COMPANY LAW
Meaning of a company :
• What is a company ?
- A Company is a voluntary association of persons formed for the purpose of
doing business, having a distinct name and limited liability.
- They can be incorporated under the Companies Act (it may be any type of
company)
- Corporations enacted under special enactments (Even those which are
incorporated outside India)
- Corporate sole - A corporation sole is a legal entity consisting of a single
("sole") incorporated office, occupied by a single ("sole") natural person.
- Any other body corporate notified by the central government
- Company is both natural and artificial person I.e company can be a member
in another company. But it acts as a natural person but only through a
designated person (i.e directors, CEO)
- Derived from the Latin word COM - which means together PANIS means
bread.
- Incorporated company owes its existence either to a special act of the
parliament or to the company law.
- A company is a legal device incorporated under the companies act 2013 for
the attainment of social , economic , political and legal ends.
- Being the creation of law, it posses only the power conferred upon it by the
MOA. Within the limits of the power associated by the charter (moa) it can
exercise all its powers.
• Features of a company :
- Corporate personality
A company incorporated under the Act is vested with a corporate
personality so it redundant bears its own name, acts under name, has a seal
of its own and its assets are separate and distinct from those of its
members.
Therefore it is capable of owning property, incurring debts, borrowing money,
having a bank account, employing people, entering into contracts and suing
or being sued in the same manner as an individual.
The shareholders are not the agents of the company and so they cannot bind it by
their acts. Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic
person. A juristic person is in law also conferred with rights and obligations and is
dealt with in accordance with law.
A company as a person : A Company is an artificial person created by law. It is not
a human being but it acts through human beings. It is considered as a legal person
which can enter into contracts, possess properties in its own name, sue and can
be sued by others etc. It is called an artificial person since it is invisible,
intangible, existing only in the contemplation of law. It is capable of enjoying
rights and being subject to duties.
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- Perpetual Succession
An incorporated company never dies, except when it is wound up as per law.
A company, being a separate legal person is unaffected by death or departure
of any member and it remains the same entity, despite total change in the
membership.
A company’s life is determined by the terms of its Memorandum of Association. It
may be perpetual, or it may continue for a specified time to carry on a task or
object as laid down in the Memorandum of Association.
The membership of an incorporated company may change either because one
shareholder has sold/transferred his shares to another or his shares devolve on his
legal representatives on his death or he ceases to be a member under some other
provisions of the Companies Act.
- Limited liability
It is one of the principal advantages of doing business under the corporate form of
organization.
The company, being a separate person, is the owner of its assets and bound by its
liabilities. The liability of a member as shareholder, extends to the contribution to
the capital of the company up to the nominal value of the shares held and not
paid by him.
Members, even as a whole, are neither the owners of the company’s
undertakings, nor liable for its debts. shareholder is liable to pay the balance, due
on the shares held by him, even if the liabilities of the company far exceed its
assets.
In the case of a company limited by guarantee, the liability of members is limited
to a specified amount of the guarantee mentioned in the memorandum.
- separate property
A company being a legal person and entirely distinct from its members, is capable
of owning, enjoying and disposing of property in its own name.
- Transferability of shares
The capital of a company is divided into parts, called shares. The shares are said to
be movable property and, subject to certain conditions, freely transferable, so that
no shareholder is permanently or necessarily wedded to a company.
if the articles do not provide anything for the transfer of shares and the Regulations
contained in Table “F” in Schedule I to the Companies Act, 2013, are also expressly
excluded, the transfer of shares will be governed by the general law relating to
transfer of movable property.
A member may sell his shares in the open market and realize the money invested
by him. This provides liquidity to a member and ensures stability to the company.
The Stock Exchanges provide adequate facilities for the sale and purchase of
shares.
- Common seal
Since the company has no physical existence, it must act through its agents and
all contracts entered into by its agents must be under the seal of the company
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The Common Seal acts as the official signature of a company. The name of the
company must be engraved on its common seal. rubber stamp does not serve
the purpose.
- Capacity to Sue and Be Sued
A company being a body corporate, can sue and be sued in its own name. To
sue, means to institute legal proceedings against (a person) or to bring a suit in a
court of law.
A company’s right to sue arises when some loss is caused to the company,
A company, as a person distinct from its members, may even sue one of its own
members.
- Contractual Rights
A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name
A shareholder cannot enforce a contract made by his company; he is neither a
party to the contract, nor be entitled to the benefit derived from of it, as a
company is not a trustee for its shareholders.
- Limitation of Action
A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company regulates the
powers and fixes the objects of the company and provides the edifice upon which
the entire structure of the company rests.
the actions and objects of the company are limited within the scope of its
Memorandum of Association.
- Separate Management
The members may derive profits without being burdened with the management of
the company.
- Voluntary Association for Profit
A company is a voluntary association for profit. It is formed for the accomplishment
of some stated goals and whatsoever profit is gained is divided among its
shareholders or saved for the future expansion of the company.
- Termination of Existence
A company, being an artificial juridical person, does not die a natural death. It is
created by law, carries on its affairs according to law throughout its life and
ultimately is effaced by law.
Different business organization and difference amongst them
• Distinction between Company and Partnership
(1) A company is a distinct legal person. A partnership firm is not distinct from the
several persons who form the partnership.
(2) In a partnership, the property of the firm is the property of the individuals
comprising it. In a company, it belongs to the company and not to the
individuals who are its members.
(3) Creditors of a partnership firm are creditors of individual partners and a decree
against the firm can be executed against the partners jointly and severally.
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The creditors of a company can proceed only against the company and not
against its members.
(4) Partners are the agents of the firm, but members of a company are not its
agents. A partner can dispose of the property and incur liabilities as long as he
acts in the course of the firm’s business. A member of a company has no such
power.
(5) A partner cannot contract with his firm, whereas a member of a company
can.
(6) A partner cannot transfer his share and make the transferee a member of the
firm without the consent of the other partners, whereas a company’s share
can ordinarily be transferred.
• Distinction between Company and Hindu Undivided Family Business
1. A company consists of heterogeneous (varied or diverse) members, whereas
a Hindu Undivided Family Business consists of homogenous (unvarying)
members since it consists of members of the joint family itself
2. In a Hindu Undivided Family business the Karta (manager) has the sole
authority to contract debts for the purpose of the business, other co-parceners
cannot do so. There is no such system in a company.
3. A person becomes a member of a Hindu Undivided Family business by virtue
of birth. There is no provision to that effect in the company.
4. No registration is compulsory for carrying on business for gain by a Hindu
Undivided Family even if the number of members exceeds twenty. Registration
of a company is compulsory.
Doctrine of lifting/piercing of corporate veil
The separate personality of a company is a statutory privilege and it must be used
for legitimate business purposes only.
Where there is a fraud or dishonest use of legal entity, the individual behind it
would be held liable and the court will lift or pierce the corporate veil
The Court will look behind the corporate entity and take action as though no entity
separate from the members existed and make the members or the controlling
persons liable for debts and obligations of the company
However, the shareholders cannot ask for the lifting of the veil for their purposes.
- The corporate veil can be lifted either under the:
1. Statutory provisions; or
2. Judicial interpretations
• Statutory Recognition of Lifting of Corporate Veil
Statutory means mentioned in the law. The Companies Act, 2013, states it in
section 7 which deals with punishment for incorporation of company by
furnishing false information; deals with liability for making fraudulent application for
removal of name of company from the register of companies and fraud conduct
of business during winding up.
• Lifting of Corporate Veil under Judicial Interpretation
Courts have found it necessary to disregard the separate personality of a
company in the following situations:
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(a) Where the corporate veil has been used for commission of fraud or improper
conduct. In such a situation, Courts have lifted the veil and looked at the
realities of the situation. (Jones v. Lipman)
(b) Where a corporate facade is really only an agency instrumentality (Re. R.G.
Films Ltd. )
(c) Where the conduct conflicts with public policy, courts lifted the corporate veil
for protecting the public policy. (Connors Bros. v. Connors)
(d) Further, In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) 2 A.C. 307,
it was held that a company will be regarded as having enemy character, if
the persons having de facto control of its affairs are resident in an enemy
country or, wherever they may be, are acting under instructions from or on
behalf of the enemy.
(e) Where it was found that the sole purpose for which the company was formed
was to evade taxes the Court will ignore the concept of separate entity and
make the individuals concerned liable to pay the taxes which they would
have paid but for the formation of the company.
(f) Avoidance of welfare legislation is as common as avoidance of taxation and
the approach in considering problems arising out of such avoidance has
necessarily to be the same and, therefore, where it was found that the sole
purpose for the formation of the new company was to use it as a device to
reduce the amount to be paid by way of bonus to workmen, the Supreme
Court upheld the piercing of the veil to look at the real transaction.
Types of companies
(i) Classification on the basis of Incorporation:
A. Statutory Companies: These are constituted by a special Act of
Parliament or State Legislature. The provisions of the Companies Act,
2013 do not apply to them. Examples of these types of companies are
Reserve Bank of India, Life Insurance Corporation of India, etc.
B. Registered Companies: The companies which are incorporated under
the Companies Act, 2013 or under any previous company law, with
ROC1 fall under this category.
C. charter company
(ii) Classification on the basis of Liability:
A. Unlimited Liability Companies: In this type of company, the members are
liable for the company's debts in proportion to their respective interests
in the company and their liability is unlimited. Such companies may or
may not have share capital. They may be either a public company or a
private company.
B. Companies limited by guarantee: A company that has the liability of its
members limited to such amount as the members may respectively
undertake, by the memorandum, to contribute to the assets of the
company in the event of its being wound-up, is known as a company
limited by guarantee. The members of a guarantee company are, in
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effect, placed in the position of guarantors of the company's debts up
to the agreed amount.
C. Companies limited by shares: A company that has the liability of its
members limited by the memorandum to the amount, if any, unpaid on
the shares respectively held by them is termed as a company limited by
shares.
(iii) Classification on the basis of members
A. Private Companies; two or more persons, max 200, where the company
to be formed is to be a private company ;Minimum paid up share
capital of INR 1,00,000 ; right to transfer its shares is restricted
B. Public Companies; seven or more persons, where the company to be
formed is to be a public company; Minimum paid up share capital of
INR 5,00,000 ; Any subsidiary of public company shall be treated as
public company even if such subsidiary company has obtained the
status of a private company in its articles
C. One Person Company (to be formed as Private Limited). one person,
where the company to be formed is to be One Person Company that is
to say, a private company, by subscribing their names or his name to a
memorandum and complying with the requirements of this Act in
respect of registration
(iv) classification on the basis of size
A. small company
B. other company
(v) classification on the basis of control
A. Holding company
B. Subsidiary company
C. Associate company
• Government company :
- When 51% of the paid up share capital is held by the government.
- The shares can be held by the central government or state government.
- Partly by central and partly by two or more governments.
- As the legal status of the company does not change by being a government
company, there are no special privileges given to them.
• Foreign Company
- A company incorporated outside India, but having a place of business
in India.
- If it does not have a place of business in India but only has agents in India
it cannot be considered to be foreign company.
• Exemption and Privileges of a Private company
- It can have a minimum of two members;
- It can commence business immediately after obtaining certificate of
incorporation;
- It need not issue prospectus or statement in lieu of prospectus;
- It can have a minimum of 2 directors;
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- It need not hold statutory meeting or file statutory report with the ROC.
• Conversion of Company
- The Act provides for conversion of public company into a private company
and vice versa
- A private company is converted into a public company either by default or
by choice in compliance with the statutory requirements.
- Once the action for conversion takes place then, a petition can be filed with
the central government with the necessary documents for its decision on the
matter of conversion
Pre-incorporation Contracts
• A pre incorporation contract is one which is purportedly made by or on behalf of
a corporation at a time when the corporation has not yet been incorporated.
• Because the corporation named in the promoter's contract has not been
formed at the time the contract is made, the corporation when formed is not
bound by the contract.
• However, adoption of the contract is anticipated by the parties to the contract.
If the corporation in fact adopts the contract, then it will assume those rights and
liabilities set out in the contract.
• When a promoter enters into a contract on behalf of a corporation to be
formed, the promoter may be considered personally liable to meet the
obligations of the corporation if for some reason the corporation is not formed or
does not adopt the contract.
• When the pre-incorporation contract is made, the corporation is not in existence
and therefore cannot be a party to the contract.
• The promoter thus must be a party to the contract, and, under agency law
principles, the promoter will be personally bound as an agent acting on behalf
of a non-existent principal.
• A pre-incorporation agreement is entered into by the corporate promoters, who
form the company by filing its Articles of Incorporation.
• Since the corporation has not been formed yet, it cannot be a party to the
agreement.
• If the corporation is not formed or if it fails to adopt the agreement, the
promoters can be held personally liable for any breach of the agreement.
• Corporate Name: The agreement should state the corporation's intended legal
name.
• Check the website of the ROC for information on how to perform a name
availability search prior to choosing a name, to make sure that the intended
name is not already in use.
• ROC also requires the corporate name to use a suffix, such as Ltd. that indicates
its limited liability status.
• If the corporation will operate under a trade name, list the trade name as well.
• Listing the trade name in the pre-incorporation agreement helps establish that
the corporation intends to use it in business -- a requirement for registration of a
trademark that is not already in use.
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• Incorporation: In the pre-incorporation contract, lists the place of incorporation.
• Normally, the place of incorporation is the place where the corporation's
principal place of business is located.
• List the corporation's principal business address if it has already been selected.
• Select a registered agent, to whom all official communications to the
corporation will be addressed.
• The registered agent need not be a shareholder, officer or director -- many
corporations list their lawyer as their registered agent, for example.
• ROC requires the registered agent to reside in the place of incorporation.
• Equity Structure: List the number of shares that the corporation is authorized to
issue and the number of shares that will initially be issued to shareholders.
• The total number of issued shares need not be equal to the number of
authorized shares -- leave the corporation room to issue additional shares in
response to future business needs.
• Name each shareholder and list the number of shares held by each.
• Purpose: Many countries require a corporation to state its purpose quite
specifically, and will not allow it to operate outside of that purpose.
In the U.S., however, it is permissible to state the corporate purpose broadly -- "to
perform any lawful activity" is acceptable, for example - Don't state the corporate
purpose narrowly unless you have solid business reasons for doing so, because a
narrow statement of purpose, if reflected in the Articles of Incorporation, can
unnecessarily limit the corporation's flexibility.
The promoters alone, therefore, remain personally liable for any contract they
purport to make on behalf of the company, unless the company enters into the
contract in terms of such agreement after incorporation. A company cannot ratify
a pre-incorporation contract, but it is open to it to enter into a new contract after
its incorporation to give effect to a contract made before its formation
A company cannot acquire shares prior to its incorporation. Where a company
was named as the transferee in the share transfer forms prior to its incorporation, it
was held that such transfers could not be registered.
Promoters of the company
• Who are promoters ?
(i) the person or persons who are in control of the issuer;
(ii) in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.
(iii) However, if a person is merely acting in a professional capacity i.e. giving only
professional advice to the Board of directors, he shall not be treated as a
promoter.
(iv) Promoters are instrumental in the formulation of a plan or programs which
have specified securities are offered to public;
(v) persons named in the offer document as promoters.
• Is a director/officer/employee of the issuer a promoter?
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A director/officer/employee who has control over the affairs of the company,
directly or indirectly whether as a shareholder, director can be considered as a
promoter.
control” shall include the right to appoint majority of the directors or to control the
management or policy decisions, management rights or shareholders agreements
or voting agreements
However, a director or officer or employee of the issuer or a person, if acting as
such merely in his professional capacity, shall not be deemed as a promoter.
• A company may have several promoters. A promoter may be a natural
person or a company.
• Promoters contract
Prompter can be before the company is incorporated.
A promoter signs ratified contracts with the company before incorporation.
Previously, the company could not ratify contract made by a promoter before its
incorporation
Specific performance of a contract may be enforced against a company in
respect of contracts entered into by promoters on behalf of the company, if such
a contract is warranted by the terms of incorporation and the company has
accepted the contract and communicated the acceptance to the other
party
The other party can also enforce the contract if the company has adopted it after
incorporation and the contract is within the terms of incorporation.
