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Code: BCH213 & BBA216

Lecture by: KV Singh

Module :-I

Introduction: Definition, Nature and
characteristics of company, Distinction
between company & partnership,
Classification of companies, Difference
between private & public company, Special
privileges and exemptions granted to a private
company, Conversion of a private company
into public company, Formation of a company,
Memorandum of Association, Articles of
Association, Prospectus and its contents.

Core Aspects: Meaning and types of
shares and share capital, Meaning of
stock and difference between share &
stock, Meaning and types of debentures
and difference between share &
debentures, Issue of shares, Allotment
of shares, Directors: Position,
Appointment, Powers, Rights, Duties
and liabilities, Types and importance of
meetings and resolutions

Management: Rule of majority & its
exceptions, Concept of lifting of
corporate veil and circumstances when
veil may be lifted, Doctrine of indoor
management and its exceptions,
Doctrine of constructive notice, Meaning
& modes of winding up of the company,
Consequences of winding up,
Dissolution of company.

Definition of Company:-

In simple words, a company can be defined
as a group of persons associated
together for the purpose of carrying on
a business, with a view to earn profits.

The word Company is an amalgamation of
the Latin word Com meaning with or
together and Pains meaning bread.

A company is a group of persons who
have come together or who have
contributed money for some common
purpose and who have incorporated
themselves into a distinct legal entity in the
form of a company for that purpose.
A company is an association of many
persons who contribute money or moneys
worth to a common stock and employs it in
some trade or business and who share the
profit and loss arising there from.
Characteristics of a
A company as an entity has several distinct
The following are the characteristics of a
company: -
Separate Legal Entity:-
On incorporation under law, a company
becomes a separate legal entity as compared
to its members. The company is different and
distinct from its members in law.
It has its own name and its own seal, its assets
and liabilities are separate and distinct from
those of its members.

Limited Liability:-
The liability of the members of the company is
limited to contribution to the assets of the
company up to the face value of shares held
by him. A member is liable to pay only the
uncalled money due on shares held by him
when called upon to pay and nothing more,
even if liabilities of the company far exceeds its
For example, if the face value of the share in a
company is Rs. 10 and a member has already
paid Rs. 5 per share, he can be called upon to
pay not more than Rs. 5 per share during the
lifetime of the company.

Perpetual Succession
A company does not die or cease to exist
unless it is specifically wind up or the task
for which it was formed has been

Membership of a company may keep on
changing from time to time but that does
not affect life of the company. Death or
insolvency of member does not affect the
existence of the company.

Separate Property

A company is a distinct legal entity. The
companys property is its own. A member
cannot claim to be owner of the
companys property during the existence
of the company.

Transferability of Shares
Shares in a company are freely
transferable, subject to certain

When a member transfers his shares to
another person, the transferee steps into
the shoes of the transferor and acquires
all the rights of the transferor in respect
of those shares.

Common Seal
A company is a artificial person and does
not have a physical presence. Therefore,
it acts through its Board of Directors for
carrying out its activities and entering into
various agreements.

The common seal is the official signature of
the company. The name of the company
must be engraved on the common seal.
Capacity to Sue and Being Sued
A company can sue or be sued in its own
name as distinct from its members.

Separate Management
A company is administered and managed by
its managerial personnel i.e. the Board of
Directors. The shareholders are simply the
holders of the shares in the company and
need not be necessarily the managers of the

One Share-One Vote:

The principle of voting in a company is
one share-one vote. I.e. if a person has
10 shares, he has 10 votes in the
Companies and Partnerships Compared
A company can be created only by
certain prescribed methods most
commonly by registration under the
Companies Act 1956.

A partnership is created by the express or
implied agreement of the parties, and
requires no formalities, though it is
common to have a written agreement.
A company can have as little as one
member and there is no upper limit on
A partnership must have at least two
members and has an upper limit of 20
(with some exceptions).

Shares in a company are normally
transferable (must be so in a public
A partner cannot transfer his share of the
partnership without the consent of all the
other partners.
Members of a company are not
entitled to take part in the
management of the company unless
they are also directors of it.

Every partner is entitled to take part in
the management of the partnership
business unless the partnership
agreement provides otherwise.

A member of a company who is not also a
director is not regarded as an agent of the
company, and cannot bind the company by his
A partner in a firm is an agent of the firm, which
will be bound by his acts.
In case of partnership, the number of members
must not exceed 10 in case of banking
business and 20 in other businesses.
A Public company may have as many members
as it desires subject to a minimum of 7
members. A Private company cannot have
more than 50 members.

On the death of any partner, the
partnership is dissolved unless there is
provision to the contrary.

On the death of the shareholder the
company existence does not get

Privileges and Exemptions granted to a
Private Company
A private company enjoy certain special
privileges which are not available to public
company .

It is so because in private company the
money is raise from few people therefore
not much public interest is involved.

But in case of public company money is
raised from general public and number is
so large.
Following are special privileges available to a
private company:-
A private company can be formed with only
two members.
A private company can proceed to allot
shares without waiting for minimum
subscription because private company is
not offer shares to the general public.
A private company not required to issue
prospectus. It means it can allot shares
without issuing a prospectus or delivering to
registrar .
A private company can commence
business immediately after its
It need not have index of members.
A private company need not required to
hold statutory meeting or file a statutory
report to registrar.
A private company need to have minimum
two directors only.
All directors appointed by single
The director of private company need not
to have retire by rotation.
A private company is exempted from
restriction regarding managerial
No person other than member is of private
company is entitle to inspect.
Restriction on the power of the board of
directors not apply to a private company .
Provision regarding prohibition of loan to
directors is not apply in private company
Provisions of Section 165 relating to
statutory meeting and submission of
statutory report do not apply.

