rs 400,000 p.m. mentioned above, can also be exceeded if in addition to meeting the conditions mentioned in (B) above, prior CGOI approval is received. In case of negative effective capital the conditions in (C) above are to be followed. (D) In case of an unit in SEZ, without prior CGOI ok, a remuneration of up to Rs. 20 lakhs p.m. can also be paid provided such companies did not raise any money from public issue in India and did not default in payment of any debt in India. Here even a non resident can be appointed as director if he has a valid employment visa.
16

Aggregate capital = paid up capital + securities premium + reserves & surplus + long term loans & deposits repayable after 1 year aggregate of investments accumulated loss prelim expenses not written off. Remuneration committee should consist at least 3 non executive independent directors including nominee directors. Directors are also eligible for other employee related benefits. Directors remuneration does not include any sitting fees, travelling expenses to attend meetings or any fees paid for technical expert. Sitting fees can be paid upto Rs. 5,000 without CGOI approval. Directors their powers, duties & liabilities Directors are authorized to do all acts that a company can do subject to the provisions of the act & MOA, AOA. They must act in good faith, overall interest of the company. Directors have the following powers: to make calls on shares; to authorize company to buy back its own shares; to issue debentures; borrow otherwise than on debentures; to invest; to make loans; (can be delegated to a committee) to fill up casual vacancies; to recommend dividend rate; to allow or to reject contracts where any director or their relatives are interested; to appoint first auditors, to fill up casual vacancy; Unanimous decision of all directors required for the following: to appoint a person as MD/Manager, who is already holding the post of a MD/Manager of not more than one other company; to make loans or to invest in shares/debentures of a body corporate u/s 372A; Following powers cannot be exercised without shareholder approval: I. To sell, lease or otherwise dispose off whole/majority of the company; II. To allow time for repayment of debt by a director; III. To invest, otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition of any assets of the company; IV. Moneys to be borrowed + moneys already borrowed by the company (excluding temporary loans from company's bankers) exceeds the aggregate of the paid up + free reserves of the company; V. To contribute in a financial year to charitable and other funds not directly relating to the business of the company or welfare of its employees, aggregate of which exceed Rs. 50,000 or 5% of its average net profits in last 3 financial years whichever is higher. (exception: contribution to National Defence Fund or any Fund approved by CGOI for defence) Decisions by directors are taken in BOD meetings to be held at least once in every 3 months. notice to be sent to all directors Quorum is 1/3rd or 2 directors whichever is higher. Interested directors not be considered for quorum; if interested directors present > 2/3rd, then balance (at least 2) present will be quorum. In case quorum not present, meeting to be adjourned same day next week. Articles can provide otherwise also. Meetings that could not be held for want of quorum are considered for minimum number of meetings. Resolution by circulation. Some of the major duties of directors are: To act in good faith, company & all shareholders interest; To act with honesty, diligently, maintain confidentiality; To ensure with help from team that frauds do not happen; 17