As long as the company does not ratify, he position remains the same as under the
common law.
• Liabilities of promoter
1. Incorporation of company by furnishing false information:
2. The promoter(s) may be held liable for the non-compliance of the
provisions. disclosures about sources of promoter’s contribution has to be
made in prospectus.
3. A promoter is liable for any misleading statement in the prospectus to a person
who has subscribed for any securities of the company on the faith of the
prospectus.
4. Punishment for fraudulently inducing persons to invest money.
5. If a company makes an offer or accepts monies of private placement,
then the company, its promoters and directors shall be liable for a penalty
which may extend to the amount involved in the offer or invitation or two
crore rupees, whichever is higher, and the company shall also refund all
monies to subscribers within a period of thirty days of the order imposing the
penalty.
6. Liability during Revival and Rehabilitation of companies
7. Failure to cooperate with Company Liquidator during winding up:
8. A promoter may be liable to public examination like any other director or
officer of the company
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9.
A company may proceed against a promoter on action for deceit or breach
of duty where the promoter has misapplied or retained any money or property
of the company or is guilty of misfeasance or breach of trust in relation to the
company.
10. Criminal Liability for misstatement in prospectus
A promoter is personally liable to third parties upon all contracts made on behalf
of the intended company, until with their consent, the company takes over this
liability.
If the promoter commits a breach of duties, the company can either rescind the
contract or can compel him to account for any secret profits that he has made.
• Legal position of promoter
A promoter is neither an agent of, nor a trustee for, the company because it is not
in existence. But he occupies a fiduciary position in relation to the company and
therefore requires to make full disclosure of the relevant facts, including any profit
made by him
• A promoter can, however, escape the punishment if he proves:
(i) That the statement or omission was immaterial; or
(ii) That he had reasonable grounds to believe, and did, up to the time of the
issue of prospectus, believe that statement was true or the inclusion or omission
was necessary.
• Duties of a promoter
1. A promoter is not allowed to derive a profit from the sale of his own property to
the company unless all material facts are disclosed. If a promoter contracts to
sell his own property to the company without making a full disclosure, the
company may either repudiate the sale or affirm the contract and recover
the profit made out of it by the promoter.
Either way the dishonest promoter is deprived of his advantage. If promoter makes
some profits in connection with a transaction to which company is a party and
does not make full disclosure of his profits; the company has the right to affirm the
contracts and promoter should handover his profits to the company.
therefore, the promoter wishes to sell his own property to the company, he should
either disclose the fact:
(a) to an independent Board of directors; or
(b) in the articles of association of the company; or
(c) in the prospectus; or
(d) to the existing and intended shareholders directly
2. A company, which has raised money from public through prospectus and still
has any un-utilized amount out of the money so raised, shall not change its
objects for which it raised the money through prospectus unless a special
resolution is passed by the company and the dissenting shareholders shall be
given an opportunity to exit by the promoters and shareholders having control
in accordance with regulations to be specified by the Securities and
Exchange Board.
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3.
Promoters’ duties cannot depend on a contract because at the time the
promotion begins, the company is not incorporated, and so cannot contract
with its promoters.
4. The promoter's duties must be the same as that of a person acting on behalf
of another individual without a contract of employment. If he does make any
misrepresentation in a prospectus he may be held guilty of fraud and would
be held liable for damages.
• Termination of Promoters' Duties
It is a general opinion that a promoter completes his duty the moment the
company, that he promotes, is incorporated or when the Board of directors is
appointed.
But, in reality it continues until the company has acquired the property for which it
was formed to manage and has raised its initial share capital, and the Board takes
over the management of the affairs of the company from the promoters.
• Remedies available to the company against the promoter
If a promoter makes a secret profit or does not disclose it, the company has got a
remedy against him. There are two possible situations.
1. Where the promoter was not in a fiduciary position when he acquired the
property which he is selling to the company, but only when he sold it to the
company.
If a person acquires property or has had it before he takes any active steps in the
promotion of a company and sells it to the company at a profit, he is entitled to
retain that profit. Here the promoter, as in Salomon's case, has had the property for
a period of time. He can hardly be said to be in a fiduciary relation to the
company. As long as he makes a full disclosure of the fact that the property is his
and he is the real vendor, he may sell it to the company at a profit. If, however, he
fails to disclose this fact the company is entitled either to rescind the contract or
claim damages for breach of duty of disclosure.
2. Where the promoter was in fiduciary position when he acquired the property
and when he sold it to the company.
This may happen in any of the following circumstances:
(a) Where the promoter bought property with a view to sell it to the company
which he intends to promote, he occupies fiduciary position vis-a-vis the
company. He must disclose all the facts to the company.
(b) Where the promoter resells property to the company at an increased price,
the property which he purchased after he has commenced to act in the
capacity of a promoter, he cannot retain the profit which he has not disclosed
to the company. *Provision yet to be notified.
(c) Where a person is a promoter for acquiring the property for the company, the
rules of agency will apply, so that any profit he makes will belong to the
company.
3. Where, the promoter bought the property with a view to sell it to the company
he promotes, the company may either—
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(a) rescind the contract and if he has made a profit on some ancillary transaction
that may also be recovered; or
(b) retain the property, paying no more for it than what the promoter has paid,
depriving him of his profit; or
(c) where the above remedies would be inappropriate, such as when the
property has been altered so as to render recession impossible and the
promoter has already received his inflated price, the company may sue him
for misfeasance (breach of duty to disclose). The measure of damages will be
the difference between the market value of the property and the contract
price.
• Rights of a promoter
1. Right to receive preliminary Expenses
2. Right to recover proportionate amount from the Co-promoters
• In addition to directors and promoters the liability under the section also
attaches to person who have authorized the issue of the prospectus.
1. Misrepresentation of facts:A promoter will be responsible for any misstatement
as to an existing fact. A calculation of future profits is not a statement of fact
2. Misstatements of Names of directors:If a director's name is misstated in the
prospectus, it is an important misrepresentation and the promoter can be held
to be liable
3. Representation true only at time of issue:Sometimes representations which
were true when the prospectus was issued, become false before the allotment
is made. In such cases, the fact ought to be communicated to the applicant
otherwise the applicant will not be able to rescind the contract. A promoter/
director who knows that a statement has become false is under a duty to
disclose the truth and if he abstains, he may be guilty of fraud.
• The following are some of the remedies available to the subscriber who is
deceived by any misleading statement or the inclusion or omission of any matter
in the prospectus:—
1. in respect of any misleading statement or the inclusion or omission of any
matter in the prospectus, bring an action against the directors and promoters
for the recovery of compensation.
2. bring an action for damages against the directors and other persons
responsible for failure to disclose matters in a prospectus.
3. may take proceedings to repudiate the contract and require repayment of his
money with interest.
Incorporation of a company
• Requirements to Incorporate a Company
- Application for availability of name;
- Preparation of MOA and AOA;
- Selection and finalization of MOA and AOA- Its printing, stamping and
signing;
- Preparation of other necessary documents;
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- Filling of the required documents for Registration to obtain certificate of
incorporation and Certificate of commencement of business.
• Doctrine of Constructive notice and Indoor Management
- Persons dealing with the company have to satisfy themselves.
- But need not know the internal irregularity.
- Directors issuing a bond.
- The doctrine of Constructive notice can be invoked by the company to
operate against the persons dealing with the company.
- The outsider cannot embark, but only can acquaint upon the MOA and
AOA.
- While the doctrine of ‘constructive notice” seeks to protect the company
against the outsiders, the principal of indoor management operates to
protect the outsiders against the company.
- According to this doctrine, while persons contracting with a company are
presumed to know the provisions of the contents of the memorandum and
articles, they are entitled to assume that the provisions of the articles have
been observed by the officers of the company. It is no part of the duty of an
outsider to see that the company carries out its own internal regulations.
• Exceptions to the Doctrine of Where the outsider cannot claim the relief on the
grounds of “ Indoor Management”
- Knowledge of irregularity : — The rule does not protect any person who has
actual or even an implied notice of the lack of authority of the person acting
on behalf of the company. Thus, a person knowing fully well that the directors
do not have the authority to make the transaction but still enters into it,
cannot seek protection under the rule of indoor management
- No knowledge of articles :— Again, the rule cannot be invoked in favour of a
person who did not consult the memorandum and articles and thus did not
rely on them
- Negligence : he ‘doctrine of indoor management’, in no way, rewards those
who behave negligently. Thus, where an officer of a company does
something which shall not ordinarily be within his powers, the person dealing
with him must make proper enquiries and satisfy himself as to the officer’s
authority. If he fails to make an enquiry, he is estopped from relying on the
Rule
- Forgery : The rule of indoor management does not extend to transactions
involving forgery or to transactions which are otherwise void or illegal ab initio.
In the case of forgery it is not that there is absence of free consent but there is
no consent at all. The person whose signatures have been forged is not even
aware of the transaction, and the question of his consent being free or
otherwise does not arise
- Non- Existent authority of the company :
• Doctrine of ultra vires
In the case of a company whatever is not stated in the memorandum as the
objects or powers is prohibited by the doctrine of ultra vires*.
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An act which is ultra vires is void, and does not bind the company
Neither the company nor the contracting party can sue on it
The general rule is that an act which is ultra vires the company is incapable of
ratification.
If the act is ultra vires (beyond the powers of) the directors only, the shareholders
can ratify it. If it is ultra vires the articles of association, the company can alter its
articles in the proper way.
Section 181 of the Companies Act, 2013 authorizes the Board of directors to
contribute to bona fide charitable and other funds
An ultra vires borrowing does not create a relationship of a debtor and creditor.
Whether a transaction is ultra vires the company can be decided on the basis of
the following:
(1) if a transaction entered into by a company falls within the objects, it is not ultra
vires and hence not void;
(2) if a transaction is outside the capacity (objects) of the company, it is ultra vires;
(3) if a transaction is in excess or abuse of the company’s powers, such
transaction will be set aside by
the shareholders;
A shareholder can get back the money paid by him to the company under an
ultra vires allotment of shares.
• Implied powers in the object clause
The powers exercisable by a company are to be confined to the objects specified
in the memorandum. While the objects are to be specified, the powers exercisable
in respect of them may be express or implied and need not be specified.
Every company may necessarily possess certain powers which are implied, such
as, a power to appoint and act through agents, and where it is a trading
company, a power to borrow and give security for the purposes of its business, and
also a power to sell. Such powers are incidental and can be inferred from the
powers expressed in the memorandum
The following powers have been held not to be implied and it is, therefore, prudent
to include them expressly in the objects clauses:
1. acquiring any business similar to the company’s own business
2. entering into an agreement with other persons or companies for carrying on
business in partnership
3. taking shares in other companies
4. Promoting other companies or helping them financially
5. a power to sell and dispose of the whole of a company’s undertaking
6. a power to use funds for political purposes
7. a power to give gifts and make donations
8. acting as a surety or as a guarantor
Effects of ultra vires transactions :
Page 14 of 66
-
Void ab initio – The ultra vires acts are null and void ab initio. The company
is not bound by these acts
- Injunction: The members can get an injunction to restrain a company
wherein ultra vires act has been or is about to be undertaken
-
Personal liability of Directors: It is one of the duties of directors to ensure that
the corporate capital is used only for the legitimate business of the
company and hence if such capital is diverted to purposes alien to the
company’s memorandum, the directors will be personally liable to replace
it.
- Ultra vires borrowing does not create the relationship of creditor and debtor
instead it creates a relationship of a borrower and a lender.
- Where a company’s money has been used ultra vires to acquire some
property, the company’s right over such property is held secure and the
company will be the right party to protect the property. This is because,
though the property has been acquired for some ultra vires object, it
represents the money of the company.
• Memorandum of Association
The Memorandum of Association is a document which sets out the constitution of
a company and is therefore the foundation on which the structure of the
company is built. It defines the scope of the company’s activities and its relations
with the outside world.
CONTENTS OF MEMORANDUM
(a) the name of the company with “Limited” as its last word in the case of a
public company; and
“Private Limited” as its last words in the case of a private company;(Name Clause)
(b) the State in which the registered office of the company is to be situated;
(Situation Clause)
(c) the objects for which the company is proposed to be incorporated and any
matter considered necessary in furtherance thereof;(objects clause)
(d) the liability of members of the company, whether limited or unlimited, and also
state,—(Liability Clause)
(e)in the case of a company having a share capital,—(Capital Clause)
• Articles of association
the articles of a company shall contain the regulations for management of the
company. The articles of association of a company are its bye-laws or rules and
regulations that govern the management of its internal affairs and the conduct of
its business. The articles play a very important role in the affairs of a company. It
deals with the rights of the members of the company inter se. They are subordinate
to and are controlled by the memorandum of association.
Page 15 of 66
Thus, the memorandum lays down the scope and powers of the company, and
the articles govern the ways in which the objects of the company are to be
carried out and can be framed and altered by the members.
• Distinction between moa and Ana
BASIS FOR
COMPARISON
Abbreviation
MEMORANDUM OF
ASSOCIATION
abbreviated as MOA
ARTICLES OF ASSOCIATION
Kind of Document
is the root document of the
company, which contains all
the basic details about the
company
is a document that contains all
the fundamental information
which are required for the
incorporation of the company.
Section 2 (28)
is also a major document
which contains all the rules and
regulations designed by the
company.
is a document containing all
the rules and regulations that
governs the company.
Powers and objects of the
company.
It is subordinate to the
Companies Act.
The MOA of the company
cannot be amended
retrospectively.
A memorandum must contain
six clauses.
Rules of the company.
Meaning
Defined in
Type of Information
contained
Status
Retrospective Effect
Major contents
Obligatory
Yes, for all companies.
Compulsory filing at the Required
time of Registration
Alteration
Alteration can be done, after
passing Special Resolution (SR)
in Annual General Meeting
(AGM) and previous approval
of Central Government (CG)
or Company Law Board (CLB)
is required.
shortly known as AOA.
Section 2 (2)
It is subordinate to the
memorandum.
The AOA can be amended
retrospectively.
The articles can be drafted as
per the choice of the
company.
A public company limited by
shares can adopt Table A in
place of articles.
Not required at all.
Alteration can be done in the
Articles by passing Special
Resolution (SR) at Annual
General Meeting (AGM)
Prospectus
initial public offer or further public offer of securities to the public by a company, or
an offer for sale of securities to the public by an existing shareholder, through issue
of a prospectus.
Page 16 of 66
Prospectus has been defined as any document described or issued as a
prospectus and includes a red herring prospectus referred to in section 32
or shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a bodycorporate.
• One of the ingredients of a prospectus is to make invitation to the public
to subscribe for securities of a body corporate which is construed as
including a reference to any section of the public, whether selected as
members or debenture-holders of the company or as clients of the person
issuing the prospectus. However, there are exceptions to it.
• All public companies making public offer issue a prospectus.
• Shelf prospectus means a prospectus in respect of which the securities or
class of securities included therein are issued for subscription in one or more
issues over a certain period without the issue of a further prospectus.
• Red herring prospectus means a prospectus which does not include
complete particulars of the quantum or price of the securities included
therein.
• Companies Act and SEBI guidelines provide for contents and disclosures
required in a prospectus.
• No application form can be issued for securities unless it is accompanied
by a memorandum containing such salient features of prospectus as may
be prescribed.
• A company is responsible for a statement in prospectus only if it is shown
that the prospectus was issued by the company or by some one with the
authority of the company. The company is also liable if though the
prospectus is issued by the promoters, the Board ratifies and adopts the
issue.
• A person who subscribed for securities on the faith of a false prospectus
may claim from directors or promoters damages for fraudulent
misrepresentation, compensation, damages for non-compliance with the
requirements of the Act.
• Where a prospectus includes any untrue statement, every person who has
authorised the issue of the prospectus shall be punishable with
imprisonment, fine or both.