(A) On the basis of the number of the
members companies can be:

Private Company

Public Company

Private company
A private company merely formed by two
members by subscribing there name in
memorandum of association.
Such a company must have minimum paid up
capital of Rs 1 lakh.
its article must have:-
Prohibit an invitation to the public to
subscribe its shares and debenture.
Restrict the right of transfer of shares.
Limit the number of its members to fifty.
Prohibiting any invitation or acceptance of
deposits from person other than its
Public company
As per companies act 1956 a public company
means which

Is not a private company

Must have at least 7 members

Have a minimum paid up capital of five lakhs
rupees or higher .
Maximum limit of members is based on desire
of members.

(B) On the basis of the liability
of the members
A company can be classified as:
Limited Companies
Unlimited Companies

Limited Companies
Limited Companies may be
Company limited by shares
Company limited by the guarantee
Company limited by Guarantee & Shares
Company limited by

In this case, the liability of members is limited
to the amount of uncalled share capital.

No member of company limited by the shares
can be called upon to pay more than the
face value of shares or so much of it as is
remaining unpaid.

Members have no liability in case of fully paid
up shares.
Company limited by the guarantee:-

A company limited by guarantee is a
registered company having the liability of its
members limited by its memorandum of
association to such amount as the members
may respectively thereby undertake to pay if
necessary on liquidation of the company.

The liability of the members to pay the
guaranteed amount arises only when the
company has gone into liquidation and not
when it is a going concern.

Company limited by Guarantee
& Shares:-

A guarantee company may be a company
with share capital or without share
If it is without share capital then liability will
only be limited by guarantee but
if it is with share capital then liability will be
limited with a combination of both.

Unlimited Company

The liability of members of an unlimited
company is unlimited. Therefore their
liability is similar to that of the liability
of the partners of a partnership firm. It
may or may not have a share capital.

However no such company is
incorporated yet in Indian Companies
Act 1956.

On the basis of the control:-
company can be classified as:
Holding and Subsidiary Companies (Sec 4)
A company shall be deemed to be subsidiary of
another company if:
That other company controls the composition of its
board of directors
That other company holds more than half in face
value of its equity share capital
The control of the composition of the Board of
Directors of the company means that the holding
company has the power at its discretion to appoint or
remove all or majority of directors of the subsidiary
company without consent or concurrence of any
other person.

On the basis of ownership

A company can be classified as:

Government Companies

Non Government Companies

Foreign Companies

One Man Company

Government Companies
It means any company in which not less than
51% of the paid up share capital is held by
the Central Government or any State
Government or partly by the Central
Government and partly by the one or more
State Governments and includes a company
which is a subsidiary of a government

Government Companies are also governed by
the provisions of the Companies Act.
However, the Central Government may direct
that certain provisions of the Companies

Non Government Companies
It is controlled and operated by private
group or public

Foreign Companies
A company incorporated in a country
outside India under the law of that other
country and has established the place of
business in India.

One Man Company
One man company is a company in which
one man holds practically the whole of
the share capital of the company, and in
order to meet the statutory requirement
of minimum number of members, some
dummy members who are mostly his
friends or relations, hold just 1or 2 shares
The dummy members are usually
nominees of the principal shareholder
who is the virtual owner of the business
and who carries it on with limited liability.

Distinction Between Public Company And
Private Company
Minimum Paid-up Capital :

A company to be Incorporated as a
Private Company must have a minimum
paid-up capital of Rs. 1,00,000.

whereas a Public Company must have a
minimum paid-up capital of Rs. 5,00,000.
Minimum number of members :

Minimum number of members required to
form a private company is 2

whereas a Public Company requires at
least 7 members.
Maximum number of members :

Maximum number of members in a
Private Company is restricted to 50.

There is no restriction of maximum
number of members in a Public
Transerferability of shares :

There is complete restriction on the
transferability of the shares of a
Private Company through its Articles
of Association.

whereas there is no restriction on the
transferability of the shares of a Public
Issue of Prospectus :

A Private Company is prohibited from
inviting the public for subscription of its

whereas a Public Company is free to
invite public for shares.
Number of Directors :

A Private Company may have 2 directors
to manage the affairs of the company.

whereas a Public Company must have at
least 3 directors.
Consent of the directors :

There is no need to give the consent by
the directors of a Private Company.

Whereas the Directors of a Public
Company must have file with the
Registrar a consent to act as Director
of the company.
Qualification shares :

The Directors of a Private Company need
not sign an undertaking to acquire the
qualification shares.

Whereas the Directors of a Public
Company are required to sign an
undertaking to acquire the qualification
shares of the public Company
Statutory meeting :

A Private Company has no obligation to
call the Statutory Meeting of the

Whereas of Public Company must call its
statutory Meeting and file Statutory
Report with the Register of Companies.
Further issue of shares :

A Private Company need not offer the
further issue of shares to its existing
share holders.

Whereas a Public Company has to offer
the further issue of shares to its
existing share holders as right shares
Managerial remuneration :

Total managerial remuneration in the
case of a Public Company cannot
exceed 11% of the net profits, and in
case of inadequate profits a maximum
of Rs. 87,500 can be paid.

Whereas these restrictions do not apply
on a Private Company.
Special privileges :

A Private Company enjoys some
special privileges.

which are not available to a Public
Conversion a private company
into a public company :-
Conversion must contain followings:-
Pass resolution in board meeting for
approving conversion

Convene general meeting of members for
alteration of name clause of Memorandum
of Association and Articles of Association
and pass special resolution.

Make application to the Registrar of
Companies (RoC) for approving conversion
to public company.

The application must be accompanied
with the following document :-

Form No.23 (with requisite filing fees) for
special resolution passed for conversion
of Private Company into Public
Company u/s 44 of the Companies Act,
1956 and for altering the Articles of
Association u/s 31 of the Companies

Conversion of Public
Company into Private
Though there is no direct provision in law for the
same but a little reference is available in section
31 for such conversion. Following is the
procedure to convert a public company into a
private company. That public company must-

Pass resolution in board meeting approving

Convene general meeting of members for
alteration of name clause of Memorandum of
Association and Articles of Association and pass
special resolution there at.