not to To use his skills, experience, wisdom in his work; To ensure that moneys are being invested judiciously; To ensure all assets are being reflected at correct value; use any money before commencement of business; To forward statutory report to ROC and all members at least 21 days before Statutory meeting; To place accounts at every AGM; To take such actions in winding up;
Directors are liable for loss to the company For ultra vires acts, breach of trust, negligence, dishonesty willful misconduct. They are liable to third parties for similar acts. Are also criminally liable for various acts under the act like * misstatements in prospectus, failure to file return of allotment, charge creation details with ROC, * failure to issue share certificates, debentures within time * failure to maintain members, debenture holders register * failure to hold AGM, presenting Annual Accounts at AGM * holding the post of director in more than 15 companies * Taking loan from company without CGOI approval Managing Directors Every public company with paid up share capital of Rs 5 cr or more must have a MD. MD has to be a director. For appointment and remuneration without CGOI approval Sch XIII to be followed; otherwise apply within 90 days of appointment to CGOI for approval. In case CGOI rejects such application, director must vacate office immediately or otherwise pay fine @ Rs. 5000 per day. If CGOI gets an impression of any contravention of Sch XIII, it may refer it to CLB for investigation. If contravention proved, CLB will pass an order for director to vacate office immediately, pay fine of Rs. 1 lakh, refund all salaries & perk received by him. However his acts will be valid. Within the provisions of retirement by rotation, terms of appointment in one go can be maximum of 5 years; can be reappointed if needed. He cannot hold post of a MD in more than 2 companies (including a private company) at a time. Such a condition can be waived by CGOI if companies are in allied business, located in same area and it feels that it is in the overall interest of the company business. Any person, who has been adjudged insolvent, convicted by court for moral turpitude, has suspended payments to creditors, cannot become MD. Whole Time Director A whole time director is a whole time employee of the company; his appointment needs to be sanctioned by a special resolution. His powers are not like a MD. He cannot take up whole time director post in any other company simultaneously. His appointment is not restricted to 5 years term. Manager is an individual who subject to supervision of the BOD has the management of the whole or substantially the whole of the affairs of the company and it includes a director or any other person holding the position of a manager. So a Manager and a MD has identical functions. The provisions under law for appointment, re appointment, term of office, number of such posts one can hold are similar to those for a MD. There can be one Manager in a company but there can be more than one MD. Powers of a Manager are more broad, whereas the powers of a MD are those entrusted by Board, Articles. If an individual anytime in the past has been insolvent, or has been convicted by court or who has failed to pay his creditors, he cannot qualify to become a MD. However for a Manger such time frame is only the preceding 5 years. 18

A Managers remuneration can be max 5% of annual net profit, whereas in case of MD such remuneration in totality can go up to 10% in case there are more than one MD. Company Secretary is an individual, member of the Institute Of Company Secretaries of India and responsible for admin and legal compliance of the company. Every company with paid up share capital of Rs 5 cr or more must have a full time Company Secretary.
Meetings & Proceedings
Statutory Meetings Statutory Meeting to be held by a public company (having share capital) after one month but within six months from date of commencement of business. Statutory Report duly certified by at least 2 directors (one must be MD) and the auditors containing the following needs to be sent to members, ROC at least 21 days before the meeting: Total number of shares allotted in cash, otherwise than in cash, amount paid up and total cash received; Receipts & Payments A/C, estimate of prelim expenses including commission, discount on shares & debentures; Names, address, occupation of directors, MD, auditors, manager, secretary; Details of contracts to be ratified, approved; Underwriting contracts details; Calls in arrear from directors; commission/brokerage paid/to be paid to directors; Non compliance of above, every officer punishable with fine of Rs. 5,000. In case a statutory meeting not held in time, court can order for compulsory winding up. Annual General Meetings AGM to be held once every year (a) to consider annual accounts with BOD Report (b) to declare dividends(c) to appoint directors in place of those retiring and (d) to appoint and to fix up remuneration of auditors; First AGM to be held within 18 months from date of incorporation; subsequent AGM to be held within 6 months financial year closing; not more than 15 months gap between 2 AGMs; To be held on a working day, in the registered office or in the city where registered office is situated; At least 21 days written notice along with Annual Report, Audited Accounts, Directors Report sent to all; shorter notice is ok if approved by all members unanimously; Default in holding AGM within time, CLB can direct with necessary instructions to hold the AGM. Fine up to Rs 50K, Rs 2,500 per day for continuing default. BOD Report to contain the following: Performance of the company; Amounts to be transferred to reserve and recommendation for dividends payments; Material changes and commitments if any affecting financial position of the company; Note on energy conservation, technology absorption, forex earned and spent. BOD Responsibility Statement: Accounts have been prepared in accordance with accounting standards; Accounting policies adopted consistently and reasonable estimates made wherever required so as to true and fair view of affairs of the company; 19