Borrowing power :
• The powers of a company are determined by the MOA and AOA
• The MD may from time to time with the approval of the BOD may borrow from
any source either from any commercial or schedule banks, or financing
institutions or firms, any sum of money required for the purpose of the company
and secure the payment or repayment of such money so borrowed in such
Page 17 of 66
manner and upon such terms and conditions in all respects duly approved by
the BOD deemed fit in particular by hypothecation or charge on all or any part
of the property of the company (both present and future) including its uncalled
capital for the time being.
• Money or fund is very important for running a business properly.
• Capital is not enough for running a business that’s why a business
requires borrowing to invest in the firm.
• Availability and choice of alternative lender(s) will be governed by the
unique variables inherent in the needs, capacities and credit history of the
borrowing business or individual.
• Methods of borrowing :
- Companies borrow money from various sources, including their directors and
shareholders, personal contacts, banks, institutional investors and (PLCs only)
through the Stock Exchange.
- In most cases of borrowing a debenture is issued.
- A debenture is the traditional name given to a loan agreement where the
borrower is a company.
• Debentures
- A debenture is a document which shows on the face of it, that the company
has borrowed a certain sum of money from the holder thereof upon certain
terms and conditions.
- Characteristics:
- Each debenture is numbered.
- Each contains a printed statement of the terms and conditions.
- A debenture usually creates a floating charge on the assets of
the companies.
- A debenture may create a fixed charge instead of a floating charge.
- No debenture holder is to have any voting rights in company meetings.
- Full particulars regarding the issue of debentures in series must be sent to the
Registrar.
- Sometimes debenture holders are given the right to appoint a receiver in
case of non-fulfillment of the terms of the debenture by the company.
- Sometimes a series of debentures are issued with a Trust Deed by which
trustees are appointed to whom some or all the properties of the company
are transferred by way of security for the debenture holders.
• Rights and Remedies of a Debenture Holder :
- If the company fails to pay interest or principal on the due date or fails to
comply with any of the terms and conditions under which the debenture was
issued, the debenture holder can adopt any of the following remedial
measures.
- He may file a suit for the recovery of money.
- He may file an application for the appointment of a receiver by the court.
- He may himself appoint a receiver if the terms of the debenture entitled him
to do so.
Page 18 of 66
- The trustees may sell the properties charged,.
- He may apply to the court for the foreclosure of the company right to
redeem the properties charged for the payment of the money.
- He may present petition for the winding up of the company.
• Fixed Charge
- A fixed charge is a charge or mortgage secured on particular property, e.g.
land and buildings, a ship, piece of machinery, shares, intellectual property
such as copyrights, patents, trademarks, etc.
- A fixed charge is a mortgage on a specific fixed-asset (such as a parcel of
land) to secure the repayment of a loan. In this arrangement the asset is
signed over to the creditor and the borrower would need the lender's
permission to sell it.
- A floating charge is a particular type of security, available only to companies.
- It is an equitable charge on (usually) all the company's assets both present
and future, on terms that the company may deal with the assets in the
ordinary course of business.
- A floating charge is mortgage on an asset that changes in quantity or value
from time to time (such as an inventory), to secure the repayment of a loan.
• Shareholders VS Debenture Holders
- A share holder has a proprietary interest in the company.
- A debenture holder is only a creditor of the company.
- Every share is included in the capital of the company.
- Debenture is a loan to the company.
- Debentures generally have a fixed or floating charge upon the assets of the
company.
- Shares do not have any charge on the assets of the company because the
shareholders are the proprietors of the company.
- A debenture holder is entitled to a fixed interest.
- Equity holder is entitled to dividend on profit.
- Debenture holders get priority over shareholders when assets are distributed
upon liquidation.
- Debenture interest is a charged against profit.
- The dividend on share are part of profit.
BASIS FOR COMPARISON
SHARES
DEBENTURES
Meaning
The shares are the owned
funds of the company.
The debentures are the
borrowed funds of the
company.
What is it?
Shares represent the capital
of the company.
Debentures represent the debt
of the company.
Holder
The holder of shares is known
as shareholder.
The holder of debentures is
known as debenture holder.
Page 19 of 66
Status of Holders
Owners
Creditors
Form of Return
Shareholders get the
dividend.
Debenture holders get the
interest.
Payment of return
Dividend can be paid to
shareholders only out of
profits.
Interest can be paid to
debenture holders even if
there is no profit.
Allowable deduction
Dividend is an appropriation
of profit and so it is not
allowed as deduction.
Interest is a business expense
and so it is allowed as
deduction from profit.
Security for payment
No
Yes
Voting Rights
The holders of shares have
voting rights.
The holders of debentures do
not have any voting rights.
Conversion
Shares can never be
converted into debentures.
Debentures can be converted
into shares.
Repayment in the event of
winding up
Shares are repaid after the
payment of all the liabilities.
Debentures get priority over
shares, and so they are repaid
before shares.
Quantum
Dividend on shares is an
appropriation of profit.
Interest on debentures is a
charge against profit.
Trust Deed
No trust deed is executed in
case of shares.
When the debentures are
issued to the public, trust deed
must be executed
Mortgages and charges
• Charges :
- Charge means the asset is given as security, against a debt.
- The value of the security offered as collateral is either equivalent to or greater
than the loan amount.
- It can be in the form of a pledge, hypothecation, mortgage, lien and
assignment.
- The charge is created on the asset based on of the nature of security.
- In this context, pledge and hypothecation are quite commonly juxtaposed as
in both cases, movable goods are given as collateral.
- However, they are different in the sense that the pledge is a type of bailment,
in which goods are delivered, with an aim of providing security for discharging
a liability.
- The reason for their distinction is that in pledge the possession of the asset
passes to the lender with the movement of the asset.
Page 20 of 66
- Conversely, there is no transfer of possession in case of hypothecation.
• Pledge :
- Definition of Pledge: A kind of bailment in which the goods are kept with the
lender as security for the payment of a debt or fulfillment of the contract.
- Thereare two parties involved in the contract of pledge, i.e. pawnor, the one
who pledges the asset and Pawnee, the one who grants a loan against
collateral.
- The Title of goods remains with the Pawnor, but the possession of goods passes
to the Pawnee.
- Deposit of goods with the lender is the precondition for the pledge. There can
be actual or constructive possession of goods.
- It is the duty of the Pawnee, not to make unauthorized use of
the pawnor’s goods and take reasonable care of the goods pledged.
- In the case of the failure of payment by the borrower, the lender has the right
to sell the asset held as collateral to recover the amount of the debt.
• Hypothecation :
- On the other hand,hypothecation means a charge created on goods, plant
and machinery by the borrower, without actually transferring the property or
possession to the creditor.
- Definition of Hypothecation: Hypothecation refers to a financial arrangement
where the borrower borrows money by against the security of goods.
- Here goods mean movable property.
- In business parlance, hypothecation is defined as the charge created over
the asset (usually inventories, debtors, etc.) for the repayment ofdebt of
suppliers, creditors, and other parties.
- In this arrangement, the asset is not delivered to the lender but kept by the
borrower until he defaults in payment of debt.
- So the possession of asset belongs to the debtor only.
- There are two parties to hypothecation, where hypothecator is the borrower
while hypothecatee is the lender.
- The right of the two parties depends on the agreement signed between
them.
- If the hypothecator fails to pay the amount, then firstly, the hypothecatee has
to take the possession of the goods hypothecated.
- Thereafter, he can sell them off to adjust the amount of his loan.
• Mortgage :
- Mortgage is not a way of lending but rather the security interest in real
property held by the borrower.
- These terms are often used for immovable property, such as real estate.
- A mortgage, in itself, is not a debt, but rather a security for a debt.
- When a person issues a mortgage, they sign over an interest of the property to
the lender. However, the borrower still has full ownership of the property.
Page 21 of 66
- In case the borrower is unable to repay the loan on the mortgage, he must
forfeit the property to the lender and the lender will take the money which is
owed to him and return any excess money to the borrower.
- Lien: It is defined to be a right of detaining the property of another until some
claim is satisfied OR A legal claim against an asset which is used to secure a
loan and which must be paid when the property is sold.
• Hypothecation–
- Many people take loans from banks or financial institutions to purchase a car
where the debt and the car (the subject matter of the contract between
lender and borrower) both remain with the borrower only.
• Conclusion: The common of the two terms is that the subject matter is a movable
asset. Similarly, the two ways are used in borrowing funds from thebank or
financial institution. Collateral security act as an assurance to the lender that the
borrower will repay the debt or, if the borrower fails to pay the outstanding dues
the lender can forfeit the goods and dispose it off.
• Comparison between Pledge, Hypothecation and Mortgage:
Pledge
Hypothecation
Mortgage
Definition
Pledge denotes that
the person who takes
the loan must provide
the bank with
something that is worth
the same amount as
the money he/she are
taking from the bank
Hypothecation is the
practice where the
borrower pledges
collateral to acquire a
loan. However, the
borrower owns the
property or collateral
until he pays off the
debt
Mortgage is not a way
of lending but rather
the security interest in
real property held by
the borrower
Collateral
Yes
Yes
Yes
Ownership
Ownership of the
collateral is with the
lender
Ownership is with the
borrower
Ownership is with the
borrower
Types
Gold Loans
Car Loans
Parties
Pawnor and Pawnee
Hypothecator
and Hypothecatee
Defined In
Section 172 of Indian
Contract Act, 1872
Legal Document
Deed of Pledge
Section 2 of
Securitization and
Reconstruction of
Financial Assets and
Enforcement of
Security Interest Act,
2002
Hypothecation
Agreement
Real Estate Mortgage
Loans
Borrower is the
Mortgagor gives the
mortgage to the
Lender, Mortgagee.
Section 58 of the
"Transfer of Property
Act 1882
Mortgage Agreement
Share and share capital
• Share: Share is defined as “an interest having a money value and made up of
diverse rights specified under the articles of association”.
Page 22 of 66
- Share capital: Share capital means the capital raised by the company by
issue of shares.
- A share is a share in the share capital of the company including the stock.
- Share gives a right to participate in the profits of the company, or a share in
the assets when the company is going to be wound up.
- A share is not a negotiable instrument, but it is a movable property.
- It is also considered to be goods under the Sale of Goods Act, 1930.
- The company has to issue the share certificate.
- It is subject to stamp duty.
- The ‘Call’ on Shares is a demand made for payment of price of the shares
allotted to the members by the Board of Directors in accordance with the
AOA;
- The call may be for full amount or part of it.
• Share Certificate and Share Warrant
- Share Certificate: The Share Certificate is a document issued by the company
and is prima facie evidence to show that the person named therein is the
holder ( title) of the specified number of shares stated therein;
- Share certificate is issued by the company to the (share holder) allottee of
shares;
- The company has to issue within 3 months from the date of allotment.
- In case of default the allottee may approach the central government.
- Share Warrant: The share warrant is a bearer document issued by the
company under its common seal.
- As share warrant is a negotiable instrument, it is transferred by endorsement
and by mere delivery like any other negotiable instrument.
• Kinds of Shares :
- Preference shares- It can be further classified as Participating preferential
shares; Cumulative preferential shares; Non Cumulative preferential shares
- Redeemable Shares and Irredeemable Shares
- Equity or ordinary shares
- Shares at premium
- Shares at discount
- Bonus shares
- Right shares
• Transfer and Transmission of shares :
- One of the most important features of the securities is that they are
transferable, which facilitates the company in acquiring permanent capital
and liquid investments to the shareholders.
- Transfer of sharesis a voluntary act of a member that takes place by way of
contract. It is not exactly same astransmission of shares, as the two differ in
their meaning and concept as well.
- The transmission of shares occurs due to the operation of law i.e. in case if the
member passes away or becomes insolvent/lunatic.
Page 23 of 66
- Transfer of shares requires and instrument of transfer, whereas no such
-
instrument is required in the transmission of shares.
Definition of Transfer of Shares: Transfer of shares refers to the intentional
transfer of title (rights as well as duties) to shares by one person to another.
There are two parties to transfer of shares, i.e. transferor and transferee.
The shares of the public company are freely transferable unless there is an
express restriction provided in the articles of association.
However, the company can refuse the transfer of shares, if it has a valid reason
for the same. In the case of a private company, there is a restriction on the
transfer of shares subject to certain exceptions.
Definition of Transmission of Shares: There are some cases when the transfer of
shares occurs due to the operation of law, i.e. when the registered
shareholder is no more, or when he is insolvent or lunatic.
Transmission of shares also occurs when the shares are held by a company,
and it is wound up.
The shares are transferred to the legal representative of the deceased and the
official assignee of the insolvent.
The transmission is recorded by the company when the transferee gives the
proof of entitlement of shares.
Key Differences Between Transfer and Transmission of Shares
When the shares are transferred by one party to another party, voluntarily, it is
known as transfer of shares.
When the transfer of shares happens due to the operation of law, it is referred
to as transmission of shares.
Transfer of shares is done intentionally whereas death, bankruptcy and lunacy
are the reasons for transmission of shares.
The transfer of shares is initiated by the parties to transfer, i.e. transferor and
transferee.
Unlike transmission of shares which is initiated by the legal representative of the
concerned member.
Transferee pays an adequate consideration to the transferor for the transfer of
shares.
In the case of transmission of shares, no consideration shall be paid.
Execution of valid transfer deed is necessary when there is the transfer of
shares, but not in the transmission of shares.
When the transfer is completed, the liability of the transferor is over. On the
other hand, the original liability of shares exists.
Stamp duty is payable on the market value of shares in case of transfer while
in the transmission of shares no stamp duty is to be paid.
Conclusion: By and larger, transfer of shares is the normal course of transferring
property, while the transmission of shares takes place only on demise or
insolvency of the shareholder.
Moreover, Transfer of shares is very common, but the transmission of shares
takes place only on the happening of the certain event.
Page 24 of 66
• Buy-Back of Securities :
- The company may purchase its securities back and it is popularly known as
buy back of shares;
- To do so , the company has to be authorized under the AOA;
- The company has to comply with the provisions of the Company law to buy
back its securities;
- The listed company has to seek permission from the SEBI;
- Specifically for the private company etc, the Buy Back Securities Rules1999 will
be applicable.
Dividends
• The sharing of profits in the going concerns and the distribution of the assets after
the winding up can be called as dividends;
• It will be distributed among the shares holders;
• The dividends can be declared and paid out of:
1. Current profits;
2. Reserves;
3. Monies provided by the government and the depreciation as provided by
the companies.
• It can be paid after presenting the balance sheet and profit and loss account in
the AGM.
• Other than the equity shareholders, even the preferential shareholders can get
the dividends.
• Rather they are the first ones to get the dividends.
• Dividends are to be only in cash, if otherwise specified in the AOA.
• In exceptional cases, even the central government may permit the payment of
interest to shareholders , even though there is no profit.
• Section 123- Declaration of Dividend
- (1) Dividend shall be declared or paid by a company for any financial year —
(a) out of the profits of the company for that year arrived at after providing
for depreciation, or out of the profits of the company for any previous financial
year or years arrived at after providing for depreciation and remaining
undistributed, or out of both; or
(b)out of money provided by the Central Government or a State Government
for the payment of dividend by the company in pursuance of a guarantee
given by that Government.
- A company may, before the declaration of any dividend in any financial year,
transfer such percentage of its profits for that financial year as it may consider
appropriate to the reserves of the company.
• Section 123- Inadequacy or Absence Of Profits
- In the event of inadequacy or absence of profits in any year, a company may
declare dividend out of its accumulated profits, free reserves and surplus
subject to the following conditions:
(a) The rate of dividend declared shall not exceed the average of the
preceding three years rates of dividend unless it has not declared any
Page 25 of 66
dividend in each of the three preceding financial year.
(b) The total amount to be drawn from such accumulated profits shall not
exceed 1/10th of its paid-up share capital and free reserves as per its latest
audited financial statement.
(c) The amount so drawn shall first be utilized to set off the losses incurred in
the financial year in which dividend is declared before any dividend in
respect of equity shares is declared.
(d) The balance of reserves after such withdrawal shall not fall below fifteen
per cent of its paid up share capital as per the latest audited financial
statement.