Make application u/s 31 of the Companies Act, 1956
to the Registrar of Companies for approving
conversion to public company. The application must
be accompanied with the following documents :-

1. Form No. 23 (with requisite filing fees) in respect of
special resolution passed u/s 31 of the Companies
Act, 1956 for alteration

2. Application in Form No.1B along with fees for
obtaining approval of the RoC for such conversion.
This application must be made within three months
from the date of passing of special resolution for
3. A printed copy of the Articles of Association

4. A copy of advertisement issued in English
newspaper in English calling for objections
regarding conversion within 21 days.

5. Particulars regarding up to date filing of documents
must be submitted with the application.

6. Obtain revised Certificate of Incorporation and
ensure that the new name is incorporated in the
Memorandum of Association, Articles of
Association and all other official correspondence of
the company

Formation of a Company
The process of forming a company can be divided
into following stages:
Registration or incorporation
Commencement of Business.

As regards a private company, it needs to go
through the first two stages only. As soon as it
receives the certificate of incorporation, it can
commence business.

But Public Company has to go through all of these

It refers to the entire process by which a
company is brought into existence.

It starts with the conceptualization of the
birth of a company and determination of
the purpose for which it is to be formed
by promoters.

Now who are Promoters?

The persons who conceive the company
and invest the initial funds are known as
the promoters of the company.

The promoters enter into preliminary
contracts with vendors and make
arrangements for the preparation,
advertisement and the circulation of
prospectus and placement of capital.
Pre-Incorporation or
Preliminary Contracts

The promoters of a company usually enter
into contract to acquire some property or
right for the company, which is yet to be

Such contracts are called Pre-
Incorporation or Preliminary Contracts.

The promoters have certain
basic duties towards the
company formed :-
He must not make any secret profit out of the
promotion of the company. Secret profit is
made by entering into a transaction on his
own behalf and then sell to concerned
property to the company at a profit without
making disclosure of the profit to the
company or its members.

He must make full disclosure to the company
of all relevant facts including to any profit
made by him in transaction with the

the company may take
decision in case of default of
promoter :

Rescind or cancel the contract made and if
he has made profit on any related
Retain the property paying no more for it
then what the promoter has paid for it
depriving him of the secret profit.
If these are not appropriate the company
can sue him to for breach of trust. Damages
up to the difference between the market
value of the property and the contract price
can be recovered from him.

Step-2:-Incorporation by
Registration :
The promoters must make a decision
regarding the type of company like a
public company or a private company or
an unlimited company, etc

And accordingly prepare the documents for
incorporation of the company. In this
connection the Memorandum and Articles
of Association (MA & AA) are crucial
documents to be prepared.
Memorandum of Association
of a company :
Is the constitution or charter of the
company and contains the powers of the
company. No company can be registered
under the Companies Act, 1956 without
the memorandum of association.

Contents of Memorandum :
The memorandum of association of every
company must contain the following
clauses :-
Name clause
Domicile clause
Objects clause
Liability clause
Capital clause
Association clause

Name clause
The name of the company is mentioned
in the name clause. A public limited
company must end with the word
'Limited' and a private limited company
must end with the words 'Private

A company cannot use a name which is
prohibited under the Names and
Emblems Act, 1950
Domicile clause
The state in which the registered office of
company is to be situated is mentioned in
this clause.

If it is not possible to state the exact location
of the registered office, the company must
state it provide the exact address either on
the day on which commences to carry on
its business or within 30 days from the date
of incorporation of the company, whichever
is earlier.

Objects clause
This clause is the most important clause of
the company. It specifies the activities
which a company can carry on and which
activities it cannot carry on. The company
cannot carry on any activity which is not
authorized by its MOA. This clause must
specify :-
Main objects of the company to be
pursued by the company on its
Objects incidental or ancillary to the
attainment of the main objects
Other objects of the company not included
in (i) and (ii) above.

Liability clause
A declaration that the liability of the
members is limited in case of the
company limited by the shares or
guarantee must be given.

The MOA of a company limited by
guarantee must also state that each
member undertakes to contribute to the
assets of the company such amount not
exceeding specified amounts as may be
required in the event of the liquidation of
the company.
Capital clause
The amount of share capital with which
the company is to be registered divided
into shares must be specified giving
details of the number of shares and
types of shares.
A company cannot issue share capital
greater than the maximum amount of
share capital mentioned in this clause
without altering the memorandum.
Association clause

A declaration by the persons for
subscribing to the Memorandum that
they desire to form into a company and
agree to take the shares place against
their respective name must be given by
the promoters.
Articles of Association
The Articles of Association (AA) contain the
rules and regulations of the internal
management of the company.
The AA is nothing but a contract between the
company and its members and also
between the members themselves that they
are agree on the rules and regulations of
internal management of the company
specified in the AA.
It specifies the rights and duties of the
members and directors.
The important items covered
by the AA include :-
Powers, duties, rights and liabilities of
Powers, duties, rights and liabilities of
Rules for Meetings of the Company
Borrowing powers of the company
Calls on shares
Transfer of shares
Forfeiture of shares
Voting powers of members, etc

Alteration of articles of

A company can alter any of the provisions
of its AA, subject to provisions of the
Companies Act and subject to the
conditions contained in the
Memorandum of association of the
Registration of the Company
Once the documents have been prepared,
stamped and signed, they must be filed
with the Registrar of Companies for
incorporating the Company.
The following documents must
be filed in this connection :-
The MA & AA
An agreement, if any, which the company
proposes to enter into with any individual
for appointment as its managing director
or whole-time director or manager.
A statutory declaration in Form 1 by an

In addition to the above, in case of a public
company, the following documents must
also be filed :-

Written consent of directors in Form 29 to agree to
act as directors
The complete address of the registered office of the
company in Form 18
Details of the directors, managing director and
manager of the company in Form 32.