Adequate accounting records have been kept so as to safeguard assets of the company and to prevent/detect frauds or irregularities; Accounts have been prepared on a going concern basis. BOD must also provide explanation to all audit qualification. BOD must also provide reasons why buyback of own shares could not be completed in time. General Meetings Extraordinary General Meeting (EGM) EGM can be convened by BOD; BOD on written requisition by members holding not less than 1/10 voting rights on the matter of requisition; BOD to act within 21 days, send 21 days notice and hold the meeting within 45 days; In case BOD fails to convene the meeting as above, the requisitionist can convene within 3 moths from the date of submission of requisition; any expenses incurred for the purpose are to be reimbursed by company and recovered from defaulting directors; CLB on its own or on an application of any director or member. Notice for meetings Notice is to be sent to all concerned i.e. all shareholders, auditors, each director, every other person entitled. 21 days notice in effect means 25 days. Notice must provide date, time, venue of meeting, meeting agenda in details and resolutions to be passed. In case of special business explanatory note, giving details of each business to be carried out, to be attached. Notice sent to the registered address personally or by post. Valid quorum - minimum 2 and 5 respectively for a private and public company. If quorum not present within half hour, adjourned to same day next week or dissolved in case meeting requisioned by members. For adjourned meeting, quorum not present within half hour, present members is Quorum. Voting & Resolutions Equity shareholders with voting rights can vote, by show of hands or by poll (in proportion to his shareholding). Preference shareholders cannot vote except in cases where their interest and rights are affected and in cases where their dividends are unpaid. Proxy can vote only in vote by poll. Ordinary Resolutions passed by more than 50% majority, i.e. votes cast in favour are more than votes cast against a resolution. Special Resolutions passed by at least 75% majority, i.e. votes cast in favour are not less than three times the number of votes cast against a resolution. Resolutions requiring special notice (14+7 days) for purposes like not to reappoint a retiring auditor, appoint someone else; remove a director before term and appoint someone else. Voting by postal ballots including electronic voting are also allowed in case of public listed company for any business or for such business where CGOI wants it to be voted by postal ballots. Notice containing details of business, draft resolutions and a prepaid envelope are to be sent to all shareholders by Registered A/D post or as directed by CGOI with a request to respond within 30 days from date of notice. As per CGOI notification resolution for the following are to be done by postal ballots: Alteration in object clause, change in registered office outside city limits and in articles for provisions defining private company. Issue of shares with differential rights, buyback of own shares, change in rights Selling of company, giving loans & guarantees in excess of limits, 20

Appointment of directors by small shareholders. Minutes of Meetings They are the concise and accurate record of all the proceeding of business in a meeting. However the Chairman has the sole discretion to decide on non inclusion of any matter which in his opinion is not relevant or detrimental to the interest of the company. The minutes are to be prepared within 30 days of the meeting, kept in a book with pages consecutively numbered, each page signed and the last page of the meeting proceeding signed and dated by the Chairman. Minutes kept in the aforesaid manner are prima facie proof of the proceedings in a meeting and all decisions taken in the meeting will be valid until the contrary proved. Minute Books of General Meeting are to be kept at the registered office and open for inspection by any member at least for two hours a day during business hours; beyond the stipulated hours one can inspect the minutes by paying requisite fees. In case the company does not follow, CLB can order such inspection also.
Accounts & Audit
Accounting records must follow the principle of: Entity Going concern Accounting period Money measurement concept Historical cost Consistency Realization concept (Accrual and Cash), Principle Of Regularity & Disclosure Principle of prudence Double-entry Books of Accounts maintained to provide following details: Receipts & Payments Income & Expenditure Sales & Purchases Production and product (in case of manufacturing etc.) Records of Inventory Assets and Liabilities. Fixed Asset details to be maintained. Final Accounts are to be prepared in Schedule VI format. Note: Schedule VI format not applicable to Banking, Insurance and Electricity companies. The books maintained must provide a true and fair view of the affairs of the company. Books of Accounts are to be maintained at Registered Office or any other office decided by BOD for which intimation sent to ROC within 7 days. preserved with supporting vouchers for a minimum of 8 years preceding the current year. Non compliance of above will result in imprisonment up to six months or fine of Rs. 10k or both. Books are open for inspection by ROC, CGOI, SEBI. Members can inspect if allowed under Articles. Non compliance of above will result in a fine of minimum Rs. 50k and imprisonment up to one year . MD along with all employees, whole time directors are responsible for maintenance of books. First account for a period starting from the incorporation date to a date not preceding the first AGM by > 9 months. 21

