Companies Act, 2013
1. MEANING AND DEFINITION OF A COMPANY
A company or firm denotes an association of likeminded persons formed for the purpose of
carrying on some business or undertaking.
A company under law is a corporate body and a legal person having status and personality
distinct and separate from the members constituting it. It is called a body corporate because the
persons composing it are made into one body by incorporating it according to the law and
clothing it with legal personality.
The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’.
Accordingly, ‘corporation’ is a legal person created by a process other than natural birth. As a
legal person, a corporate is capable of enjoying many rights and incurring many liabilities of a
natural person.
An incorporated company owes its existence either to a Special Act of Parliament or to
company law. Public corporations like Life Insurance Corporation of India, SBI etc., have been
brought into existence through special Acts of Parliament, whereas companies like Tata Steel
Ltd., Reliance Industries Limited have been formed under the Company law i.e. Companies
Act, 1956 which is replaced by the Companies Act, 2013.
In the legal sense, a company is an association of both natural and artificial persons and is
incorporated under the existing law of a country.
In terms of the Companies Act, 2013 a “company” means a company incorporated under this
Act or under any previous company law. In common law, a company is a “legal person” or
“legal entity” separate from, and capable of surviving beyond the lives of its members.
A company is rather a legal device for the attainment of social and economic end. It is,
therefore, a combined political, social, economic and legal institution.
It is also defined as “an association of many persons who contribute money or money’s worth
to a common stock and employ it in some trade or business and who share the profit and loss
arising therefrom. The common stock so contributed is denoted in money and is the capital of
the company. The persons who contributed in it or form it, or to whom it belongs, are members.
The proportion of capital stock to which each member has contributed entitled is his “share”.
The shares are always transferable although the right to transfer them may be restricted.”
2. Characteristics of a Company
Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law) and it is clothed with many rights, obligations,
powers and duties prescribed by law.
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The most striking characteristics of a company are discussed below:
(i) Corporate personality: A company incorporated under the Act is vested with a corporate
personality so it bears its own name, acts under name, may has a seal of its own and its assets
are separate and distinct from those of its members. It is a different ‘person’ from the members
who compose it. 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. Its shareholders are its notional owners and do not
own anything in it except ownership of shares issued and they can be its creditors
simultaneously. A shareholder cannot be held liable for the acts of the company even if he
holds virtually the entire share capital. The shareholders are not the agents of the company and
so they cannot bind it by their acts. The company does not hold its property as an agent or
trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect
of its liabilities.
(ii) Company as an artificial 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 who 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.
(iii) Limited Liability: “The privilege of limited liability for business debts is one of the
principal advantages of doing business under the corporate form of organisation.” 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. In other words, a
shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon
to pay and nothing more, even if the liabilities of the company far exceed its assets. This means
that the liability of a member is limited.
For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/(or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay
more than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares,
he has no further liability to pay even if the company is declared insolvent. 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.
(iv) 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. Perpetual
succession, means that the membership of a company may keep changing from time to time,
but that shall not affect its continuity. The membership of an incorporated company may
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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. Thus, perpetual succession denotes the ability of a company
to maintain its existence by the succession of new individuals who step into the shoes of those
who cease to be members of the company. Professor L.C.B. Gower rightly mentions,
“Members may come and go, but the company can go on forever. During the war all the
members of one private company, while in general meeting, were killed by a bomb, but the
company survived — not even a hydrogen bomb could have destroyed it”.
(v) 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. The company is the
real person in which all its property is vested, and by which it is controlled, managed and
disposed off. No member can claim himself to be the owner of the company’s property during
its existence or in its winding-up. A member does not even have an insurable interest in the
property of the company.
(vi) 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.
Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares
held by the members are movable property and can be transferred from one person to another
in the manner provided by the articles. A member may sell his shares in the open market and
realise the money invested by him. This provides liquidity to a member (as he can freely sell
his shares) and ensures stability to the company (as the member is not withdrawing his money
from the company). The Stock Exchanges provide adequate facilities for the sale and purchase
of shares. Further, as of now, in most of the listed companies, the shares are also transferable
through Electronic mode i.e. through Depository Participants in dematerialised form instead of
physical transfers. However, there are restrictions with respect to transferability of shares of a
Private Limited Company.
(vii) 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. All legal proceedings against the company are to be instituted in its name.
Similarly, the company may bring an action against anyone in its own name. A company’s
right to sue arises when some loss is caused to the company, i.e. to the property or the
personality of the company. A company, as a person distinct from its members, may even sue
one of its own members.