(e) No dividend shall be declared unless carried over losses and depreciation
are set off against profit of the company of the current year.
• FREE RESERVES :
- “free reserves” means such reserves which, as per the latest audited balance
sheet of a company, are available for distribution as dividend. provided that—
(i) any amount representing unrealized gains, notional gains or revaluation of
assets, whether shown as a reserve or otherwise, or
(ii)any change in carrying amount of an asset or of a liability recognised in
equity, including surplus in profit and loss account on measurement of the
asset or the liability at fair value, shall not be treated as free reserves.
• Depreciation :
- The useful life or residual value of an asset have been specified in Part C of the
Schedule. Companies will be required to give disclosure for cases where the
useful life or residual value is different from the useful life or residual value as
specified in Part C of the Schedule.
- It is clarified in the 2013 Act that the requirements of Part C will not be
applicable for companies in respect of which the useful life or residual value is
notified by a regulatory authority.
• Interim Dividend
- The Board of Directors of a company may declare interim dividend during any
financial year out of the surplus in the Profit and Loss Account and out of
current year profits.
- Provided that in case the company has incurred loss during the current
financial year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared at
a rate higher than the average dividends declared by the company during
the immediately preceding three financial years
• Deposit of Dividend : The amount of the dividend, including interim dividend,
shall be deposited in a scheduled bank in a separate account within five days
from the date of declaration of such dividend.
• Payment of Dividend
- No dividend shall be paid by a company in respect of any share there in
except to the registered shareholder of such share or to his order or to his
banker and shall not be payable except in cash:
Page 26 of 66
- Provided that nothing in this sub-section shall be deemed to prohibit the
capitalization of profits or reserves of a company for the purpose of issuing fully
paid-up bonus shares or paying up any amount for the time being unpaid on
any shares held by the members of the company:
- Provided further that any dividend payable in cash may be paid by cheque
or warrant or in any electronic mode to the shareholder entitled to the
payment of the dividend.
- Section 127 requires every Company to pay the dividend or post the warrant
in respect thereof has not been posted within thirty days from the date of
declaration to all the shareholders entitled to the payment of the dividend
• Defaults in Deposits
- As per Section 123 (6) a Company which fails to comply with the provisions of
section 73 (Prohibition on acceptance of deposits from public) and Section 74
(Repayment of deposits, etc., accepted before commencement of this Act)
shall not, so long as such failure continues, declare any dividend on its Equity
shares.
- Under the Companies Act, 1956 the restriction was imposed in case of failure
of redeemable preference shares accepted before the commencement of
the Companies Act, 1956.
• What has Changed ?
- In case of interim dividend, where the Company has incurred losses during the
current financial year up to the end of the quarter immediately preceding the
date of declaration of interim dividend, in such a case, the rate at which such
interim dividend shall be declared shall not be at a rate higher than the
average dividends declared by the Company during the immediately
preceding 3 financial years.
- Dividend payable in cash can also be paid in any electronic mode to the
shareholder entitled to the payment of such dividend.
- Now a Company which fails to comply with the provisions of section 73
(Prohibition on acceptance of deposits from public) and Section 74
(Repayment of deposits, etc., accepted before commencement of this Act)
shall not, so long as such failure continues, declare any dividend on its Equity
shares.
- Under the Companies Act, 1956 the restriction was imposed only in case of
failure of redeemable preference shares accepted before the
commencement of the Companies Act, 1956.
- Instead of transferring a fixed % of profits to reserves before declaring dividend
every year, a Company can at its discretion transfer such % of profit to the
reserves before declaring dividend as it deem necessary and moreover such
transfer is not mandatory.
- The depreciation calculation methodology has been changed and it shall
only be calculated in accordance with the Schedule II and no other
alternative has been provided.
Page 27 of 66
- In case of inadequacy or absence of profits in any year, a company may
declare dividend out of surplus profits earned by it in previous years and
transferred to reserves , subject to the fulfillment of the conditions as
prescribed in Rule.
- Power of the Central Government in public interest to allow Company to
declare dividend for any financial year out of profits of the Company for that
year or any previous financial year or years without providing for depreciation,
has been dispensed with.
• SECTION 124 UNPAID DIVIDEND ACCOUNT
- (1) Where a dividend has not been paid or claimed within 30 days from the date
of the declaration, the company shall, within 7 days thereafter, transfer the total
amount of unpaid or unclaimed dividend to a special account to be opened
by the company in that behalf in any scheduled bank to be called the Unpaid
Dividend Account.
(2) The company shall, within 90 days of transferring of unpaid or unclaimed
dividend amount to the unpaid dividend account, prepare a statement
containing the names, their last known addresses and the unpaid dividend to be
paid to each person and place it on the website of the company, if any, and
also on any other website approved by the Central Government for this
purpose, in such form, manner and other particulars as may be prescribed.
(3) If any default is made in transferring the unpaid or unclaimed dividend
amount or any part thereof to the Unpaid Dividend Account of the company,
the Company shall pay, from the date of such default, interest @ 12% P.A. on so
much of the amount which has not been transferred to the said account and
the interest accruing on such amount shall ensure to the benefit of the members
of the company in proportion to the amount remaining unpaid to them.
(4) Any person claiming to be entitled to the amount in the Unpaid Dividend
Account of the company may apply to the company for payment of the
money claimed.
(5) Any money transferred to the Unpaid Dividend Account of a company and
which remains unpaid or unclaimed for a period of seven years from the date of
such transfer shall be transferred by the company along with interest accrued, if
any, thereon to the Investor Education & Protection Fund established and the
company shall send a statement in the in Form DIV 5. of the details of such
transfer to the authority which administers the said Fund and that authority shall
issue a receipt to the company as evidence of such transfer:
(6) All shares in respect of which unpaid or unclaimed dividend has been
transferred under sub-section (5) shall also be transferred by the company in the
name of Investor Education and Protection Fund along with a statement
containing such details as may be prescribed (Provided that any claimant of
shares transferred above shall be entitled to claim the transfer of shares from
Investor Education and Protection Fund in accordance with such procedure
and on submission of such documents as may be prescribed.)
(7) If a company fails to comply with any of the requirements of section 124, the
company shall be punishable with minimum fine of 5 lakh rupees and a max of
Page 28 of 66
25 lakh rupees and every officer of the company who is in default shall be
punishable with a minimum fine of 1 lakh rupees and max of 5 lakh rupees.
• SECTION 126 : Right to dividend, rights shares and bonus shares to be held in
abeyance pending registration of transfer of shares.
- Where any instrument of transfer of shares has been delivered to any
company for registration and the transfer of such shares has not been
registered by the company, it shall, notwithstanding anything contained in
any other provision of this Act,—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend
Account referred to in section 124 unless the company is authorized by the
registered holder of such shares in writing to pay such dividend to the
transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights
shares under clause (a) of sub-section (1) of section 62 and any issue of fully
paid-up bonus shares.
• SECTION 127 Punishment for failure to distribute dividends.
- Where a dividend has been declared by a company but has not been paid
or the warrant in respect thereof has not been posted within thirty days from
the date of declaration to any shareholder entitled to the payment of the
dividend, every director of the company shall, if he is knowingly a party to the
default, be punishable with imprisonment which may extend to two years and
with fine which shall not be less than one thousand rupees for every day
during which such default continues and the company shall be liable to pay
simple interest at the rate of 18% P.A during the period for which such default
continues:
- Provided that no offense under this section shall be deemed to have been
committed:—
(a) where the dividend could not be paid by reason of the operation of any
law;
(b) where a shareholder has given directions to the company regarding the
payment of the dividend and those directions cannot be complied with and
the same has been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against
any sum due to it from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the
warrant within the period under this section was not due to any default on the
part of the company.
• Dividend Distribution Tax
- As per section 115(O) of Income Tax Act, 1961 any dividend paid by
Companies to its shareholders is subject to Dividend Distribution Tax .
- Basic Rate 15%
- Surcharge 10%
- Cess - 3%
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-
Effective Rate @ 16.995 %
Dividend is tax free in the hands of Shareholders
Responsibility is on the corporate to ensure payment of DDT.
Time limit - 14 days from date of approval
Date of Approval - Interim Dividend - from BM date
Final Dividend
- from AGM date
Tax to be paid online and Information to be filed with IT Department along
with the Income Tax Audit Report.
• Payment of Dividend to Non Resident Shareholders : Dividends are freely
repatriable without any restrictions (net after Tax deduction at source or Dividend
Distribution Tax, if any, as the case may be), excepting remittance of dividend
requires permission when investment was allowed subject to *dividend balancing
condition.
• DIVIDEND BALANCING
- Where a company is engaged in any of the industries in the consumer goods
sector, specified in Annexure E to Foreign Exchange Management (Transfer or
issue of security by a person resident outside India) Regulations, 2000, or in any
other activity where the condition of dividend balancing has been stipulated
in terms of the provisions of Industrial Policy and Procedures notified by
Secretariat for Industrial Assistance, the cumulative outflow of foreign
exchange on account of payment of dividend over a period of seven years
from the date of commencement of commercial production to investors
outside India shall not exceed cumulative amount of export earning of the
company during those years.
• Remittance of Dividend
- Indian companies intending to remit dividend to their non-resident
shareholders should make an application to an authorized dealer in Form RCD
1, supported by the particulars of non-resident shareholding in form RCD 2and
other documents prescribed in the form.
- In case of Interim Dividend application may be made by the company in
India to the authorized dealer by letter (in duplicate) enclosing only the form
RCD 2 and a copy of the Board Resolution approving the payment of interim
dividend.
- Authorized dealers may allow the remittance of dividend in accordance with
the procedure prescribed by RBI.
- In cases where dividend is to be credited to NRO accounts of the non-resident
investors, there is no need to follow the above procedure.
AUDIT & AUDITORS
• APPOINTMENT OF AUDITORS
- Every company shall, at the first annual general meeting, appoint an
individual or a firm as an auditor who shall hold office from the conclusion of
that meeting till the conclusion of its sixth annual general meeting and
thereafter till the conclusion of every sixth meeting.
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- The company shall place the matter relating to such appointment for
-
-
ratification by members at every annual general meeting.
Before the appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made,
shall be in accordance with conditions as may be prescribed. The certificate
shall also indicate whether the auditor satisfies the criteria provided in S. 141.
No audit firm having a common partners or partners whose tenure has expired
immediately preceding financial year shall be appointed as auditor of the
same company for a period of five year.
New provisions introduced in Companies Act 2013
Compulsory rotation of auditors by listed companies and classes of
companies as may be prescribed.
a) Individual auditor – not more than 1 term of 5 consecutive years
b) Audit firm including LLP – not more than 2 terms of 5 consecutive
years
c) During the cooling period ( of 5 years) even any audit firm having one
or more common partners with the audit firm being rotated is not
eligible to be appointed auditor of the same company.
- SCHEME OF NOTIFICATION UNDER COMPANIES ACT
Manner and procedure of selection and appointment of auditors
A company which does not have audit committee, the Board shall take into
consideration the qualifications and experience of the individual or the firm proposed
to be considered for appointment as auditor and whether experience are
commensurate with the size and requirements of the company.
In case audit committee is constituted, and if Board agrees with recommendation of
Audit committee, it shall further recommend the appointment of an individual or a
firm as auditor to the members in the annual general meeting else the reason for
disagreement should be cited.
Conditions for appointment and notice to Registrar
The auditor appointed under Rule 3 shall submit a certificate that –
(a) The individual or the firm, as the case may be, is eligible for appointment & is not
disqualified for appointment under the Chartered Accountant Act, 1949 & rules and
regulations thereunder
(b) The proposed appointment is as per the term provided under the Act and within
authority of the Act.
(c) The list of proceedings against the auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.
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Class of Companies
For the purposes of S.139, the classes of companies shall mean the following classes
of companies excluding one person companies and small companies :a) All unlisted public companies having paid up capital of Rs. 10 crores.
b) All private limited companies having paid up share capital of Rs. 20 crores.
c) All companies having paid up share capital of below threshold limit mentioned in
(a) & (b) above, but having public borrowings from financial institutions, banks or
public deposits of Rs. 50 crores or more.
• Rotation of auditors
No of consecutive years for
which an individual auditor
has been functioning as
auditor in the same company
Maximum No. of consecutive
years for which he may be
appointed in the same
company
Aggregate period which the
auditor would complete in
the same company in view of
column I and II
5 years ( or more than 5
years)
3 years
8 years or more
4 years
3 years
7 years
3 years
3 years
6 years
2 years
3 years
5 years
1 year
4 years
5 years
- In accordance with the new Act, a listed company shall not appoint or reappoint audit firms for more than two terms of five consecutive years. An issue
is likely to arise as to how the years of service before enactment of new law
should be considered for rotation. The following views are possible.
- Not to hold office for more than 10 years. The companies have been given 3
years time frame to comply with this requirement. If this view is accepted, an
audit firm, which has completed 7 or more years can continue to hold for 3
years.
- In accordance with the new Act, an audit firm can have two maximum terms
of five consecutive years each. Hence, the same is not considered for
deciding rotation of auditors.
- In banks, the rotation of auditors is for every 4 years. Since these are
requirements under the Banking Regulation Act, the same would prevail over
the new Act.
• REMOVAL, RESIGNATION OF AUDITOR AND GIVING SPECIAL NOTICE
- The auditor appointed under S.139 may be removed from his office before the
expiry of his term only by a special resolution of the company, after obtaining
the previous approval of the Central Government in that behalf in the
prescribed manner
Page 32 of 66
- The auditor who has resigned from the company shall file within a period of 30
-
days from the date of resignation, a statement in the prescribed form with the
company and the Registrar. In the case of non-compliance, the auditor shall
be punishable with fine which shall not be less than Rs.50000 to Rs.500000
Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor or specifically
providing that retiring auditor shall not be reappointed.
Duties & powers of company’s auditor with reference to the audit of the
branch and branch auditor
The duties and powers of the company’s auditor with reference to the audit of the
branch and the branch auditor as per S.143
The branch auditor shall submit his report to the company’s auditor
Reporting of fraud by the auditor shall also extend to such branch auditor to the
extent it relates to the concerned branch.
- QUALIFICATION OF AUDITORS : Eligibility for appointment:
Composition
Companies Act, 1956
Companies Act, 2013
Individual
Only if the person is a
Chartered Accountant (CA)
Similar requirement
Firm
All partners practicing in
India should be qualified for
appointment
Majority partners practicing
in India should be qualified
for appointment
Limited Liability
Partnership (LLP)
Not eligible for appointment
Similar criteria to the firm.
Partners who CA are
authorize to act & sign on
behalf of firm
- Disqualifications for appointment:
a. Body corporate other than LLP
b. Officer or employee of the Company
c. A person who is a partner, or who is in the employment, of an officer or
employee of the company
• POTENTIAL ISSUES
- In the context of disqualification, certain provisions refer to person as well as
firm; while other provisions refer to person and his relative
- With reference to business relationship, it prohibits an auditor, whether person
or firm. However, there is no such restriction in case of relatives. Also there is no
restriction on the partners from having business relation with the company.
- Clarification required in the following:
a. Whether restrictions, with reference to person, only are applicable to
individual auditor and not the firm or its partner?
b. Whether the restriction on firms also applies to partner?
Page 33 of 66
c. With reference to business relation, it means normal or arm’s length
business relation. It does not mean auditor cannot buy soaps or detergents if
he is the auditor of the FMGC company.
d. Whether consolidated financial statements will be regarded as separate
entity for computing limit of 20 companies.
• REMUNERATION OF AUDITORS
- The remuneration of the auditor of a company shall be fixed in its general
meeting or in such manner as may be prescribed.
- The remuneration prescribed shall in addition to the fee payable to an auditor,
include the expenses, if any, incurred by the auditor in connection with audit
of the company and any facility extended to him but does not include any
remuneration paid to him for any other service rendered by him at the request
of the company.