Subsequent accounts are to be maintained for a financial year, ideally 12 months but not > 15 months; which can be extended with ROC approval up to 18 months. Balance Sheet and attached P&L Account prepared in Sch VI format and in accordance with Accounting Standards, along with schedules, notes to accounts presented to BOD for approval; signed by at least two directors (one must be MD if any) and Company Secretary (or manager) and then presented to the Auditors for audit. Audited Accounts along with Auditors Report, BOD Report, other reports, accounts for subsidiary companies, if any, are to be circulated. The above documents are to be presented at the AGM to every member, debenture holder, auditors for approval. For listed companies. abridged accounts in prescribed format duly approved and signed by BOD can also be sent with a provision that detailed accounts can be inspected. Above are to be filed with ROC within 30 days of AGM. In case AGM not held, the above along with reasons for not holding AGM are to be filed with ROC within 30 days from the latest date when AGM should have been held. In case accounts are not adopted in AGM, adjourned AGM, reasons for the same are to be filed with ROC. For Private companies Balance Sheet, P&L Account are to be filed separately; third party cannot have access to P&L. First Auditors to be appointed by BOD within one month of registration and to hold office till the first AGM; in case it is not done, shareholders in general meeting can appoint. Subsequent auditors appointed by ordinary resolution at every AGM are to be informed within 7 days and auditors to confirm to ROC about their acceptance /refusal within 30 days. Such Auditors to hold office till the next AGM. Auditors are to be appointed at every AGM by special resolution in case of companies where 25% or more of the subscribed capital is held by Public Financial Institution, Government Company, CGOI, State Governments, State Financial Institutions where State Governments hold more than 51% of subscribed capital, nationalized banks or General Insurance companies. Only individual persons qualified as CA holding certificate of practice under the ICAI, not an employee of the company or not holding any full time employment not indebted to the company for Rs. 1,000 or more or who has not given guarantee for a debt not holding any securities carrying voting rights can be appointed as auditors. A person (in individual capacity or as a partner in one or more firms) can hold auditor position in max 20 companies, out of which not more than 10 companies having a paid up capital of Rs. 25 lakhs or more. This limit does not include auditor position in private companies. Auditor has to confirm that appointment, if made, will be within the above specified limit. A retiring auditor is automatically re appointed unless he is (a) disqualified or unwilling (b) resolution passed to appoint someone else (c) notice given to appoint someone else but resolution could not be passed due to some reasons. If auditor not appointed in AGM, adjourned AGM, CGOI can appoint an auditor. Auditors for companies, in which not less 51% of paid up capital is held by Government Company, CGOI, State Governments, Corporations owned/controlled by State Governments, CGOI, are to be appointed by CAG. Casual vacancies caused by resignation of an auditor can be filled by general meeting, otherwise by BOD. Branch audit (unless exempted by CGOI) can also be audited by a different auditor; main auditor will have right to visit and have access to books of accounts of such branch. 22