(viii) 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.
(ix) 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
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company rests. The actions and objects of the company are limited within the scope of its
Memorandum of Association.
(x) Separate Management: As already noted, the members may derive profits without being
burdened with the management of the company. They do not have effective and intimate
control over its working and they elect their representatives as Directors on the Board of
Directors of the company to conduct corporate functions through managerial personnel
employed by them. In other words, the company is administered and managed by its managerial
personnel.
(xi) 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. Only a Section 8
company can be formed with no profit motive.
(xii) 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. Generally, the existence of a company is terminated by means
of winding up. However, to avoid winding up, sometimes companies adopt strategies like
reorganisation, reconstruction and amalgamation.
To sum up, “a company is a voluntary association for profit with capital divisible into
transferable shares with limited liability, having a distinct corporate entity and a common
seal with perpetual succession”.
3. DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL
The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called
as “lifting of or piercing 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.
The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an
entity relies on its corporate personality as a shield to cover its wrong doings.
Ever since the decision in Salomon v. Salomon & Co. Ltd., (1897) A.C. 22, normally Courts
are reluctant or at least very cautious to lift the veil of corporate personality to see the real
persons behind it. Nevertheless, 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.
(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.
(h) Where it is found that a company has abused its corporate personality for an unjust and
inequitable purpose, the court would not hesitate to lift the corporate veil. Further, the
corporate veil could be lifted when acts of a corporation are allegedly opposed to justice,
convenience and interests of revenue or workmen or are against public interest. Thus, in
appropriate cases, the Courts disregard the separate corporate personality and look behind the
legal person or lift the corporate veil.
4. Illegal Association
In order to prevent the mischief arising from large trading undertakings being carried on by
large fluctuating bodies so that persons dealing with them did not know with whom they were
contracting, the law has put a ceiling on the number of persons constituting an association or
partnership. An unincorporated company, association or partnership consisting of large number
of persons has been declared illegal.
By virtue of section 464 of the Companies Act, 2013, no association or partnership consisting
of more than 50 persons shall be formed for the purpose of carrying on any business that has
for its object the acquisition of gain by the association or partnership or by the individual
members thereof, unless it is registered as a company under this Act or is formed under any
other law for the time being in force.
5. Types of Companies
The Companies Act 2013 provides for the kinds of companies that can be promoted and
registered under the Act. The three basic types of companies which may be registered under
the Act are:
(a) Private Companies;
(b) Public Companies; and
(c) One Person Company (to be formed as Private Limited)
Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful
purpose by—
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
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(c) 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
(2) A company formed under sub-section (1) may be either—
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.
Classification of Companies
(i) Classification on the basis of Incorporation: There are three ways in which companies
may be incorporated.
(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 Registrar of Companies (RoC) fall under this
category.
(ii) Classification on the basis of Liability: Under this category there are three types of
companies:
(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 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. For example, a shareholder who has paid INR 75 on a
share of face value INR 100 can be called upon to pay the balance of INR 25 only. Companies
limited by shares are by far the most common and may be either public or private.
(iii) Other Forms of Companies
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(a)Associations not for profit having license under Section 8 of the Companies Act, 2013 or
under any previous company law;
(b) Government Companies;
(c) Foreign Companies;
(d) Holding and Subsidiary Companies;
(e) Associate Companies/Joint Venture Companies
(f) Investment Companies
(g) Producer Companies.
(h) Nidhi Companies
(i) Dormant Companies
1. Private Company: As per Section 2(68) of the Companies Act, 2013, “private company”
means a company having a minimum paid-up share capital as may be prescribed, and which
by its articles, (i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this definition, be treated as a single member:
Provided further that the following persons shall not be included in the number of members;
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased, and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
It must be noted that it is only the number of members that is limited to two hundred. A private
company may issue debentures to any number of persons, the only condition being that an
invitation to the public to subscribe for debentures is prohibited.
The aforesaid definition of private limited company specifies the restrictions, limitations and
prohibitions, which must be expressly provided in the articles of association of a private limited
company.
The words ‘Private Limited’ must be added at the end of its name by a private limited company.
A private company may be formed for any lawful purpose by two or more persons, by
subscribing their names to a memorandum and complying with the requirements of this Act in
respect of registration. A private company shall have a minimum number of two directors and
the only two members may also be the two directors of the private company.