• POWERS & DUTIES OF AUDITORS & AUDITING STANDARDS
- a)Every auditor of a company shall have a right of access at all times to the
books of accounts and vouchers of the company, whether kept at the
registered office of the company or at any other place and shall be entitled
to require from the officers of the company such information and explanation
as he may consider.
- b)Auditor of a company which is a holding company shall also have the right
of access to the records of all its subsidiaries in so far as it relates to the
consolidation of its financial statements with that of subsidiaries.
- c)Where any matters required to be included in the audit report under this
section is answered in the negative or with a qualification, the report shall
state the reasons thereof.
- d)The branch auditor shall prepare a report on the accounts of the branch
examined by him and send it to the auditor of the company who shall deal
with it in his report in such manner as he considers necessary.
- e)Unless any auditing standards are notified, auditing standards specified by
ICAI shall be deemed to be auditing standards.
New requirements introduced by 2013 Act
a) Every auditor shall comply with auditing standards
b) The auditor of holding company shall also have the right to access to the records of
of all its subsidiaries in so far as they relate to consolidation.
c) Whether he has sought the desired information.
d) The auditor’s report shall state any qualifications, reservation or adverse remark
relating to the maintenance of accounts and other matters connected therewith
e) The auditor’s report to state whether company has adequate internal financial
controls systems in place and operating effectiveness of such controls.
f) If an auditor of a company, in the course of the performance of his duties as auditor,
has reason to believe that an offence involving fraud is being or has been committed
against the company by officers or employees of the company, he shall immediately
report the matter to the Central Govt. within the time prescribed.
g) If the auditor does not report the fraud committed or being committed, he
shall
Page
34be
of 66
punishable with fine which shall be less than Rs. 1 lakhs but may extend to Rs. 25
lakhs
Reporting of frauds by auditor
Following procedure has been prescribed for reporting fraud:
(a) Auditor shall forward his report to the Board or the Audit committee, as the case
may be, immediately after he comes to know of fraud, seeking their reply or
observations within 45 days
(b) On receipt of such reply or observations the auditor shall forward his report and
the reply or observation of Board of the Audit committee along with his comments
to Central Govt. within 15 days of receipt of such reply or observations
(c) In case the auditor fails to get any reply or observations from the Board or the
Audit committee within the stipulated period of 45 days, he shall forward his
report to the Central Govt. along with a note containing the details of his report that
was earlier forwarded to the Board or the Audit Committee of which he failed to
receive any reply or observations within the stipulated time.
(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed
cover by Registered Post with acknowledgement due OR by speed post followed by
an e-mail in confirmation of the same.
(e) The report shall be on the letter head of auditor containing postal and e-mail
address with his sign, seal and membership number
(f) The report shall be in the form of a statement as specified in Form ADT – 4
• AUDITOR NOT TO RENDER CERTAIN SERVICES
- The section provides that an auditor appointed under this Act shall not directly
or indirectly provide any of the following “other services” to auditee-company
or its holding company or subsidiary company:
a. Accounting and book keeping services
b. Internal audit
c. Design and implementation of any financial information system
d. Actuarial services
e. Investment advisory services
f. Investment banking services
g. Rendering of outsourced financial services
h. Management services
i. Any other services as may be prescribed
- It is not clear whether the restriction will apply to rendering of non-audit
services by the auditor to its network firms wherever located to the auditee ’s
holding company or subsidiary located outside India.
- Further, the Act does not define the terms such as investment advisory services
and management services which are subject to varying interpretation.
• AUDITOR TO SIGN AUDIT REPORT ETC
- The person appointed as an auditor of the company shall sign the auditor’s
report or sign or certify any other document of the company in accordance
with the provisions of S.141 (2) and the qualifications, observations or
comments on financial transactions or matters, which have any adverse
effect on the functioning of the company mentioned in the auditors report
shall be read before the company in the general meeting and shall be open
to inspection by any member of the company.
Page 35 of 66
- The auditor of holding company has the right to access to the records of all its
subsidiaries so far as it relates to consolidation requirements.
- The auditor has to comment on whether the company has adequate internal
financial control system and operating effectiveness of such control.
- POTENTIAL ISSUES : üThe requirement pertaining to reporting on “Financial
transactions or matters is not clear. Is the auditor required to report on the
propriety of the transaction i.,e whether the transaction has adverse impact
on the functioning of the company.
In case of fraud, the Act does not state that auditor’s reporting responsibility
will arise only in the case of material frauds. This means the auditor may need
to report all frauds to the Central Govt. irrespective of its size.
Right to access of records not provided in the context of associates or Joint
Ventures which also needed for Consolidated Financial statements.
Not clear whether CARO reporting will be under the new legislation.
• AUDITOR TO ATTEND GENERAL MEETINGS
- All notices of, and other communications relating to, any general meeting
shall be forwarded to the auditor of the company , and the auditor shall unless
otherwise exempted by the company, attend either by himself of through his
authorized representative, who shall also be qualified to be an auditor, any
general meeting and shall have right to be heard at such meeting on any part
of the business which concerns him as the auditor.
• PUNISHMENT FOR CONTRAVENTION
- If any of the provisions of S.139 to S.146 is contravened, the company shall be
punishable with fine which shall not be less than Rs.25000 but which may
extend to Rs.5 lakhs and every officer of the company who is in default shall
be punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than Rs.10000 but which may extend to Rs.
1lakhs or with both.
- If the contravention by the auditor is wilful or with intention to deceive the
company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a terms which may extend to 1 year and
with fine not less than Rs. l lakhs to Rs. 25 lakhs
- The auditor who has been convicted shall refund the remuneration and pay
for damages to company or the statutory bodies.
• CENTRAL GOVT. TO SPECIFY AUDIT OF ITEMS OF COST IN RESPECT OF CERTAIN
COMPANIES
- The Central Govt may, by order in respect of such class of companies
engaged in the production of such goods or providing such services as may
be prescribed, direct that particulars relating to the utilization of material or
labour or to other items of cost as may be prescribed shall also be included in
the books of accounts kept by that class of companies:
- If the Central Govt is of the opinion that it is necessary to do so, it may, by
order, direct that the audit of cost records of class of companies which are
covered shall be conducted in the manner specified.
Page 36 of 66
Corporate Governance
• International Standard on Auditing (ISA) 260: “Communications of Audit Matters
with Those Charged with Governance”
• Governance is the term used to describe the role of persons entrusted with the
supervision, control, and direction of an entity.
• Depending on the jurisdiction, different bodies may have responsibility for
corporate governance:
a. Board of Directors
b. Audit Committee
c. Other supervisory committees
• ISA 260 requires the auditor to determine those persons that are charged with
governance
• Benefits of Good Corporate Governance
- Most direct benefit is to non- management shareholders.
- Ultimate benefit is the more efficient allocation of capital to its most
productive uses.
• Reasons for Corporate Governance failures
- No governance system, no matter how well designed, will fully prevent
greedy, dishonest people from putting their personal interests ahead of the
interests of the companies they manage.
• Auditor and corporate governance
- The auditor does not have direct corporate governance responsibility but
rather provides a check on the information aspects of the governance
system.
- Corporate governance involves decision making, accountability, and
monitoring.
Decisions require relevant and reliable information.
Accountability involves measuring, reporting, and transparency.
Monitoring involves systems and feedback.
- Auditor’s primary role is to check whether the financial information given to
investors is reliable.
• Objective of an Audit
- To express an expert opinion on the fairness with which financial statements
present, in all material respects, a company’s financial position, results of with
GAAP.
- To be able to express such an opinion, the auditor must examine the financial
statements and supporting records using sound auditing techniques.
Corporate social responsibility(CSR)
• Corporate social responsibility(CSR, also calledcorporate conscience,corporate
citizenshiporresponsible business) is a form ofcorporate self-regulationintegrated
into abusiness model.
• CSR policy functions as a self-regulatory mechanism whereby a business monitors
and ensures its active compliance with the spirit of the law, ethical standards
and national or internationalnorms.
Page 37 of 66
• With some models, a firm's implementation of CSR goes beyond compliance and
statutory requirements, which engages in "actions that appear to further some
social good, beyond the interests of the firm and that which is required by law".
• The binary choice between 'complying' with the law and 'going beyond' the law
must be qualified with some nuance.
• In many areas such as environmental or labor regulations, employers can choose
to comply with the law, to go beyond the law, but they can also choose to not
comply with the law, such as when they deliberately ignore gender equality or
the mandate to hire disabled workers.
• There must be a recognition that many so-called 'hard' laws are also 'weak' laws,
weak in the sense that they are poorly enforced, with no or little control and/or
no or few sanctions in case of non-compliance.
• 'Weak' law must not be confused withsoft law.
• The aim is to increase long-term profits and shareholder trust through positive
public relations and high ethical standards to reduce business and legal risk by
taking responsibility for corporate actions.
• CSR strategies encourage the company to make a positive impact on the
environment andstakeholdersincluding consumers, employees, investors,
communities, and others.
• Proponents argue that corporations increase long-term profits by operating with
a CSR perspective, while critics argue that CSR distracts from businesses'
economic role.
• A 2000 study compared existingeconometricstudies of the relationship between
social and financial performance, concluding that the contradictory results of
previous studies reporting positive, negative, and neutral financial impact, were
due to flawedempirical analysisand claimed when the study is properly
specified, CSR has a neutral impact on financial outcomes.
• Critics questioned the "lofty" and sometimes "unrealistic expectations" in CSR or
that CSR is merelywindow-dressing, or an attempt to pre-empt the role of
governments as a watchdog over powerfulmultinational corporations.
• Political sociologists became interested in CSR in the context of theories
ofglobalization,neoliberalism\and late capitalism.
• Some sociologists viewed CSR as a form of capitalist legitimacy and in particular
point out that what began as a social movement against uninhibited corporate
power was transformed by corporations into a 'business model' and a 'risk
management' device, often with questionable results.
• CSR is titled to aid an organization's mission as well as serve as a guide to what
the company represents for its consumers.
• Business ethicsis the part ofapplied ethicsthat examines ethical principles and
moral or ethical problems that can arise in a business environment.ISO 26000is
the recognized international standard for CSR.
• Public sector organizations (the United Nations for example) adhere to thetriple
bottom line(TBL).
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• It is widely accepted that CSR adheres to similar principles, but with no formal
act of legislation.
Oppression and mismanagement
• Indian corporate sector faces a massive problem of protecting minority
shareholders from the dominant ones.
• The problem lies with controlling the majority shareholders, and preventing
oppression and mismanagement.
• This is without a doubt a very imperative issue, but a close analysis of the ground
reality would force one to conclude that the Board is not really central to the
corporate governance malaise in India.
• The central problem in Indian corporate governance is not a conflict between
management and owners, but a conflict between the dominant shareholders
and the minority shareholders.
• The Board cannot even in theory resolve this conflict, as it is composed of those
very dominant shareholders upon whom this control needs to be exercised.
• Oppressionas per Section 397(1) of Companies Act 1956 has been defined as
'when affairs of the company are being conducted in a manner prejudicial to
public interest or in a manner oppressive to any member or members'.
• In layman’s version, Oppression is the exercise of authority or power in a
burdensome, cruel, or unjust manner.
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• It can also be defined as an act or instance of oppressing, the state of being
oppressed, and the feeling of being heavily burdened, mentally or physically, by
troubles, adverse conditions, and anxiety.
• The term Mismanagement has been defined under Section 398 (1) as
'conducting the affairs of the company in a manner prejudicial to public interest
or in a manner prejudicial to the interests of the company or there has been a
material change in the management and control of the company, and by
reason of such change it is likely that affairs of the company will be conducted in
a manner prejudicial to public interest or interest of the company’.
• The primary provision dealing with the Oppression in this act is Sec.397, which was
modeled in the likeliness of Sec. 210 of the English Companies Act 1948.
• The section prescribes criteria for maintainability of application for relief in cases
of oppression.
• The impugned act should be prejudicial to the interest of the company or
oppressive upon a member or group of members; or the act may be prejudicial
to general “public interest”.
• It is also the burden of the applicant to satisfy before the Board that winding up
the company would “unfairly prejudice” him or the class he is representing;
but otherwise the facts prima facie would justify that the company be wound up
on just and equitable grounds.
• The right to apply is given to members as specified in the definition of “minority”.
Both conditions under this section should subsist in order to entail relief from the
Board.
• Where there are no allegations to support a winding up, a petition u/s 397
cannot be entertained.
• Right to apply to the Company Law Board in case of oppression and/or
mismanagement is provided U/S 399 to the minority shareholders meeting the ten
percent shareholding or hundred members or one-fifth members limit, as the
case may be.
• However, the Central Government is also provided with the discretionary power
to allow any number of shareholders and/or members to apply for relief under
Section 397 and 398 in case the limit provided under Section 399 is not met.
• On the other hand, CA 2013 provides for provisions relating to oppression and
mismanagement under Sections 241-246. Section 241 provides that an
application for relief can be made to the Tribunal in case of oppression and
mismanagement.
• Under CA 2013, the Tribunal may also waive any or all of the requirements of
Section 244(1) and allow any number of shareholders and/or members to apply
for relief.
• This is a huge departure from the provisions of CA 1956 as the discretion which
was provided to the Central Government to allow any number of shareholders to
be considered as minority is, under the new CA 2013 been given to the Tribunal
and therefore is more likely to be exercised.
Page 40 of 66
• Briefly examining a few provisions of Companies Act 1956 vis-à-vis the provisions
of Companies Act 2013, we get1. Provision of Section 397 and 398 of 1956 Act are combined in Section 241 of
2013 Act and accordingly applications for relief in cases of oppression,
mismanagement will have to be directed to the Tribunal.
2. While the powers of the Tribunal under 1956 Act on application under Section
397 or 398 and Section 404 were limited, 2013 Act granted additional powers to
the Tribunal including to:
(a) restrictions on the transfer or allotment of the shares of the company;
(b) removal of the managing director, manager or any of the directors of the
company;
(c) recovery of undue gains made by any managing director, manager or
director during the period of his appointment as such and the manner of
utilization of the recovery including transfer to Investor Education and Protection
Fund or repayment to identifiable victims;
(d) the manner in which the managing director or manager of the company
may be appointed subsequent to an order removing the existing managing
director or manager of the company;
(e) appointment of such number of persons as directors, who may be required
by the Tribunal to report to the Tribunal on such matters as the Tribunal may
direct; and
(f) imposition of costs as may be deemed fit by the Tribunal.
3. The requirement of establishing existence of 'just and equitable' circumstances
to waive any and all requirements of the section pertaining to the meeting the
minimum minority limits and providing 'security' while allowing such an
application are excluded from the Companies Act, 2013.
4. Further, by way of Section 245, 2013 Act has introduced the concept of class
action which was non-existent in the previous version of the Act.
• Upon careful examination of the provisions of the new Act it can be ascertained
that legislative intent in this Act is to safeguard the minority interest in a more
comprehensive manner; though these sections of 2013 Act is yet to be notified.
• Thus, we have to be content with the provisions of the old Act particularly in
handling the Oppression and Mismanagement issue.
• However, despite the powerful weapon handed over to the shareholders by the
Companies Act, in reality, the shareholders have not been able to use them and
most of the provisions remain dead provisions and have not been used as
potential weapons to correct any wrongful act on the part of the directors or to
give them any directions.
• Consequently, the Board of directors of a large number of companies is elected
only by a few shareholders who attend the Annual General Meetings and those
who can muster sufficient number of proxies and can demonstrate their voting
power. Government Companies is an exception.
• In Government Companies all the directors are appointed on the advice of the
Government by the President of India or the Governor of a State. Hence,
Page 41 of 66
theoretically it can perhaps be said that the shareholders democracy is absolute
in such companies.
• In other companies however, the shareholders democracy is dependent upon
the voting strength of shareholders and also to a great extent on the availability
of members attending their General Meetings either by themselves or through
their proxy.
• This again depends on the proximity of Registered Office of the company to the
place of residence of the shareholders.
• Apart from this most of the shareholders do not have enough time to spare from
their busy schedules to concern themselves with the affairs of the company in
which they have invested.