Branch auditor to send the branch accounts audited along with their report to main auditor for consolidation. Special Audit can be ordered by CGOI for taking necessary actions in case it feels that the company is not being run in accordance with sound business practices, in the broader interest of the industry and can be harmful and it is not financially sound and can become insolvent. Cost Audit to be done by a cost accountant of cost records maintained by specified companies carrying out production, manufacturing, mining activities. Auditors can be removed before expiry of his term with CGOI approval, special notice and ordinary resolution. Auditors remuneration are to be fixed by BOD, CGOI as the case may be. Auditors have the rights to access all the books of accounts and seek all info necessary for the audit. In case of branch audit, visit the branches and have access to all books of accounts, to receive notice for all general meetings and attend, participate in such meetings. An auditor is a watchdog but not a bloodhound. His duties are to find out if the affairs of the company are being carried as per law, broader interest viz. as follows: if loans & advances given against securities are properly secured and the terms are not prejudicial to companys interest. if loans have been shown as deposits. the company not an investment company, if investments have been sold at a price less than its cost. if personal expenses charged to P&L. to provide Auditors Report. In case of any qualification, report needs to highlight that. he has to provide a certificate in the Prospectus. he has to certify the Statutory Report. A Sample Audit Report To the Members of XYZ LIMITED 1. We have audited the attached Balance Sheet of XYZ Limited ("the Company") as at 31st March 2009, and the related Profit and Loss Account and the Cash Flow Statement for the year ended on that date annexed thereto, which we have signed under reference to this report. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As required by Companies (Auditors Report) Order, 2003 as amended by The Companies (Auditor's Report) (Amendment) Order, 2004 issued by Central Government of India in terms of section 227 (4A) of 'The Companies Act, 1956' of India (the Act) and on the basis of such checks as we considered appropriate and according to the information and explanation given to us, we give in the Annexure, a statement on the matters specified in paragraph 4 and 5 of the said order. 4. Further to our comments in the annexure referred to in paragraph 3 above, we report that: i) We have obtained all the information & explanations, which to the best of our knowledge and belief were necessary for the purpose of our Audit; 23

ii) In our opinion, proper books of account as required by law have been kept by the Company, so far as appears from our examination of those books; iii) The Balance Sheet, Profit & Loss account and the Cash Flow Statement dealt with by this report are in agreement with books of account; iv) In our opinion, the Balance Sheet, Profit & loss Account and Cash Flow statement dealt with by this report comply with the accounting standards referred to in subsection (3C) of section 211 of the Act; 5) On the basis of written representations received from the directors as on 31st March, 2009 and taken on record by the Board of Directors, none of the Directors is disqualified as on 31st March, 2009 from being appointed as a Director in terms of clause (g) of sub section (1) of Section 274 of the Act; 6) In our opinion, and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Act and give a true and fair view in conformity with accounting principles generally accepted in India; a) in the case of Balance Sheet, of the state of affairs of the company as at 31st March, 2009; b) in the case of Profit & Loss Account, of the profit for the year ended on that date, and c) in the case of Cash Flow Statement, of the cash flow for the year ended on that date. Place : Gurgaon Dated :, 2009 For ABC & Co. Chartered Accountants Mr. CA Membership No: XXXXX
Corporate Governance and Audit Committee The companies with Rs 5 crore or more paid up share capital should have an Audit Committee with at least three members mainly with Independent Directors and the Chairman being an Independent Director. Members should have knowledge of financial management, audit, accounts. They will have all support of resources from the company, have access to information contained in the records of the Company, obtain professional advice from external sources They will have the separate discussions with management , internal, external as well as cost auditors to judge and ensure financial integrity and stability of the company. The Audit Committee should have the responsibility to monitor the integrity of the financial statements of the company; review the company's internal financial controls, internal audit function and risk management systems; make recommendations in relation to the appointment, reappointment, remuneration, terms of engagement and removal of the external auditor, and review, monitor the external auditor's independence and objectivity and the effectiveness of the audit process. monitor and approve all Related Party Transactions.
Compromise, Arrangement, Reconstruction, Amalgamation
Compromise is a mutual settlement of disputes between company, creditors, members. Arrangement is a process of reorganization of share capital of a company by division, consolidation, variation of rights. Reconstruction is a process when an existing company is being wound up, a new company is formed to take over its assets and liabilities; reconstruction is a broad term, it includes arrangement, reorganization, amalgamation etc. Amalgamation involves two or more companies combining into one entity. Reconstruction may become necessary in cases where companies financial health is very bad, it is unable to pay its creditors, replace assets, is in the verge 24