Certificate of Incorporation
Once all the above documents have been
filed and they are found to be in order,
the Registrar of Companies will issue
Certificate of Incorporation of the
This document is the birth certificate of the
company and is proof of the existence of
the company.
Once, this certificate is issued, the
company cannot cease its existence
unless it is dissolved by order of the
Step-3:-Commencement of
A private company or a company having no
share capital can commence its business
immediately after it has been

Other Companies can commence their
activities only after they have obtained
Certificate of Commencement of

formalities for Commencement of
1.If a company has share capital and has issued a
prospectus, then:
Shares up to the amount of minimum subscription must
be allotted.
Every director has paid to the company on each of the
No money is or may become payable to the applicants
of shares or debentures for failure to apply for or to
obtain permission to deal in those shares or debentures
in any recognized stock exchange.
A statutory declaration in Form 19 signed by one
director or the employee company secretary or a
Company secretary in whole time practice that the
above provisions have been complied with must be

2. If a company has share capital but has not
issued a prospectus, then: -

It must file a statement in lieu of prospectus with the
Registrar of Companies

Every director has paid to the company on each of
the shares, which he has taken the same amount
as the other members have paid on such shares

A statutory declaration in Form 20 signed by one
director or the employee - company secretary or a
Company secretary in whole time practice that the
above provisions have been complied with must be

Once the above provisions have been
complied with, the Registrar of
Companies grants Certificate of
Commencement of Business after
which the company can commence its

Section 2(36) of the Companies Act, 1956
defines a prospectus as any document
described or issued as a prospectus
and includes any notice, circular,
advertisement or other document
inviting deposits from the public or
inviting offers from the public for the
subscription or purchase of any
shares in, or debentures of a body

In simple words, a prospectus may be
defined as an invitation to the public to
subscribe to the shares or debentures of
a company. Any document inviting
deposits from the public shall now be
treated as a prospectus.

Contents of Prospectus
following matters to be specified in the prospectus:-

The main objects of the company.

The names, occupations and addresses of the
signatories to the Memorandum of Association and
number of shares subscribed for by them.

The number of redeemable preference shares intended
to be issued, with the date of redemption or, where no
date is fixed, the period of notice required for
redeeming the shares; and the proposed method of

The number of shares, if any, fixed by the
articles, as the qualification shares of a director.

The names, addresses and occupations of the
directors, the managing director, or manager
together with any provision in the articles or a
contract regarding their appointment,
remuneration, or compensation for loss of
Particulars of shares or debentures which,
within the two preceding years, had been
issued for consideration other than cash,
and the amount of consideration for which
they were issued.

Where the issue of shares or debentures is
underwritten, the names of the
underwriters & details of Underwriting

The names, occupations and addresses of
vendors from whom the company has
acquired any property, and the amount
paid or payable in cash, shares or
debentures to the vendors.

The amount or estimated amount of
preliminary expenses and. the names of
persons by whom any of those expenses
have been paid or are payable.

The names and addresses of the auditors, if any,
of the company.
Full particulars of the nature and extent of the
interest, if any, of every director or promoter i)
in the promotion of the company, or ii) in any
property acquired by the company within two
years of the issue of the prospectus.

If the share capital of the company is divided
into different classes of shares, voting rights and
rights to dividend and the right as to capital
attached to the several classes of shares.

A reasonable time and place at which
copies of all balance sheets and profit
and loss accounts, if any on which the
report of auditors is based, may be

Reports to be set out in the

In addition to the above matters of the Schedule
requires the following report to be set out in the
1) An auditor's report showing
i) profits or losses in each of the last five years,
ii) assets and liabilities at the date of the last
iii) the rates of dividend paid by the company in
respect of each class of shares during the
preceding five financial years, and
iv)Similar details with regard to subsidiary
companies, if any.

2) If the company proposes to acquire any
business, a report should be made by a
Chartered Accountant, whose name
should be disclosed, upon
i) The profits and losses of the business,
ii) and assets and liabilities of the business,
for the preceding five years

3) If the proceeds, or any part of the
proceeds, of the issue of the shares or
debentures are or is to be applied directly
or indirectly in the purchase of any
business, then a report similar to the one
in (2) above is required to be set up.

Registration of Prospectus
with Registrar of Companies

Section 60 requires that a copy of the
prospectus duly signed by every director
or proposed director must be delivered to
the Registrar of Companies before the
date of its publication. - Every copy of the
prospectus, on its face, must state that a
copy of the prospectus has been delivered
to the Registrar of Companies
Further, the copy of the prospectus must have
endorsed on, or attached to it the following
i) The consent of the expert to the issue of the
prospectus, if his report has been included
therein and such expert must not be
connected or interested in the formation,
promotion or management of the company.

ii) A copy of every contract appointing or
fixing the remuneration of a managing
director or manager.

iii) A copy of every material contract unless
it is entered into in the ordinary course of
business within two years before the date
of issue of the prospectus.

iv) The consent in writing of the person if
any named in the prospectus as the
auditor, adviser, attorney, solicitor, banker
of the company to act in that capacity.

v)Consent of director or directors, named
in the articles or prospectus, to act as
such directors of the company.

vi) A copy of the underwriting agreement,
if any.

Core Aspects: Meaning and types of
shares and share capital, Meaning of
stock and difference between share &
stock, Meaning and types of debentures
and difference between share &
debentures, Issue of shares, Allotment
of shares, Directors: Position,
Appointment, Powers, Rights, Duties
and liabilities, Types and importance of
meetings and resolutions

To carry on any business, some money is
The term 'capital' usually means a
particular amount of money with which a
business is started.
In the case -of a company where large
amount of money is required, it is raised
by the issue of shares. The amount so
raised is called the 'share capital' of' the
In view of the stages involved in
collecting the money on shares, the
share capital of a company may be
classified as follows:

Nominal or Authorized Capital:-
It refers to the amount staled in the
memorandum of association as the
capital of the company with which it is
to be registered.
This is the maximum amount of capital
which a company is authorized to raise
by issuing the shares.
Issued Capital:-