• Besides, they are not always educated enough and experienced enough to be
conversant with the working of the joint stock companies.
• For achieving the shareholders’ democracy, the shareholders have to unite and
organize themselves on national, state and district levels and get their
associations registered under the Societies Registration Act or any other
applicable statute so that their voice is heard and they can assert themselves
and safeguard the interests of their members.
Winding up / Dissolution of Companies
• The term ‘winding up’ of a company may be defined as:the proceedings by
which a company is dissolved (i.e. the life of a company is put to an end).
Thus, the winding up is the process of putting an end to the life of the company.
• And during this process, the assets of the company are disposed of, the debts of
the company are paid off out of the realized assets or from the contributories
and if any surplus is left, it is distributed among the members in proportion to their
shareholding in the company.
• The winding up of the company is also called the ‘liquidation’ of the company.
• The process of winding up begins after the Court passes the order for winding up
or a resolution is passed for voluntary winding up.
• The company is dissolved after completion of the winding up proceedings.
• On the dissolution, the company ceases to exist.
• So, the legal procedure by which the existence of an incorporated company is
brought to an end is known as winding up.
• LIQUIDATOR
- A person appointed to carry out the winding up of a company is called
liquidator.
- If the winding up is through Court, the term used for such person is official
liquidator.
- The duties of liquidator includes to realize the property of the company, to pay
its debts, and to distribute the surplus (if any) among the members.
- The official liquidator acts under the supervision of the Court, through a
recognized reporting system.
- The following are the general powers of liquidator(s):a. To institute or defend any suit, action, prosecution or other legal
Page 42 of 66
proceeding, civil or criminal on behalf of the company.
b. To carry on the business of the company so far as may be necessary for the
beneficial to it.
c. To pay to the creditors.
d. To make any compromise or arrangement with creditors.
e. To compromise all calls and liabilities to calls, debts and liabilities capable of
resulting in debts.
f. To sell the movable and immovable property and things in action of the
company by public auction or private contract, with power to transfer to any
person or to sell the same in parcels.
g. To do all acts and to execute all deeds, receipts and other documents in
the name and on behalf of the company and for that purpose to use in the
company’s seal when necessary.
h. To prove, rank and claim in the bankruptcy, insolvency or sequestration of
any contributory for any balance against his estate and to receive dividends
as a separate debt due from the bankrupt or insolvent in the bankruptcy.
i. To draw, accept, make and endorse any bill of exchange or promissory note
in the name and on behalf of the company.
j. To raise on the security of the assets of the company any money.
• Consequences of winding up
- Some important consequences of winding up of company are:
- As regards the company itself: winding up does not mean that the company
has ceased to exist.
- The company exists as a corporate entity with all the rights of such entity, with
only change that its management and administration is to be carried on
through liquidator / liquidators till the final dissolution of the company.
- As regards the shareholders : A new statutory liability as contributories comes
into existence.
- Every transfer of shares or alteration in the status of a shareholder, after the
winding up has commenced by the order of the Court , shall unless approved
by the liquidator , be void.
- As regards the creditors: They cannot file or continue suits against the
company, except with the leave of the Court.
- They cannot proceed with the execution, if they have obtained decrees
already.
- They must lodge their claim and prove their debt before the liquidator.
- As regards the management, on appointment of liquidator, all the powers of
the directors, chief executive and other officers, shall cease, except for the
purpose of giving notice of resolution to wind up and appointment of
liquidator and filing of consent of liquidator etc.
- As regards the disposition of company’s property, all such dispositions are void
unless with the leave of the Court or the liquidator.
• Modes of winding up : The winding up of a company may be either- by the
Court; or voluntary; or subject to the supervision of the Court.
Page 43 of 66
• Winding up of the company by the Court :
- The winding up of a company by an order of the Court is called the
compulsory winding up.
- A Company may be wound up by the Court on the petition submitted to it by
the following ways:- a.if the company has, by special resolution, resolved that the company be
wound up by the Court;
- b.if default is made in delivering the statutory report to the registrar or in
holding the statutory meeting or any two consecutive annual general
meetings;
- c.if the company does not commence its business within a year from its
incorporation, or suspends its business for a whole year;
- d.if the number of members is reduced, in the case of private company,
below two or, below three in case of public company and below seven in
case of listed company’
- e.if the company is unable to pay its debts;
- f. if the company is- i.conceived or brought forth for, or is or has been carrying on, unlawful or
fraudulent activities;
ii.carrying on business not authorized by the memorandum;
iii.conducting its business in a manner oppressive to any of its members or
persons concerned with the formation or promotion of the company or
the minority shareholders;
iv.run and managed by persons who fail to maintain proper and true
accounts, or commit fraud, misfeasance or malfeasance in relation to the
company; or
v.managed by persons who refuse to act according to the
requirements of the memorandum or articles or the provisions of this Act or
fail to carry out the directions or decisions of the Court or the ROC given in
the exercise of powers under the Act;
- g. if the Court is of opinion that it is just and equitable that the company
should be wound up;
- 1.Complete deadlock in the management of the company.
2.Failure of company’s main object.
3.Recurring losses.
4.Aggressive or oppressive policy of majority shareholders.
5.Incorporation of company for fraudulent or illegal purpose.
6.Public interest.
- h. if the company ceases to have a member.
• Procedure for winding up of company and filing of petition before respective
High Court:
- 1.To pass Special Resolution by 3/4th majority of the members of the company
that the company be wound up by the Court in case if the company itself
intend to file a petition and to file the Special Resolution with the registrar.
Page 44 of 66
- 2.To prepare a list of the assets to ascertain that the company is unable to pay
its debts.
- 3.To prepare a list of the creditors.
- 4.In case of defaults in payments the creditor or creditors to make a decision
for the filing of the winding up petition.
- 5.In case if the ROC intends to file a petition, they should not file a petition, for
winding up of the company, unless an investigation into the affairs of the
company has revealed that it was formed for: any fraudulent; or unlawful
purpose; or that it is carrying on a business not authorized by its memorandum;
or that its business is being conducted in a manner oppressive to any of its
management has been guilty of fraud, misfeasance or other misconduct
towards the company or towards any of its members.
- 6. To engage advocates for the preparation and filing of the petition.
• Who is competent to file petition for winding up in the Court?
- Petition may be presented by any one of the following:
- 1.The company may itself by passing a special resolution
- 2.Creditor(s)
- 3.Any contributory or contributories
- 4.Registrar of Companies
- 5.SEBI
• Documents to be annexed with the petition
- Petition for winding up;
- Affidavit verifying the petition;
- Copy of special resolution in case if the company itself intends to dissolve;
- Copies of the agreements and other documents on the basis of which
creditors intends to file a winding up petition will be annexed with the petition;
- All other supporting documents on the basis of which the petitioner rely as an
evidence.
• PROCEDURE FOR VOLUNTARY WINDING UP
- The following steps are to be taken for Member’s voluntary winding up:
- Step 1. Where it is proposed to wind up a company voluntarily, its directors
make a declaration of solvency on duly supported by an auditors report and
make a decision in their meeting that the proposal to this effect may be
submitted to the shareholders.
- They, then, call a general meeting (Annual or Extra Ordinary) of the members.
- Step 2. The company, on the recommendations of directors, decides that the
company be wound up voluntarily and passes a Special Resolution, in general
meeting (Annual or Extra Ordinary) appoints a liquidator and fixes his
remuneration.
- On the appointment of liquidator, the Board of directors ceases to exist.
- Step 3. Notice of resolution shall be notified in official Gazette within 10 days
and also published in the newspapers simultaneously.
- A copy of it is to be filed with Registrar also.
Page 45 of 66
- Step 4. Notice of appointment or change of liquidator is to be given to
Registrar by the company along with his consent within 10 days of the event.
- Step 5. Every liquidator shall, within 14 days of his appointment, publish in the
official Gazette, and deliver to the Registrar for registration, a notice of his
appointment.
- Step 6 . If liquidator feels that full claims of the creditors cannot be met, he
must call a meeting of creditors and place before them a statement of assets
and liabilities.
- Step 7 . A return of convening the creditors meeting together with the notice
of meeting etc. shall be filed by the liquidator with the registrar, within 10 days
of the date of meeting.
- Step 8 . If the winding up continues beyond one year, the liquidator should
summon a general meeting at the end of each year and make an
application to the Court seeking extension of time.
- Step 9: A return of convening of each general meeting together with a copy
of the notice, accounts statement and minutes of meeting should be filed with
the registrar within 10 days of the date of meeting.
- Step 10: As soon as affairs of the company are fully wound up, the liquidator
shall make a report and account of winding up, call a final meeting of
members, notice of convening of final meeting before which the report /
accounts shall be placed.
- Step 11: A notice of such meeting shall be published in the Gazette and
newspapers at least 10 days before the date of meeting.
- Step 12: Within a week after the meeting, the liquidator shall send to the
registrar a copy of the report and accounts on prescribed Form.
• DOCUMENTS REQUIRED FOR VOLUNTARILY WINDING UP BY MEMBERS
- Special Resolution for voluntary winding up
- Declaration of Solvency
- Affidavit by Directors of the company verifying the attached auditor’s report,
profit and loss account, balance sheet, statement of assets and liabilities
prepared from the date of closing of last accounts till the latest practicable
date, immediately before the making of declaration.
- Consent of liquidator.
- A copy of Notice of resolution passed for winding up the company voluntarily
and published in the Official Gazette.
- A copy of Notice for appointment of liquidator and published in the Official
Gazette.
- A copy of Preliminary report prepared by the liquidator.
- Final report and accounts of the company prepared by liquidator presented
in General meeting of shareholders after finalization of winding up.
- Notice of final meeting.
- Return containing final report and accounts along with minutes of meeting to
be filed with the concerned Company Registration Office.
Page 46 of 66
Directors
• Every company must have a Director who has stayed in India for a total period
of 182 days or more in previous calendar year. Existing Companies, not fulfilling
this condition, to appoint Resident Director at earliest. MCA has clarified that
period to be taken into consideration will be calendar year 14. Hence, on
proportionate basis, number of days Director should be resident in India shall
exceed 136 days.
• The Board of Directors can appoint any person as additional director by passing
a resolution. A person who fails to get appointed as a director in a general
meeting cannot be appointed as an additional Director by the Board of
Directors.
• The Board of Directors may appoint an alternate for a director during his
absence from India for a period of not less than three months
• An alternate director vacates office when the original director returns to India. A
person shall not be appointed as alternate director for more than one person in
a company
• Nominee Director Sec. 161 : the Board may appoint any person as a director
nominated by any institution. Such appointed nominee director shall not be
treated as an independent director. The institution instead of appointing director
on the board can appoint observer on the board. Companies law has not
defined the role and liabilities of observer.
Types of Director Private
Company
Public Company
Listed
Company
Woman Director
No
1. Paid up share capital of
one hundred crore or
more
2. Turnover of Three
hundred crore or more
Yes
Independent
Director
No
1. Paid up share capital of
Yes
Ten crore Rupees or more
or
2. Turnover of one hundred
crore rupees or more or
3. Aggregate outstanding
loan , Debenture Deposits
exceeding Fifty crore
Resident Director Yes
Yes
Yes
• Tenure : Managing Director/Whole Time Director or Manager can be appointed
for a term of five years at a time. Sec 196(2) Additional Director appointed by
Page 47 of 66
Board of Directors shall be appointed till the conclusion of next AGM. The
appointment of Additional Director should be approved by members in general
meeting. Sec 162
• Rotation of Directors :
- Unless the articles provide for the retirement of all directors at every annual
general meeting, not less than two-thirds of the total number of directors of a
public company shall—
a)be persons whose period of office is liable to determination by retirement of
directors by rotation; and
b)save as otherwise expressly provided in this Act, be appointed by the
company in general meeting.
- At the first annual general meeting of a public company held next after the
date of the general meeting at which the first directors are appointed and at
every subsequent annual general meeting, one-third of the directors for the
time being as are liable to retire by rotation.
- The directors to retire by rotation at every annual general meeting shall be
those who have been longest in office.
• Appointment of the directors (Sec. 152)
- Applicable to both Private and Public Companies:
- Declaration by the Appointee that he/she is not disqualified mandatory [Sec
152(4)]
- Consent to act as director to be filed with the Company
- Company to file the consent with ROC.
- Number of Directorships Sec. 165 : total directorship of directors should not
exceed 20, directorship in public company should not exceed 10.
Public Limited
Company (minimum
3 Directors)
Private Limited Company
(minimum2 Directors)
Resident Director
(compulsory)
Resident or non
resident director
Resident Director
(compulsory)
Independent
Director
Woman Director
(at least 2)
if applicable
If applicable
Category
Executive/non
executive
Category
Executive/non
executive
Category
Executive/non
executive
Category
Non Executive
Category
Executive/non
executive/indepen
dent Director
Listed Company
(minimum 3 Directors)
Resident Director
(compulsory)
Category Executive/non
executive
1/3rd Independent
Director
(mandatory)
Category
Non executive
Women Director
(Compulsory)
Category - Executive/
non executive/
independent Director
Page 48 of 66
• Duties/responsibilities of directors
- For the first time, duties of directors have been specified in the Act.
- A director shall:
- (i) Act in accordance with the company’s Articles
- (ii) Act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company
- (iii) Exercise his duties with due and reasonable care, skill & diligence.
- A director shall not:
- (i) Involve in a situation where he may have direct or indirect interest
- (ii) Achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives
- (iii) Shall not assign his office
• Liabilities of Director
- Companies Act, 2013 cast a criminal liability and civil liability on “officer who is
in default” which includes Executive Director and KMP.
- Definition of Officer in default is as follows: “officer who is in default”, for the
purpose of any provision in this Act which enacts that an officer of the
company who is in default shall be liable to any penalty or punishment by way
of imprisonment, fine or otherwise, means any of the following officers of a
company, namely:—
- (i) whole-time director;
- (ii) key managerial personnel;
- (iii) where there is no key managerial personnel, such director or directors as
specified by the Board in this behalf and who has or have given his or their
consent in writing to the Board to such specification, or all the directors, if no
director is so specified;
- iv) any person who, under the immediate authority of the Board or any key
managerial personnel, is charged with any responsibility including
maintenance, filing or distribution of accounts or records, authorizes, actively
participates in, knowingly permits, or knowingly fails to take active steps to
prevent, any default;
- (v) any person in accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act, other than a person
who gives advice to the Board in a professional capacity;
- (vi) every director, in respect of a contravention of any of the provisions of this
Act, who is aware of such contravention by virtue of the receipt by him of any
proceedings of the Board or participation in such proceedings without
objecting to the same, or where such contravention had taken place with his
consent or connivance;
- (vii) in respect of the issue or transfer of any shares of a company, the share
transfer agents, registrars and merchant bankers to the issue or transfer;
• Appointment
- The appointment of independent director shall be approved by the company
in general meeting. an independent director shall hold office for a term up to
Page 49 of 66
five consecutive years on the Board of a company, but shall be eligible for
reappointment on passing of a special resolution by the company.
- no independent director shall hold office for more than two consecutive
terms, but such independent director shall be eligible for appointment after
the expiration of three years of ceasing.
- No remuneration other than sitting fees , commission on profit and
reimbursement of expenses shall be payable.
- Alternate Director of the independent director should also be an independent
Director .
• Databank
- Independent director may be selected from a data bank containing names,
addresses and qualifications of persons who are eligible and willing to act as
independent Director maintained by any body, institute or association. It is
optional to appoint independent director from databank .
• Code of Conduct (Schedule IV)
- uphold ethical standards of integrity and probity act objectively and
constructively while exercising his duties exercise his responsibilities in a bona
fide manner in the interest of the company devote sufficient time and
attention to his professional obligations for informed and balanced decision
making
- not allow any extraneous considerations that will vitiate his exercise of
objective independent judgment in the paramount interest of the company
as a whole, while concurring in or dissenting from the Collective judgment of
the Board in its decision making .