of liquidation, winding up, or it wants to move out of existing business or extend its existing business into unrelated areas. Reconstruction may take place in cases without winding up or in cases where companies are voluntarily wound up. The company, thus to avoid winding up, may prepare a scheme where all parties agree to compromise and get it sanctioned by the Court. On an application for reconstruction or amalgamation where the assets, liabilities in part or whole to be transferred to a new company, Court will pass the order. Court will give the order which may include transfer of assets, liabilities; Continuation of any legal proceedings; issue of shares in the new entity; dissolution without winding up of the existing company; to take care of dissenting shareholders, any other issue. Company to file a certified copy of the order with ROC within 30 days; default attracts Rs. 500 as fine. In takeover bid where 90% of the shareholders (excluding those shares which are held by transferee company or its nominees, subsidiaries) approve a scheme, dissenting shareholders can within one month apply to court for redress all. If no such application is made or if the court does not annul the order of amalgamation, the dissenting shareholders will have to part their shares on same terms and conditions as agreed by other shareholders. Transferee company will pay the money to transferor company to be kept in a separate bank account and then paid to the dissenting shareholders. In national interest CGOI can order amalgamation of two companies. Both the companies will be sent the proposal for consideration, objections, appeal and for taking necessary actions. The interest of shareholders, debenture holders, creditors will remain same in the new company. In case interests are affected, appeal can be made for compensation and paid on the basis of assessment made; any one aggrieved by such assessments may appeal to CLB for reassessments. Once the whole process is complete, copies of the order is to be placed before Parliament. Books of accounts of the companies are to be preserved and not destroyed without CGOI permission.
Prevention of Oppression and Mismanagement
Rule of the majority shall prevail (Foss vs. Harbottle). Exceptions: Ultra vires acts. Fraud on the minority. Where resolutions were required to be passed by at least 3/4th majority were actually passed by simple majority. Infringement on the personal rights of members. Oppression of minority and mismanagement of company affairs. In case the members of a company are of the opinion a) that the company's affairs are being conducted in a manner prejudicial to public interest or companys interest or in a manner oppressive to any member or members, b) or that by reason of any material change in the management or control of the company, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or companys interest they can apply to CLB for relief. If CLB is convinced of the situation, as aforesaid in (a) above and feels the situation is such that it justifies a winding up order, or as aforesaid in (b) above it may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. 25

Who can apply? In the case of a company having a share capital, not < 100 members of the company or not < 1/10th of the total number of its members, whichever is less, or any member or members holding not < 1/10th of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares ; or in case of a company not having a share capital, not < 1/5th of the total number of its members,
Dissolution and Winding Up
A company can be dissolved under the following circumstances: Removing the name of a defunct company from ROC register. ROC is of the opinion that the company is not carrying any business, it will issue a notice to company and if company does not reply, ROC will publish a notice in official gazette, still no reply received, it will then be published in official gazette for striking off the name. In cases of a scheme of arrangement, amalgamation where the assets and liabilities of a company are transferred to another company. By winding up. Winding up is a process where the life of the company of the company comes to an end, properties sold off administered and distributed among creditors and members. Dissolution is a process subsequent to winding up where the name of the company is struck off the register. Winding up can happen in 3 ways: a) Compulsory winding up by court; b) Voluntary winding up. Compulsory winding up by court It can happen under the following circumstances: a) Company passes a special resolution to wind up. b) Default in holding statutory meeting or in submitting the statutory report to ROC. c) Number of members coming below legal minimum. d) Company fails to start its business within one year from incorporation or suspends business for a continuous period of one year. e) Fails to pay its debts within three weeks of demand from creditor, or to honor a court decree or the court feels that the company is unable to pay its debts. f) The court feels that It is just and equitable to wind up a company. Some of the following circumstances where the court may take a stand to wind up on just and equitable grounds are: The objects of the company cant be followed as they have become impracticable or impossible. A complete deadlock in the company management. Company was formed to carry on illegal or fraudulent business. There is oppression of the minority or mismanagement. When the company cannot carry on business profitably. The company does not exist in reality but just a bubble. Once the court order is passed, it has to be filed within one month with ROC and ROC to notify in Official Gazette. On such order passed and notified, the officers and employees are discharged from their duties, except when the company business is carried on for realization of assets. Powers of BOD terminated and Official Liquidator employed. The order will work in favor of creditors, contributors. 26