It is that part of the authorized capital
which is issued to the public for
subscription, It is not necessary for a
company to issue all the nominal capital
in the beginning itself.
Subscribed Capital:-
lt is that part of the issued capital which
has been actually subscribed by the
public. In other words, it is that part of
issued capital for which the
applications have been received from
the public and shares allotted to them.
Called-up Capital:
It is that part of nominal value of issued
capital which has been called-up or
demanded on the shares by the
company. Normally, a company does not
collect the full amount on shares it has
Paid-up Capital:
It is that part of the capital which has
actually been received from the
For example, a company has called-up
Rs. 5 lacks, but it has actually received
Rs. 4,90,000, then it is the paid-up
capital of the company.
Reserve Capital:
That part of the uncalled capital of a
company which it has decided, by special
resolution, not to call except in the event,
and for the purpose of the winding up of
the company, is called the 'reserve
Types of Shares

(a) preference share and

(b) Equity share
Equity Shares:
All shares which are not preference shares are
'equity shares'.
These shares carry no special privileges and
their rights and liabilities are governed by the
articles of association of the company.
In the eyes of law, equity shareholders are not
the owners of the company, because a company
has its own independent legal entity.
Dividend is paid to the holders of these shares
after the preference shareholder, to whom
dividend at a fixed rate has been paid.

The rate of dividend payable on equity shares
is not fixed and keeps on changing from year
to year depending on the amount of profits
available for distribution.
On the liquidation of the company, the claims
of equity shareholders are satisfied only after
satisfying all other claims.
Equity shareholders have a right to vote on
various resolutions in proportion to his share
of the paid up equity capital, whereas the
preference shareholders have, generally, no
voting rights.

Preference Shares:

Under Section 85(1) of the Companies Act,
a preference share is one which fulfils the
following conditions:
With respect of dividend, it carries a
preferential right to be paid a fixed amount
or an amount calculated at a fixed rate.
With respect of capital, it carries a
preferential right to be repaid the amount
of the capital paid-up in the event of
winding up of the company.
In other words the amount paid on
preference shares must be paid back before
anything is paid to the equity shareholders.

Types of Preference Shares:
Cumulative Preference Shares:
These shares are entitled to dividend at a
fixed rate whether there are profits or no

If in a particular year due to inadequate
amount of profits, the dividend could not
be paid, then the unpaid dividend shall be
carried forward to the subsequent years
and shall be paid in the succeeding year
out of the profits along with the fixed
dividends for that year.
Non-Cumulative Preference Shares:
These are the shares on which the
dividend does not go on accumulating.
If in a particular year there are no
profits or profit is inadequate, the
shareholders shall not get anything or
receive a partial dividend and they
cannot claim the arrears of dividends in
the subsequent year.
Participating Preference Shares:
The holders of such shares are entitled
to receive dividend at a fixed rate and,
in addition, they have a right to
participate in the surplus profits along
with equity shareholders after divided
has been paid to equity shareholders.
Non-Participating Preference Shares:
The holders of such shares are entitled to
only a fixed rate of dividend and do not
participate further in the surplus
If the articles are silent, all preference
shares are deemed to be non-

Convertible Preference Shares:
The holders of such shares have a right to
convert these shares into equity shares
within a certain period.

Non-convertible Preference Share:
The preference shares, where the holders
have no right to convert their shares
into equity shares are known as non-
convertible preference shares.

Stock means a number of shares put
together in a bundle.
The stock is expressed in terms of money
and not as so many shares.
Stock can be split into fractions of any
amount without regard to the original
face value of the share.
The main advantage of stock is that the
shareholder can transfer any portion of it
as he likes.


A share may be partly paid up or fully
paid up BUT Stock is always fully paid up

Shares can be issued initially to the
public. BUT Stock cannot be issued
originally to the public.

A share has a nominal value. BUT A stock
has no nominal value.

A share has a distinctive number which
distinguishes it from other shares BUT A
stock has no such number but has a
consolidated value.

All the shares are of equal denomination
BUT The stock may be of unequal

Shares can be issued by any company
public or private BUT Stock can be
issued only by a public company limited
by shares.

The term 'Allotment' has no where been
define; in the Companies Act. It may be
said that:

Allotment is an appropriation by the
Board of directors of a certain number
of shares to a specified person in
response to his application.

Process of Allotments
A public limited company invites subscriptions
from the public and for this purpose a prospectus
is issued.
In response to this invitation, the prospective
investors offer to buy shares by submitting the
prescribed application form.
If the application is accepted by the company, it
proceeds to allot him the shares.
With the issue of the latter of allotment, the offer
stands accepted thereby giving rise, to a legally
binding contract between the company and the
Thus, an allotment is the acceptance by the
company of the offer to purchase shares.

Notice of Allotment.
An allotment is the acceptance of an offer to
take shares by an applicant, and like any other
acceptance, it must be communicated.

There can be no binding contract unless the
acceptance of the offer is properly
communicated. Thus, notice of allotment must
be given to the allottee.

If the letter of allotment is properly
posted i.e., it is correctly addressed and
stamped, a contract will arise even if the
letter of allotment is delayed or lost in the
course of transit.

In this letter of allotment, besides other
details of the number of shares applied
for, the number of shares allotted etc.,
the allottee is asked to pay the money
due on allotment to the company's
bankers within a specified time unless
there is partial allotment and the
allotment money is appropriated out of
the excess application money.

Rules regarding Allotment of
A. General Rules:-
The general rules regarding allotment of shares are
as follows:

i) The allotment must be made by proper
It is the duty of the Board of' directors to allot the
shares. However, the Board may delegate this
authority to some other person or persons as
per the provisions of the articles of association.
Allotment of Shares made by an improper
authority will make it void.

ii) The allotment should be made
within s reasonable time:
The offer to purchase shares of the
company must be accepted within a
reasonable time otherwise the applicants
may refuse to take shares because after a
reasonable time the offer lapses.
What is the 'reasonable time' is a question
of fact in each case.

iii) It must be communicated:
The allotment of shares should be
communicated to the applicants. Posting
of a properly addressed and stamped
letter of allotment will be taken as a valid
Even if this letter of allotment is delayed or
lost in transit, the allottee will be liable.

iv) It must be absolute and unconditional

The allotment of shares must conform to the
terms and conditions of the application. If
the allotment is not according to the terms
and conditions, the applicant may refuse to
accept the shares even though allotment
has been made to him. If the conditions are
not fulfilled, the applicant. must reject the
shares promptly. His silence or acceptance
will debar him from this right.