- not abuse his position to the detriment of the company or its shareholders or
for the purpose of gaining direct or indirect personal advantage or
advantage for any associated person;
- refrain from any action that would lead to loss of his independence;
- where circumstances arise which make an independent director lose his
independence, the independent director must immediately inform the Board
accordingly ; assist the company in implementing the best corporate
governance practices.
• Rotation : Independent Director is not liable to retire by rotation
• Immunity : An independent director shall be held liable only in respect of such
acts of omission or commission by a company which had occurred with
his knowledge or connivance or for failure to exercise due diligence in such acts
{Section149(12)}
• Committees of the Board :
Particulars
Corporate
Audit Committee
Social Responsibility
Committee
Nomination
& Remuneration Co
mmittee
Page 50 of 66
Listed Company
Public
Limited Companies
Private
Limited Companies
• Net worth of Rs
500 Crores or
more OR
• Turnover of Rs 1000
Crores or more OR
• Net profit of Rs 5
Crores or more
• Net worth of
Rs 500 Crores
or more OR
• Turnover of
Rs 1000 Crores
or more OR
• Net profit of Rs 5
Crores or more
• Net worth of
Rs 500 Crores
or more OR
• Turnover of
Rs 1000 Crores
or more OR
• Net profit of Rs 5
Crores or more
Mandatorily Require Mandatorily Require
d
d
• Paid-up Capital of
Rs 10 Crores or
more OR
• Outstanding loans
/ deposits /
debentures,
of Rs50Crores
or more OR
• Turnover of Rs. 100
Crores or more
Not Required
• Paid-up Capital of
Rs. 10 Crores or
more OR
• Outstanding loans
/ deposits /
debentures,
of Rs50 Crores
or more OR
• Turnover of Rs. 100
Crores or more
Not Required
• Composition of CSR Committee :
- Consisting of three or more directors out of which one shall be an
independent director.
- Unlisted public company and a private company which are not required to
appoint independent Directors, can constitute CRS committee
without independent Director.
- Board’s Report must contain specified details in respect to CSR like
composition of CSR committee, CSR policy, expenditure made on CSR etc.
• Composition of Audit Committee
- Minimum three directors with majority of independent directors
- Audit Committee members and Chairman of Audit Committee shall have
ability to read and understand financial statements
• Composition of Nomination & Remuneration Committee
- Three or more non-executive directors with majority of independent directors
- Chairperson of the company can act as committee member but not as the
Chairman of the nomination and remuneration committee
• Pointers for CS
- Whether it is mandatory for Private Company to appoint an
independent directors as member of CSR Committee?
- As per Companies (Corporate Social Responsibility Policy) Rule, 2014
no requirement to appoint Independent Director for Private company who
have CSR committee.
Page 51 of 66
Meetings
• Board Meeting (Sec. 173) and the Companies (meetings of Board and its Powers)
Rule 2014.
- Minimum 4 meetings in a year. Maximum gap between two meetings – 120
days.
- Minimum Notice of 7 days for a meeting. No shorter notice permitted unless
independent director is present, if any [Sec 173]
- Small Companies – At least One meeting in each half of calendar year.
Minimum gap between two meetings – 90 days [Sec 173]
• Board Meeting
- BM Notice may be given by hand delivery/electronic means.
- Meetings through Video Conferencing permitted. But proper recording of
video conferencing to be kept.
- Minimum quorum shall be one third of its total strength or two directors,
whichever is higher
• Participation by video conferencing : The participation of directors in a meeting
of the Board may be either in person or through video conferencing or other
audio visual means. Procedure as per Companies (Meetings of Board and its
Powers) Rules, 2014.
• Matter not to be dealt with at meeting through video conferencing :
- the approval of the annual financial statements;
- the approval of the Board’s report;
- the approval of the prospectus;
- the Audit Committee Meetings for consideration of accounts; and
- the approval of the matter relating to amalgamation, merger, demerger,
acquisition and takeover
• Pointers for CS
- Whether presence of directors through Video conference shall be
considered for quorum?
- If the procedure of video conferencing is duly complied by the Company,
then the presence of Director can be considered for quorum.
- What if the Directors attend the meeting through video conference,
however the procedure is not complied with?
- Directors presence will not be considered for quorum and also he would
not be entitled to vote on any matter of Board meeting.
• Matters to be asked before, during and after the meeting :
- Before meeting
i. Notice of the meeting should be sent to all the directors 7 days prior to
the date of Board meeting.
ii. Quorum is present for the meeting. Or else the meeting will be adjourned
for want of quorum.
During meeting
i. Appointment of chairman to conduct the meeting.
Page 52 of 66
ii. Minutes of the previous meeting should be approved and signed by
Chairman
iii. interested director in any contract shall not vote for approval contract.
- After meeting
i. Minutes of the meeting should be forwarded to all directors within 30
days for their review.
ii. If any resolution which require reporting to ROC, are passed , then such
compliance should be completed.
• Secretarial Standard on Board Meetings (SS-1)
- The Secretarial Standards issued by ICSI are recommendatory in nature.
- Notice in writing of every Meeting should be given to every Director by hand
or by post or by facsimile or by e-mail or by any other electronic mode.
- Unless the Articles prescribe a longer notice period, Notice should be given
at least fifteen days before the date of the Meeting.
- The Board should meet at least once in every three months, with a maximum
interval of 120 days between any two Meetings such that at least four
Meetings are held in each year.
- Every company should have a Chairman who would be the Chairman
for Meetings of the Board.
- Leave of absence should be granted to a Director only when a request for
such leave has been communicated to the Secretary or to the Board or to the
Chairman
- The presence of all the members of any Committee constituted by the Board
is necessary to form the Quorum for Meetings of such Committee unless
otherwise stipulated by the Board while constituting the Committee.
- Quarterly or half-yearly financial results should be approved at a Meeting of
the Board or its Committee and should not be approved by means of a
Resolution passed by circulation.
- Within fifteen days from the date of the Meeting of the Board or Committee
or of an adjourned Meeting, the draft Minutes thereof should be circulated to
all the members of the Board or the Committee, as the case may be, for
their comments.
- Minutes should not be pasted or attached to the Minutes Book.
- Minutes, if maintained in loose-leaf form, should be bound at
intervals coinciding with the financial year of the company.
• Relaxations for OPCs and Small companies :
Particulars
One Person Company
Small Company
Holding of Board meeting
Not applicable
when there is only one
director on its Board of
Directors.
Applicable
Page 53 of 66
At least one
board meeting of the
board of director has
been conducted in each
half calendar year and
gap between two meeting
is not less than ninety days
Quorum of Board meeting
Holding of Annual
General meeting
Financial statement not to
include cash
flow statement
Signing of
financial statements
Signing of Annual Return
Due date of filing
for Financial
Statements with Registrar.
Holding of Annual
General meeting
Applicable if there
are more than one
Directors
Applicable
In case of One DirectorNot applicable
In case of more than
one Director- 1/3 of its
total strength or 2
directors whichever is
higher
Not applicable
1/3 of its total strength or 2
directors whichever
is higher
Applicable
Applicable
Applicable
By only one Director
by the chairperson of
the company where he
is authorised by the Board
or by two directors out of
which one shall be
managing director and the
Chief Executive Officer, if
he is a director in the
company, the Chief
Financial Officer and the
company secretary of the
company, wherever they
are appointed.
By Company Secretary
By Company Secretary
or where there is
or where there is
not Company Secretary by not Company Secretary by
the Director of the
the Director of the
Company.
Company.
180 days.
30 days
Not applicable
• Liabilities of PCS
Particulars Default
Annual return Certifies the annual
return otherwise than in
conformity with Section 92 or the
rules made there under
Secretarial a Certification of Secretarial
udit report
Audit Report
Applicable.
Penalty
Fine which shall not be less than fifty
thousand rupees but which
may extend to five lakh rupees
Not less than one lakh rupees
but which may extend to
five lakh rupees
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Fraud
If found to be guilty of fraud
or False State or made false statement
ment, return
Certificate
Imprisonment not less than six months
but may extend to ten years and also
liable to fine not less than amount
involved in the fraud, but which may
extend to three times the amount
involved in fraud
Competition Law
• Competition law is a law that promotes or seeks to
maintain market competition by regulating anti-competitive conduct by
companies;
• Competition law is implemented through public and private enforcement.
• Principle - Competition Law :
- Competition law, or antitrust law, has three main elements:
1. prohibiting agreements or practices that restrict free trading
and competition between business.
This includes in particular the repression of free trade caused by cartels.
2. banning abusive behavior by a firm dominating a market, or anticompetitive practices that tend to lead to such a dominant position.
Practices controlled in this way may include predatory
pricing, tying, price gouging, refusal to deal, and many others.
3. supervising the mergers and acquisitions of large corporations,
including some joint ventures.
Transactions that are considered to threaten the competitive process can
be prohibited altogether, or approved subject to "remedies" such as an
obligation to divest part of the merged business or to offer licenses or access
to facilities to enable other businesses to continue competing.
Substance and practice of competition law varies from jurisdiction to
jurisdiction;
Protecting the interests of consumers (consumer welfare) and ensuring
that entrepreneurs have an opportunity to compete in the market
economy are often treated as important objectives;
- Competition law is closely connected with law on deregulation of access
to markets, state aids and subsidies, the privatization of state owned assets
and the establishment of independent sector regulators, among other marketoriented supply-side policies;
- In recent decades, competition law has been viewed as a way to
provide better public services;
- Competition laws can produce adverse effects when they reduce
competition by protecting inefficient competitors and when costs of legal
intervention are greater than benefits for the consumers.
• Practice - Competition Law
- Collusion and cartels
- Dominance and monopoly
- Mergers and acquisitions
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- Intellectual property, innovation and competition
• Collusion
- Collusion is an agreement between two or more parties, sometimes illegal and
therefore secretive, to limit open competition by deceiving, misleading, or
defrauding others of their legal rights, or to obtain an objective forbidden
by law typically by defrauding or gaining an unfair market advantage.
- It is an agreement among firms or individuals to divide a market, set prices,
limit production or limit opportunities.
- It can involve "wage fixing, kickbacks, or misrepresenting the independence of
the relationship between the colluding parties".
- In legal terms, all acts effected by collusion are considered void.
- Collusion - Indicators : Practices that suggest possible collusion include:
1. Uniform prices
2. A penalty for price discounts
3. Advance notice of price changes
4. Information exchange
• Cartel
- In economics, a cartel is an agreement between competing firms to control
prices or exclude entry of a new competitor in a market.
- It is a formal organization of sellers or buyers that agree to fix selling prices,
purchase prices, or reduce production using a variety of tactics.
- Cartels usually arise in an oligopolistic industry, where the number of sellers is
small or sales are highly concentrated and the products being traded are
usually commodities.
- Cartel members may agree on such matters as setting minimum or target
prices (price fixing), reducing total industry output, fixing market shares,
allocating customers, allocating territories, bid rigging, establishment
of common sales agencies, altering the conditions of sale, or combination of
these.
- The aim of such collusion (also called the cartel agreement) is to
increase individual members' profits by reducing competition.
- If the cartelists do not agree on market shares, they must have a plan to
share the extra monopoly profits generated by the cartel.
- One can distinguish private cartels from public cartels.
- In the public cartel a government is involved to enforce the cartel agreement,
and the government's sovereignty shields such cartels from legal actions.
- Inversely, private cartels are subject to legal liability under the antitrust laws
now found in nearly every nation of the world.
- Furthermore, the purpose of private cartels is to benefit only those individuals
who constitute it, public cartels, in theory, work to pass on benefits to the
populace as a whole.
- Competition laws often forbid private cartels.
- Identifying and breaking up cartels is an important part of the competition
policy in most countries, although proving the existence of a cartel is rarely
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easy, as firms are usually not so careless as to put collusion agreements on
paper.
- Several economic studies and legal decisions of antitrust authorities have
found that the median price increase achieved by cartels in the last 200 years
is around 25%.
- Private international cartels (those with participants from two or more nations)
had an average price increase of 28%, whereas domestic cartels averaged
18%.
- Fewer than 10% of all cartels in the sample failed to raise market prices.
• Dominance and Monopoly
- When firms hold large market shares, consumers risk paying higher prices and
getting lower quality products than compared to competitive markets;
- However, the existence of a very high market share does not always mean
consumers are paying excessive prices since the threat of new entrants to the
market can restrain a high-market-share firm's price increases;
- Competition law does not make merely having a monopoly illegal, but rather
abusing the power that a monopoly may confer, for instance through
exclusionary practices.
- First it is necessary to determine whether a firm is dominant, or whether it
behaves "to an appreciable extent independently of its competitors,
customers and ultimately of its consumer.“
- Under EU law, very large market shares raise a presumption that a firm is
dominant, which may be rebuttable.
- If a firm has a dominant position, then there is "a special responsibility not to
allow its conduct to impair competition on the common market.“
- Similarly as with collusive conduct, market shares are determined with
reference to the particular market in which the firm and product in question is
sold.
- Then although the lists are seldom closed, certain categories of abusive
conduct are usually prohibited under the country's legislation.
- A refusal to supply a facility which is essential for all businesses attempting to
compete to use can constitute an abuse.
- In one case however, a French funeral service was found to have demanded
exploitative prices, and this was justified on the basis that prices of funeral
services outside the region could be compared.
- A more tricky issue is predatory pricing.
- This is the practice of dropping prices of a product so much that one's smaller
competitors cannot cover their costs and fall out of business. Certain experts
consider predatory pricing to be unlikely.
- Forms of abuse relating directly to pricing include price exploitation.
- It is difficult to prove at what point a dominant firm's prices become
"exploitative" and this category of abuse is rarely found.
- One last category of pricing abuse is price discrimination.
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- An example of this could be offering rebates to industrial customers who
export your company's sugar, but not to customers who are selling their goods
in the same market as you are in.
• Mergers and Acquisitions
- A merger or acquisition involves, from a competition law perspective, the
concentration of economic power in the hands of fewer than before;
- This usually means that one firm buys out the shares of another;
- The reasons for oversight of economic concentrations by the state are the
same as the reasons to restrict firms who abuse a position of dominance, only
that regulation of mergers and acquisitions attempts to deal with the problem
before it arises, ex ante prevention of market dominance;
- Competition law requires that firms proposing to merge gain authorization
from the relevant government authority;
- The theory behind mergers is that transaction costs can be reduced
compared to operating on an open market through bilateral contracts.;
- Concentrations can increase economies of scale and scope;
- However often firms take advantage of their increase in market power,
their increased market share and decreased number of competitors, which
can adversely affect the deal that consumers get;
- Merger control is about predicting what the market might be like, not knowing
and making a judgment;
- What amounts to a substantial lessening of, or significant impediment to
competition is usually answered through empirical study;
- The market shares of the merging companies can be assessed and added,
although this kind of analysis only gives rise to presumptions, not conclusions;
- The Herfindahl – Hirschman Index is used to calculate the "density" of the
market, or what concentration exists;
- Aside from the math, it is important to consider the product in question and
the rate of technical innovation in the market;
- A further problem of collective dominance, or oligopoly through "economic
links“ can arise, whereby the new market becomes more conducive
to collusion;
- It is relevant how transparent a market is, because a more concentrated
structure could mean firms can coordinate their behavior more easily, whether
firms can deploy deterrents and whether firms are safe from a reaction by
their competitors and consumers.
- The entry of new firms to the market, and any barriers that they might
encounter should be considered;
- If firms are shown to be creating an uncompetitive concentration, in the US
they can still argue that they create efficiencies enough to outweigh any
detriment, and similar reference to "technical and economic progress;
- Another defense might be that a firm which is being taken over is about to fail
or go insolvent, and taking it over leaves a no less competitive state than what
would happen anyway;
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- Conglomerate mergers are preferred, because companies acquire a large
portfolio of related products, though without necessarily dominant shares in
any individual market.