All debts will become due for payment. No suit can be proceeded without the leave of the court. Court has full powers. However Income Tax Dept. can proceed without courts leave. Court can at any time stay the winding up process. Court can intervene in finalizing the list of contributors and arrange to get the assets collected. Court can make calls on shares. Order people to deliver the assets in their possession. Issue summons to those who may have in their custody assets and documents and to make them deliver the same. In case the creditors do not prove their claims in time, exclude them from the list. Court can order public examination of promoters, directors etc.; even order arrest of contributors absconding. Court can order for dissolution; and even declare within 2 years a dissolution void.
Voluntary winding up It can happen under the following circumstances: a) Company passes an ordinary resolution to wind up in cases where the duration or the purpose is over. b) Company passes a special resolution to wind up. Once the resolution is passed, the company ceases to be in business except for the purpose of realization of assets. the officers and employees are discharged from their duties, except when the company business is carried on for realization of assets or in reconstruction cases. Liquidator appointed, takes possession of assets and all powers of BOD terminated unless otherwise required. the order will work in favor of creditors, contributors. creditors cannot file suit any longer. all transfer of shares to become void. Voluntary winding up by members In case of voluntary winding up, the company has to file a declaration of solvency with ROC within 5 weeks preceding the resolution date along with accounts since the last date till date duly audited. Liquidator to be appointed, his remuneration fixed. ROC to be informed within 10 days of appointment or changes. BOD powers will cease, if not asked for by liquidator. Liquidators cannot accept shares in another company as a consideration for sale of properties unless it is sanctioned by special resolution. He can be abstained till such time dissenting shareholders interest are purchased at a rate determined by agreement or arbitration. If the liquidator is of the opinion that the is unable or will be unable to pay its debs within time, then a meeting of creditors is to be convened. If winding up process continues for a period beyond one year, liquidator to file audited accounts of the liquidation process with ROC within 2 months from the year end and also call AGM every year and every subsequent year. Once the process of winding up is over, the liquidator has to give an advertisement at least one month in advance in the Official Gazette, one local newspaper to call the final general meeting for presenting final audited accounts with explanations to the members of the company. copy of accounts to be filed with ROC within one week. ROC will register the same. Official Liquidator will scrutinize the accounts and supporting documents and report to the court. In case all is well, company is dissolved. Otherwise 27

court will direct Official Liquidator to investigate and ask for his report to facilitate its decision. Once the process of winding up is over, the liquidator has to give an advertisement at least one month in advance in the Official Gazette, one local newspaper to call the final general meeting for presenting final audited accounts with explanations to the members of the company. Voluntary winding up by creditors In case declaration of solvency is not made, but company still wants to go for voluntary winding up, the creditors will have a control on the whole process. BOD to give a notice and advertise through the Official Gazette and two local newspaper to convene a meeting of members and that of the creditors separately for the purpose of passing the resolution. Statement of affairs with a list of creditors outstanding to be presented at creditors meeting; and a copy of resolution to be filed with ROC. Liquidator to be appointed in the above meetings. If different persons are appointed, creditors choice will be selected. One can appeal against such nomination. Creditors may appoint a Committee Of Inspection with 5 members; company can also nominate its 5 members into the committee. In case of any dispute Court to take final decision. Committee will scrutinize accounts of the liquidator and provide necessary instructions. Liquidators remuneration to be fixed. BOD powers will cease, if not asked for by Committee Of Inspection or creditor. Casual vacancy of liquidator (other than the one appointed by court) can be filled by creditors. Liquidators cannot accept shares in another company as a consideration for sale of properties unless it is sanctioned by Court or Committee Of Inspection. Creditors may appoint a Committee Of Inspection with 5 members; company can also nominate its 5 members into the committee. In case of any dispute Court to take final decision. Committee will scrutinize accounts of the liquidator and provide necessary instructions. Liquidators remuneration to be fixed. BOD powers will cease, if not asked for by Committee Of Inspection or creditor. Casual vacancy of liquidator (other than the one appointed by court) can be filled by creditors. Liquidators cannot accept shares in another company as a consideration for sale of properties unless it is sanctioned by Court or Committee Of Inspection. If winding up process continues for a period beyond one year, liquidator to file audited accounts of the liquidation process with ROC within 2 months from the year end and also call general meeting of creditors as well as the members every year and every subsequent year. Once the process of winding up is over, the liquidator has to give an advertisement at least one month in advance in the Official Gazette, one local newspaper to call the final general meeting of the creditors as well as of the members for presenting final audited accounts with explanations. Liquidator has to prepare a list A of Contributors i.e members whose name appears in the Register of Members and other list B for those who ceased to be members within the last one year. In case the money realized from the sale of assets are not enough to meet the creditors liabilities, expenses on winding up and adjustment of contributors rights, members will be called upon to pay to the extent of their shares are unpaid. All present members whose shares are partly paid may have to pay the balance. 28