B. Legal Rules
So far as the private companies are
concerned, the Act does not lay
down any restrictions as to the
allotment of shares.
But the Act has laid down certain
restrictions regarding the allotment
of shares by public companies
When no public offer is made
Where a public company does not offer its
shares to the public but arranges the
capital privately, the company cannot
proceed with the allotment unless it files
with the Registrar of Companies at least
three days before the first allotment.
When an Offer is made to the
i) A prospectus must be issued and a
copy of the same should be filed with
the Registrar.
The company cannot allot the shares
immediately after issuing the
No allotment can be made until the
beginning of the fifth day from the date
of issue of prospectus
ii) Minimum subscription:
No company can proceed to allot shares to
the public until the minimum
subscription (which is usually 90% of the
issue amount) has been subscribed, and
the sum payable on applications for it has
been received by the company in cash.
iii) Application money:
It is the amount which is payable on each
share along with the application for
purchase of shares. The amount payable
on application on each - share shall not
be less than 5 per cent of the nominal
amount of the share.

iv) Application money to be
deposited in a scheduled bank:
All the money received from
applicants must be deposited in a
scheduled bank and it shall remain
there until the certificate to
commence business is received.

An allotment of shares shell be termed irregular if
it is made without fulfilling the conditions
precedent to a regular allotment. The allotment
of shares will irregular in the following cases:
1) Where an allotment is made without receiving
the minimum subscription.
2) Where an allotment is made without receiving
at-least five per cent of the nominal value of
shares as application money.
3) Where an allotment is made without depositing
the application money in a Scheduled bank.

4) In the case of a company which does not
invite public to subscribe its shares, if the
allotment is made without filing with the
Registrar the 'Statement in lieu of
prospectus' at least three days before the
first allotment of shares.

5) Where the company fails to apply for listing
of its shares in one or more recognized stock
exchanges before the tenth day after the first
issue of prospectus.

6) Where the allotment is made before the
expiry of the fifth day after the date of issue
of the prospectus.

Consequences of an irregular allotment
are as follows:

i) Voidable at the option of the allottee:
In these cases discussed above the
allotment is voidable at the option of the
allottee. But this right should be exercised
by the allottee within two months after
the holding of the statutory meeting by
the company
ii) Fine:
Where time limit regarding the opening of
the subscription list is not observed, the
allotment remains valid but the company
and every officer who is in default are
liable to a fine upto Rs. 5.000 each
iii) Director's liability:
The directors of the company who are
responsible for irregular allotment, are
liable to compensate the company and
the allottee for any loss, damages or cost
suffered or incurred by them.

Share capital of a company is divided into
shares of fixed face value. A company may
issue shares at a price less than the face
value of the share.
In that case, it is termed as 'issue of shares at
a discount.
For example if a share of Rs. 10 is issued at Rs.
9 per share, it means that the share is issued
at a discount of Re. 1. Generally, the issue of
shares at a discount is discouraged and that
is why the Companies act has imposed strict
restrictions on the issue of shares at a
A company may issue shares at a
discount, if the following conditions are
1) The shares offered at a discount must be of a
class already issued i.e., the first issue cannot be
at a discount.

2) At least one year must have elapsed since the
company became entitled to commence issue. It
means that in the first year of its working, shares
cannot be issued at a discount.

3) The issue must be authorized by an ordinary
resolution passed in the general meeting of the
company and this must be confirmed by the
Company Law Board.

4) The resolution must specify the
maximum rate of discount which in no
case shall exceed 10%. However, a higher
rate of discount may be allowed if the
Company Law Board agrees to a higher

5) The shares must be issued within two
months after receiving the sanction of
the Company Law Board or within such
extended time as the Company Law
Board may allow.

There can be cases when the company may
issue shares at a price higher than the face
value of the shares. This is termed as issuing
the shares at a premium.

For example, when a share of Rs. 10 each is
issued at Rs. 12 per share, it is an issue at a
premium, the amount of premium being Rs.
2 per share. There is no restriction on the
issue of shares at a premium; if the
company's reputation is good then it can sell
shares at a premium.


The most common form of raising loan
from the public is by issue of
A certificate issued by the company
under its seal acknowledging a debt
due by it to its holder, is known as
The main characteristics of debenture can
be summarized as follows:
1) A debenture is in the form of a
certificate issued under the seal of the
company. However, the seal of the
company is not necessary for the validity
of a debenture.
2) This certificate is an acknowledgement
of debt by the company to its holder.
3) A debenture usually provides for the
repayment of a specified principal sum
on a Specified date.
4) It usually provides for the payment of
interest at regular intervals at fixed dates
until the principal amount is completely
paid back.
5)Debenture certificates are freely
transferable just like shares.

6) Debentures arc generally issued in series
but even a single debenture issued to one
person is quite valid.

7) A debenture holder has no right to vote at
any meeting of the company.

Types of Debentures
Registered and Bearer Debentures:
Registered debentures are made out in the name
of a particular person, whose name is
recorded in the company's register of
debentures. The name of the debenture holder
appears in the debenture certificate.
Such debentures are transferable in the same
manner as shares by transfer deeds. Interest
on such debentures is payable to the person
whose name is registered with the company
in the register of debenture holders.
Secured and Unsecured Debentures:
Secured debentures are those debentures which
are Secured either by the mortgage of a
particular asset of the company known as
'Fixed Charge or by the mortgage of general
assets of the company known as Floating
charge. Secured debentures are also known as
mortgage debentures.
Unsecured debentures, on the other hand are
those debentures which are not secured by any
charge or mortgage on any property of the
company. Unsecured debentures.
Only good companies of strong financial standing
can issue such debentures.