• Intellectual Property, Innovation and Competition
- Competition law has become increasingly intertwined with intellectual
property, such as copyright, trademarks, patents, industrial design rights and in
some jurisdictions trade secrets;
- On the one hand, it is believed that promotion of innovation through
enforcement of IPRs promotes competitiveness, while on the other the
contrary may be the consequence;
- The question rests on whether it is legal to acquire monopoly through
accumulation of IPRs;
- In which case, the judgment needs to decide between giving preference
to intellectual property rights or towards promoting competitiveness:
1. Should antitrust laws accord special treatment to intellectual property.
2. Should intellectual rights be revoked or not granted when antitrust laws are
violated.
- Concerns also arise over anti-competitive effects and consequences due to:
1. Intellectual properties that are collaboratively designed with consequence
of violating antitrust laws (intentionally or otherwise).
2. The further effects on competition when such properties are accepted into
industry standards.
3. Cross-licensing of intellectual property.
4. Bundling of intellectual property rights to long term business transactions or
agreements to extend the market exclusiveness of intellectual property rights
beyond their statutory duration.
5. Trade secrets, if they remain a secret, having an eternal length of life.
- Some scholars suggest that a prize instead of patent would solve the problem
of deadweight loss, when innovators got their reward from the prize, provided
by the government or non-profit organization, rather than directly selling to the
market, see Millennium Prize Problems;
- However innovators may accept the prize only when it is at least as much as
how much they earn from patent, which is a question difficult to determine.
• Predatory Pricing
- Predatory pricing (also undercutting) is a pricing strategy where a product or
service is set at a very low price, intending to drive competitors out of
the market, or create barriers to entry for potential new competitors.
- If competitors or potential competitors cannot sustain equal or lower prices
without losing money, they go out of business or choose not to enter the
business.
- The predatory merchant then has fewer competitors or is even a de
facto monopoly.
- In many countries predatory pricing is considered anti-competitive and is
illegal under competition laws.
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- It is usually difficult to prove that prices dropped because of deliberate
predatory pricing rather than legitimate price competition.
- In any case, competitors may be driven out of the market before the case is
ever heard.
• Price Gouging
- Price gouging is a pejorative term referring to when a seller spikes the prices
of goods, services or commodities to a level much higher than is considered
reasonable or fair, and is considered exploitative, potentially to an unethical
extent.
- Usually this event occurs after a demand or supply shock.
- Examples include price increases of basic necessities after hurricanes or
other natural disasters.
- In precise, legal usage, it is the name of a crime that applies in some
jurisdictions of the United States during civil emergencies.
- In less precise usage, it can refer either to prices obtained by practices
inconsistent with a competitive free market, or to windfall profits.
- In the former Soviet Union, it was simply included under the single definition
of speculation.
- The term is similar to profiteering but can be distinguished by being shortterm and localized, and by a restriction to essentials such as food, clothing,
shelter, medicine and equipment needed to preserve life, limb and property.
- In jurisdictions where there is no such crime, the term may still be used
to pressure firms to refrain from such behavior.
- The term is not in widespread use in mainstream economic theory, but
is sometimes used to refer to practices of a coercive monopoly which raises
prices above the market rate that would otherwise prevail in a
competitive environment.
- Alternatively, it may refer to suppliers' benefiting to excess from a shortterm change in the demand curve.
• Tying
- Tying (informally, product tying) is the practice of selling one product or
service as a mandatory addition to the purchase of a different product or
service.
- In legal terms, a tying sale makes the sale of one good (the tying good) to
the de facto customer conditional on the purchase of a second distinctive
good (the tied good).
- Tying is often illegal when the products are not naturally related.
- It is related to but distinct from freebie marketing, a common (and legal)
method of giving away (or selling at a substantial discount) one item to ensure
a continual flow of sales of another related item.
- Some kinds of tying, especially by contract, have historically been regarded
as anti-competitive practices.
- The basic idea is that consumers are harmed by being forced to buy an
undesired good (the tied good) in order to purchase a good they actually
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want (the tying good), and so would prefer that the goods be sold
separately.
- The company doing this bundling may have a significantly large market share
so that it may impose the tie on consumers, despite the forces of market
competition.
- The tie may also harm other companies in the market for the tied good, or
who sell only single components.
- One effect of tying can be that low quality products achieve a higher market
share than would otherwise be the case.
- Tying may also be a form of price discrimination: people who use more razor
blades, for example, pay more than those who just need a one-time shave.
- Though this may improve overall welfare, by giving more consumers access to
the market, such price discrimination can also transfer consumer surpluses to
the producer.
- Tying may also be used with or in place of patents or copyrights to help
protect entry into a market, discouraging innovation.
- Tying is often used when the supplier makes one product that is critical to
many customers.
- By threatening to withhold that key product unless others are also purchased,
the supplier can increase sales of less necessary products.
• Scale Monopoly
- under the Fair Trading Act 1973 existed if a single company (or a group
of interconnected companies) supplies or acquires at least one quarter
of the goods or services of a particular type in all or part of the UK;
- Powers of the OFT to investigate a scale monopoly were replaced by
new market investigations powers when the relevant provisions of the
Enterprise Act 2002 came into force on 20 June 2003.
• Complex Monopoly
- A complex monopoly is said to exist whenever firms tacitly collude, and act as
if they are a single firm;
- The OFT 1973, first defined a complex monopoly as a number of firms with
a collective market share of over 25% that operate very similar or identical
price and non-price policies.
• The Office of Fair Trading (OFT)
- In the UK, the Office of Fair Trading (OFT) has the job of ensuring that markets
are competitive, that firms conduct their business fairly, and that consumers'
wishes and interests are properly considered;
- The OFT is an independent organization;
- Its powers come from consumer and competition legislation, including the
Competition Act 1998;
- It is currently headed by the Director General of Fair Trading (DGFT) and has a
permanent staff of officials;
- The Director General is appointed by the Secretary of State for Trade &
Industry;
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- Takes overall responsibility for creating a climate of competition in the UK;
- The OFT is accountable under the law for its actions and always endeavors to
be open, fair and transparent in its decisions;
- However, under the Enterprise Act 2002 these arrangements change, and the
powers of the DGFT will be transferred to the OFT Board, of which the DGFT will
become the first Chairman.
• Block Exemption Regulation
- The Block Exemption Regulation (BER) is an exemption in a business line or
industry, which debars organizations in the industry from some business
activities in order to create competition.
- The regulation is highly known in the automobile industry due to the effect
caused by the BER from the European Commission.
- BER has changed the automobile industry in the last decade.
- Prior to 2003 automobile owners in the EU region risk nullifying their vehicle
warranty when the vehicles were serviced or repaired in workshops not
belonging to the vehicle manufacturer or its dealers.
- This barrier was broken in October 2003, when the European Commission (EC)
passed a law allowing vehicle owners the freedom of having their servicing
and repairs done at their chosen workshop.
- According to the UK Department of Business Education & Skills, the
empowerment created by this law provides competition in the automobile
industry as vehicle owners now have the opportunity to repair and service
their vehicle at alternative workshops to the automobile manufacturers.
- BER provides automobile users the flexibility and benefit to reduce the amount
spent on servicing, thereby providing consumers more choice and better
value for money.
-
Right to Information, 2005
• TheRight to Information Act(RTI) is an Act of theParliament of India"to provide for
setting out the practical regime of right to information for citizens" and replaces
the erstwhile Freedom of information Act, 2002.
• The Act applies to all States and Union Territories of India exceptJammu &
Kashmir. Under the provisions of the Act, any citizen may request information
from a "public authority" (a body of Government or "instrumentality of State")
which is required to reply expeditiously or within thirty days.
• The Act also requires every public authority to computerize their records for wide
dissemination and to proactively certain categories of information so that the
citizens need minimum recourse to request for information formally.
• This law was passed by Parliament on 15 June 2005 and came fully into force on
12 October 2005.
• The first application was given to a Pune police station.
• Information disclosure in India was restricted by theOfficial Secrets Act 1923and
various other special laws, which the new RTI Act relaxes.
• It codifies a fundamental right of citizens.
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• Background : Freedom of Information Act 2002
- The establishment of a national-level law for freedom of information proved to
be a difficult task. The Central Government appointed a working group under
H. D. Shourie and assigned it the task of drafting legislation.
- The Shourie draft was the basis for the Freedom of Information Bill, 2000 which
eventually became law under the Freedom of Information Act, 2002.
- This Act was severely criticized for permitting too many exemptions, not only
under the standard grounds of national security and sovereignty, but also for
requests that would involve "disproportionate diversion of the resources of a
public authority".
- There was no upper limit on the charges that could be levied. There were no
penalties. The Act was passed by Parliament, but was never notified, so it did
not attain legal force.
• State-level RTI Acts
- The state-level RTI Acts were first successfully enacted by the state
governments of Tamil Naidu (1997), Goa(1997), Rajasthan(2000), Delhi(2001),
Maharashtra(2002), Assam(2002),Madhya Pradesh(2003), Jammu and
Kashmir(2004),Haryana(2005) andAndhra Pradesh(2005).
• Scope
- The Act covers the whole of India except Jammu and Kashmir, whereJ&K Right
to Information Actis in force.
- It covers all constitutional authorities, including the executive, legislature and
judiciary; any institution or body established or constituted by an act of
Parliament or a state legislature.
- It is also defined in the Act that bodies or authorities established or constituted
by order or notification of appropriate government including bodies "owned,
controlled or substantially financed" by government, or non-Government
organizations "substantially financed, directly or indirectly by funds" provided by
the government are also covered in the Act.
• Private bodies
- Private bodies are not within the Act's ambit directly.
- In a decision of Sarbjit roy vs Delhi Electricity Regulatory Commission, the Central
Information Commissionalso reaffirmed that privatized public utility companies
are not applicable for RTI.
- As per recent verdict, Private Bodies and NGOs as well come under the purview
of RTI....
• Political parties
- TheCentral Information Commission(CIC), consisting of Satyanand Mishra, M.L.
Sharma and Annapurna Dixit, has held that the political parties are public
authorities and are answerable to citizens under the RTI Act.
- The CIC, a quasi-judicial body, has said that six national parties Congress,BJP,NCP,CPI(M),CPIandBSPandBJD- have been substantially funded
indirectly by the Central Government and have the character of public
authorities under the RTI Act as they perform public functions.
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- In August 2013 the government introduced a Right To Information
(Amendment) Bill which would remove political parties from the scope of the
law.
- In September 2013 the Bill was deferred to the Winter Session of Parliament.
- In December 2013 the Standing Committee on Law and Personnel said in its
report tabled in Parliament, "The committee considers the proposed
amendment is a right step to address the issue once and for all.
- The committee, therefore, recommends for passing of the Bill."
• Process
- The RTI process involves reactive (as opposed to proactive) disclosure of
information by the authorities.
- An RTI request initiates the process.
- Each authority covered by the RTI Act must appoint theirPublic Information
Officer(PIO).
- Any person may submit a written request to the PIO for information.
- It is the PIO's obligation to provide information to citizens of India who request
information under the Act.
- If the request pertains to another public authority (in whole or part), it is the
PIO's responsibility to transfer/forward the concerned portions of the request to
a PIO of the other authority within 5 working days.
- In addition, every public authority is required to designateAssistant Public
Information Officers(APIOs) to receive RTI requests and appeals for forwarding
to the PIOs of their public authority.
- The applicant is required to disclose his name and contact particulars but not
any other reasons or justification for seeking information.
- TheCentral Information Commission(CIC) acts upon complaints from those
individuals who have not been able to submit information requests to a
Central Public Information Officer or State Public Information Officer due to
either the officer not having been appointed, or because the respective
Central Assistant Public Information Officer or State Assistant Public Information
Officer refused to receive the application for information.
- The Act specifies time limits for replying to the request.
(a) If the request has been made to the PIO, the reply is to be given within30
daysof receipt.
(b) If the request has been made to an APIO, the reply is to be given
within35 daysof receipt.
(c) If the PIO transfers the request to another public authority (better
concerned with the information requested), the time allowed to reply
is30 daysbut computed from the day after it is received by the PIO of the
transferee authority.
(d) Information concerning corruption and Human Rights violations by
scheduled Security agencies (those listed in the Second Schedule to the
Act) is to be provided within45 daysbut with the prior approval of the
Central Information Commission.
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(e) However, if life or liberty of any person is involved, the PIO is expected to
reply within48 hours.
- Since the information is to be paid for, the reply of the PIO is necessarily limited
to either denying the request (in whole or part) and/or providing a
computation of "further fees".
- The time between the reply of the PIO and the time taken to deposit the
further fees for information is excluded from the time allowed. If information is
not provided within this period, it is treated as deemed refusal. Refusal with or
without reasons may be ground for appeal or complaint.
- Further, information not provided in the times prescribed is to be provided free
of charge.
- Appeal processes are also defined.
• Fees
- A citizen who desires to seek some information from a public authority is
required to send, along with the application, a demand draft or a
bankers cheque or an Indian Postal Order of Rs.10/- (Rupees ten) payable to
the Accounts Officer of the public authority as fee prescribed for seeking
information.
- The applicant may also be required to pay further fee towards the cost of
providing the information, details of which shall be intimated to the applicant
by the PIO as prescribed by the RTI ACT.
• Exclusions
- Central Intelligence and Security agencies specified in the Second Schedule
like IB, Directorate General of Income tax (Investigation), RAW, Central Bureau
of Investigation (CBI), Directorate of Revenue Intelligence, Central Economic
Intelligence Bureau, Directorate of Enforcement, Narcotics Control Bureau,
Aviation Research Centre, Special Frontier Force, BSF, CRPF, ITBP, CISF, NSG,
Assam Rifles, Special Service Bureau, Special Branch (CID), Andaman and
Nicobar, The Crime Branch-CID-CB, Dadra and Nagar Haveli and Special
Branch, Lakshadweep Police etc. will be excluded.
- Agencies specified by the State Governments through a Notification will also
be excluded.
- The exclusion, however, is not absolute and these organizations have an
obligation to provide information pertaining to allegations of corruption and
human rights violations. Further, information relating to allegations of human
rights violation could be given but only with the approval of the Central or
State Information Commission.
• Information Exclusions
- The following is exempt from disclosure under section 8 of the Act:(a) Information, disclosure of which would prejudicially affect the sovereignty
and integrity of India, the security, "strategic, scientific or economic" interests
of the State, relation with foreign State or lead to incitement of an offense;
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(b) Information which has been expressly forbidden to be published by any
court of law or tribunal or the disclosure of which may constitute contempt
of court;
(c) Information, the disclosure of which would cause a breach of privilege of
Parliament or the State Legislature;
(d) Information including commercial confidence, trade secrets or intellectual
property, the disclosure of which would harm the competitive position of a
third party, unless the competent authority is satisfied that larger public
interest warrants the disclosure of such information;
(e) Information available to a person in his fiduciary relationship, unless the
competent authority is satisfied that the larger public interest warrants the
disclosure of such information;
(f) Information received in confidence from foreign Government;
(g) Information, the disclosure of which would endanger the life or physical
safety of any person or identify the source of information or assistance given
in confidence for law enforcement or security purposes;
(h) Information which would impede the process of investigation or
apprehension or prosecution of offenders;
(i) Cabinet papers including records of deliberations of the Council of Ministers,
Secretaries and other officers;
(j) Information which relates to personal information the disclosure of which has
no relationship to any public activity or interest, or which would cause
unwarranted invasion of the privacy of the individual (but it is also provided
that the information which cannot be denied to the Parliament or a State
Legislature shall not be denied by this exemption);
- Notwithstanding any of the exemptions listed above, a public authority may
allow access to information, if public interest in disclosure outweighs the harm to
the protected interests.
- However, this does not apply to disclosure of "trade or commercial secrets
protected by law ".
• RTI and good governance
- The right to information act is an agent of good governance. The RTI makes
administration more accountable to the people. The people become aware
of administration and give them an opportunity to take part in decision
making process. The RTI promoted democratic ideology by promoting
openness and transparency in the administration. The best way to deal with all
these challenges while promoting good governance is by making the act
redundant. The governments, instead of waiting for the common people to
seek the information, must voluntary make all the information available to the
people. It will not only promote good governance but also increase the trust
between government and the people it governs
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