In case the Court feels that the contribution from present members will not suffice the requirement, it can call upon past members for contributions. Liability of the past members will also be to the extent of their shares are unpaid. However a past member shall not be liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the winding up and they will also not be required to pay for any liability incurred after they ceased to be members. In cases where the liability of a MD, Director or any other officer is unlimited under the Act, and the Court deems it necessary for them to contribute, then they in addition to their liability, if any, to contribute as an ordinary member, be liable to make a further contribution as if they were, at the commencement of the winding up, a member of an unlimited company. However they will not be liable to contribute if they have ceased to hold the position for one year or upwards before the commencement of the winding up and they will also not be required to pay for any liability incurred after they ceased to hold the position. In cases where the Court deems it necessary, it can also ask any other people, who were a party in companies fraudulent business affairs or who have been guilty of misfeasance or breach of trust, to contribute in the winding up process. A Contributor has to contribute because its name appears in the Register Of Members. In case the contributor dies or becomes insolvent or if a company is under liquidation, then their legal representative, official assignee or the liquidator as the case may be will have to meet the contributions. In the Winding Up process, payments are to be discharged in the following order: 1. Costs and expenses on winding up including liquidators remuneration 2. Workmens (as defined under Industrial Disputes Act) dues and dues of secured creditors to the extent they rank pari passu with workmens dues. 3. All revenues, taxes etc. due to Central and State Govt. 4. All employee wages & salaries due for not > 4 months in a period of 12 months subject to a max notified by CGOI. 5. All holiday pay of employees. 6. All contribution payable to ESI fund. 7. Amounts payable under Workmen Compensation Act. 8. Payments due under PF, Pension, Gratuity, Welfare fund. 9. Payments to creditors under floating charge. 10.Payments to unsecured creditors. 11.Payments to preference shareholders for their - capital + dividends declared but not paid for; - arrears of undeclared dividends if Articles or terms of issue so provides for. 12.Payment of capital to equity shareholders 13.Arrears of undeclared dividends of preference shareholders if the same were not provided for by Articles or terms of issue. 14.Surplus distributed to equity shareholders, provided the preference shares were not of participating nature. 15.Payments towards expenses on investigations u/s 235 & 237. In cases where any payment due to creditors or to a contributor are not claimed within 6 months after the due date, as well as there are unpaid dividends or undistributed assets, the liquidator will transfer such amounts to Public Account of India with RBI. Once the winding up process is over and the company is to be dissolved, books and papers will be disposed off under the directive of Courts, members, Committee Of Inspection or the creditors as the case may be. After 5 years all are discharged of any responsibility. 29

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Private Limited company Its Privileges:

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Memorandum and Articles of Association Memorandum of Association

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Prevention of Oppression and Mismanagement

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Dissolution and Winding Up

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