Redeemable and Irredeemable
Redeemable debentures means such
debentures which arc repayable after a
specified period. A redeemed debenture
may be re-issued until it is cancelled.
Upon the re-issue of redeemable debenture,
the debenture holders will continue to
have the same rights and privileges as if
the debentures had never been redeemed.
Irredeemable debentures, on the other
hand, are those debentures for which no
fixed date is specified for repayment and
the holders of which cannot compel the
company to redeem them as long as the
company is functioning and docs not
make default in interest payment.
Irredeemable debentures arc also known
as perpetual debentures.
Convertible and Non-Convertible
Convertible debentures are those where in
the debenture holder is given an option to
convert their debentures into equity shares
in the company at a stated rate of exchange
on the expiry of a specified period.
On conversion, the debenture holders become
the members of the company.

Non-convertible debenture on the other
hand are those debentures for which the
debenture holder does not have any right for
conversion into equity shares

1) Shareholders are just like owners of the
company whereas the debenture
holders are creditors of the company.

2) A shareholder enjoys the rights of
proprietorship of a company
A debenture holder can enjoy the rights of
a lender only.

3) A shareholder has a right of control
over the working of the company by
attending and voting in the general
The debenture holders do not have any
voting right, and therefore, they are
unable to exercise any such influence.

4) A shareholder is entitled to receive
dividend when there are profits. The rate
of dividend varies from year to year
depending upon the amount of profit.
The debenture holders are entitled to
interest at a fixed rate which the
company must pay whether or not there
are profits.

5) In respect of shares, dividend is payable
only when the proposal to pay dividend
is passed by the shareholders at the
annual general meeting of the company.
There is no need of such approval in the
case of payment of interest on

6)A company cannot purchase its own
shares from the market whereas it can
purchase its own debentures and cancel
them or re-issue them.

7) In the event of winding up, shareholders
cannot claim payment unless all outside
creditors have been paid in full.
Debenture holders being secured creditors
get priority in payment over the

The directors are the persons elected by
the shareholders to direct, conduct,
manage or supervise the affairs of the
They manage and Control the overall
affairs of the company.
The day to day working of the company is
left to other managerial persons
appointed for the purpose.

If a person performs the functions of a
director, he will be deemed to be a
director, even if he is not so designated.

However, the experts who give
professional advice shall not be deemed
to be directors.

Their position under various headings can be
discussed as follows:
As Agents-
The company being an artificial person cannot
manage its affairs on its own. It has to be
entrusted to some human agency known as
They are elected representatives of the
shareholders and may be termed as agents of the
The relationship between the company and its
directors is that of principal and agent,
therefore, the general principles of the law of
agency govern the relations of the company and
its directors.

As agents, it is their duty to carry on the
business with reasonable care and
They must act within the authority
conferred upon them by the Act,
memorandum and articles and while
entering into contracts on behalf of the
company within the scope of this
authority, they will bind the company.
In other words, if they act beyond the
scope of their authority, they will be held
personally liable.

As Trustees-
The 'trustee' means a person who holds and
manages the property for the benefit of
other persons.

Though in the strict legal sense, directors
are not the trustees of the company, but, to
some extent, they have been treated as
trustees of the company. They are the
custodians of the money and properties of
the company and as such are responsible for
the proper use of such money and property.
If they misuse the money or property, they
have to refund or reimburse the same.

The directors must exercise their
powers in good faith and for the benefit
of the company, and not for their own

As Managing Partners
Directors have been described as the
managing partners because
on the one hand they are entrusted with
the management and control of the
affairs of the company and
on the other hand, they are the
shareholders of the company.
They manage the affairs of the
company for their own benefit as a
shareholder as well as for the general
benefit of the company.
As an Employee-
Directors are the elected representatives
of the shareholders. As such, they are
not employees or servants of the

But under a special contract with the
company director may hold a salaried
employment in the company and in that
case he will be treated as an employee
or servant of the company and he will
enjoy all the rights available to an

Only individuals can be appointed as
directors of the company.

Any person who is competent to contract
and whose holds the qualification
shares is eligible for appointment as a
director of the company.

Directors may be appointed in any of the
following ways
By the articles
By the shareholders in the general
By the Board of directors;
By the Central Government and
By third parties.

By Articles-
The names of the first directors are
usually given in the articles of the
In case they are not named in the articles
then the subscribers to the
memorandum are deemed to be the
first directors of the company and they
shall hold office until the directors are
appointed at the first annual general

A person cannot be appointed as director by articles, or
named as a director, or named as a proposed director in
the prospectus unless he or his authorized agent:-

has signed and filed with the Registrar his consent in
writing to act as such director; and

has either (a) Signed the memorandum for his
qualification shares; or

(b) Taken the qualification shares from the company and
paid or agreed to pay for them; or

(c) Signed and filed with the Registrar an undertaking in
writing to take from the company his qualification shares
and pay for them; or (d) filed with the Registrar an
Affidavit that his qualification shares, if any, are registered
in his name.

The above restrictions, however, do
not apply to
A company not having a share capital;
A private company;
A company which was the private
company before becoming a public

By Shareholders in General Meeting-
The first directors of the company shall
hold the office till the first annual general
According to Section 255 of the Act,
directors of a public company must be
appointed every year in its annual general
Unless the articles provide for retirement
of all the directors at every annual general
meeting, at least two-third of the total
number of directors must retire by rotation.
Thus, only one-third can be the permanent
or non-retiring or ex-officio directors.

The retiring directors are eligible for re-
If a person other than a retiring director
wishes to contest the election for
directorship, he must give a notice in
writing to the company at least fourteen
days before the meeting.
The company is then required to inform
the members either by individual
notices or by advertisement of at least
seven days before the meeting about
such a candidature.

If the vacancies could not be filled up in
the annual general meeting, the meting
is adjourned for the next week to be
held at the same time and at the same

If at the adjourned meeting also the
place of the retiring director is not filled
up and that meeting as not expressly
resolved not to fill the vacancy, then the
retiring directors shall be deemed to
have been re-appointed as directors.

It should be noted that the appointment
of each director in the general meeting
must be made by a separate resolution,

In other words, two or more directors
cannot be appointed by one resolution.

By Board of Directors-
The Board of directors may also appoint
directors in the following cases:

Additional Directors: - The Board of
directors may, if authorized by the
articles, appoint additional directors.
i) But care should be taken to see that the
total number of directors including the
additional director must not exceed the
maximum number fixed by the articles.
ii) Such an additional director shall hold
office only upto the date of the next
annual general meeting.

Alternate Directors:
The board may appoint the alternate directors
if the articles authorize such an appointment.

An alternate director is appointed to act in '
place of a director who remains absent for
more than three months from the state in which
the meetings of the Board are ordinarily held.

Such an alternate director shall hold office till
the time when the original director (in whose
place he was appointed) returns or on the
expiry of the original director's term.

Casual Director:
If the office of any director falls vacant for some
reason before the expiry of his term of office,
such a casual vacancy may be filled by the
Board of directors according to the regulations
of the articles.

Such a vacancy may be caused by death,
resignation, insanity, insolvency etc.

The person who is appointed by the Board to fill
up the casual vacancy, shall hold the office only
upto the date upto which the director in whose
place he is appointed, would have held the

By Central Government-
To safeguard the interest of the
company, or its shareholders, or the
public, the Central Government may
appoint such number of directors as the
Company Law Board may, by order in
writing, specify.

Such directors are appointed to prevent
oppression and mismanagement of the
affairs of the company.
The company Law Board may pass such an
order on a reference made to it by the Central
Government, or on the application of at least
one hundred 'members, or of member
holding at least ten per cent voting rights.

Such directors are not required to hold
qualification shares and they are not liable to
retire by rotation.

However, such directors can be removed by
the Central Government at any time and
appoint some other person in his place.

By Third Parties-
The articles of the company may authorize
the third parties to appoint persons on the
Board of directors as their nominee.

But the number of directors so nominated
must not exceed one-third of the total
number of directors.

The term 'third parties' here means the
debenture holders, financial institutions or
banks, etc., who have lent money to the

The idea behind such appointment is to
ensure that the money lent is used only
for the purposes for which it has been
lent. Such directors are not liable to
retire by rotation.
For the' appointment of every director, a
separate resolution has to be passed.

Powers to be exercised by Board & Board
Meetings :
According to Section 292 the following powers
can be exercised by the Board & Board
Meeting by means of resolutions passed at
meetings of the Board:
1) The power to make calls;
2) The power to issue debentures;
3) The power to borrow money otherwise than
on debentures; ,
4) The power to invest the funds of the
company; and
5) The power to make loans.

6. The power to fill up the casual vacancies on the
7. The power of sanctioning a contract on which a
director is interested;
8. The power to appoint or employ a person as
managing director or manager, if he is already a
managing director or manager of another
9. The power of making investments in shares or
debentures of companies under the same
10. The power of receiving notice of disclosure of
shareholdings by directors and persons deemed to
be directors;
11. The power to make declaration of solvency in the
case of member's voluntary winding up.

The first two powers cannot be delegated
by the Board to any committee but the
remaining three powers can be
delegated to any committee or sub-
committee, if any.

However, such delegation can be-made
by the Board by passing a resolution at
the meeting of the Board.

Powers to be exercised with the sanction
in general meeting:
Section.293 of the Act imposes certain
restrictions on the powers of the Board of
There are certain powers which can be
exercised by the Board of directors only
with the consent of the company in the
general meeting, they are:
i) The power to sell, lease or otherwise of
the company's undertaking;
ii) The power to remit or give time for the
repayment of any debt due by a director;

iii) The power to invest, otherwise than in
trust securities, the compensation
received for compulsory acquisition of
'the company's undertakings or property;
iv) The power to borrow money in excess
of the total of the paid-'up capital of the
company and its free reserves; and
v) The power to contribute to any
charitable or other funds not directly
connected with - the business of the
company or the welfare of the
employees beyond Rs. 50,000.

Other restrictions on the powers of the Board:-
In addition to the restrictions imposed by Section 293,
there are two more restrictions:
I. Restriction on making political contributions:
According to Section 293-A, Government companies
and companies which have been in existence for
less than three financial years are prohibited from
making political contributions.

Any other Company may contribute any amount or
amounts directly or indirectly to any political party or
for any political purpose to any person.
The amount of such contribution must
not exceed five per cent of its average
net profits during the three immediately
preceding financial years.

Further, for making such contributions,
a resolution authorizing such
contribution, should be passed at the
meeting of the Board of directors.

II.Restriction on appointment of sole
selling or buying agents:-
The Board can appoint a sole selling or
buying agent of the company for any
area only after obtaining the sanction in
the general meeting of the company
and the appointment can be made only
for a term not exceeding five years at a

Managerial Powers of Directors
The Board of directors has the following
managerial powers:

i) Power to make contracts with third
parties on behalf of the company;

ii) Power to recommend dividends;

iii) Power to allot, forfeit and transfer
shares of the company;

iv) Power to appoint director to fill up the
casual vacancy;
v) Power to take decision regarding the
terms and conditions for the issue of
vi) Power to appoint managing director,
manager or secretary of the company;
vii) Power to form policy and issue
instructions for the efficient running of
the business;
viii) Power of control and supervision of
work of subordinat

The duties of directors call broadly be
classified under the following two

1) Statutory duties

2) General duties

Statutory Duties-
Some of the statutory duties of directors
i) Every director must disclose his
shareholdings in the company [Sec.
ii) Every director must disclose his
personal interest in contracts to be
entered into by the company [Sec.
iii) Directors must not receive any loan
from a public company or its subsidiary
of which he is a director in contravention
of Section 295.

iv)To hold statutory and annual general
meetings and lay before the company a
Balance Sheet and Profit and Loss
Account and other reports.

v) To convene extraordinary general
meeting on the requisition of the
specified number of members.
vii) To file with the Registrar the reports
and resolutions as required by the Act.

viii) To maintain books and registers
required under the Act and articles.

ix) To perform all such duties as required
under the Act and articles.