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Privileges and Exemptions of a Private Company
The Companies Act, 2013, confers certain privileges on private companies which are not
subsidiaries of public companies. Such companies are also exempted from complying with
quite a few provisions of the Act. The basic rationale behind this is that since private limited
companies are restrained from inviting capital and deposits from the public, not much public
interest is involved in their affairs as compared to public limited companies. Private limited
companies lose the privileges and exemptions the moment they cease to be private companies.
One Person Company
With the implementation of the Companies Act, 2013, a single person could constitute a
Company, under the One Person Company (OPC) concept.
The new Companies Act, 2013 has done away with redundant provisions of the previous
Companies Act, 1956, and provides for a new entity in the form of one person company (OPC),
while empowering the Central Government to provide a simpler compliance regime for small
companies.
The introduction of OPC in the legal system is a move that would encourage corporatisation of
micro businesses and entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC.
It had suggested that such an entity may be provided with a simpler legal regime through
exemptions so that the small entrepreneur is not compelled to devote considerable time, energy
and resources on complex legal compliance.
OPC is a one shareholder corporate entity, where legal and financial liability is limited to the
company only.
Rule 3 of Companies (Incorporation) Rules, 2014 provides that
(1) Only a natural person who is an Indian citizen and resident in India(a) shall be eligible to incorporate a One Person Company;
(b) shall be a nominee for the sole member of a One Person Company.
(2) A natural person shall not be a member of more than a One Person Company at any point
of time and the said person shall not be a nominee of more than a One Person Company.
(3) Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporates.
(4) OPC cannot convert voluntarily into any kind of company unless two years have expired
from the date of incorporation of One Person Company
(5) OPC shall be mandatorily be converted into in case the paid up share capital is increased
beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two
crore rupees.
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Benefits of One Person Company
The concept of One Person company is quite revolutionary. It gives the individual
entrepreneurs all the benefits of a company, which means they will get credit, bank loans,
access to market, limited liability, and legal protection available to companies.
Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were
required to start a company. But now the concept of One Person Company would provide
tremendous opportunities for small businessmen and traders, including those working in areas
like handloom, handicrafts and pottery. Earlier they were working as artisans and weavers on
their own, so they did not have a legal entity of a company. But now the OPC would help them
do business as an enterprise and give them an opportunity to start their own ventures with a
formal business structure,
Further, the amount of compliance by a one person company is much lesser in terms of filing
returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one
person company will have direct access to the market and the wholesale retailers. The new
concept would also boost the confidence of small entrepreneurs.
Small Company
Small company is a new form of private company under the Companies Act, 2013. A
classification of a private company into a small company is based on its size i.e. paid up capital
and turnover. In other words, such companies are small sized private companies.
As per section 2(85) ‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial
year does not exceed two crore rupees:
Public Company
By virtue of Section 2(71), a public company means a company which:
(a) is not a private company; and
(b) has a minimum paid-up share capital, as may be prescribed.
Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles
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As per section 3(1)(a), a public company may be formed for any lawful purpose by seven or
more persons, by subscribing their names or his name to a memorandum and complying with
the requirements of this Act in respect of registration.
A public company may be said to be an association consisting of not less than 7 members,
which is registered under the Act. In principle, any member of the public who is willing to pay
the price may acquire shares in or debentures of it. The securities of a public company may be
quoted on a Stock Exchange. The number of members is not limited to two hundred.
The securities or other interest of any member in a public company shall be freely transferable.
Limited Companies
As per section 3(2), a company formed under this Act may be either (a) a company limited by
shares; or (b) a company limited by guarantee or (c) an unlimited company.
The term 'Limited Company' means a company limited by shares or by guarantee.
The liability of the members, in the case of a limited company, may be limited with reference
to the nominal value of the shares, respectively held by them or to the amount which they have
respectively guaranteed to contribute in the event of winding up of the company. Accordingly,
a limited company can be further classified into: (a) Company limited by shares, and (b)
Company limited by guarantee.
Companies Limited by Shares
As per section 2(22), “company limited by shares” means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the shares respectively
held by them. Accordingly, no member of a company limited by shares, can be called upon to
pay more than the nominal value of the shares held by him. If his shares are fully paid-up, he
has nothing more to pay. But in the case of partly-paid shares, the unpaid portion is payable at
any time during the existence of the company on a call being made, whether the company is a
going concern or is being wound up. This is the essence of a company limited by shares and is
the most common form in existence.
Companies Limited by Guarantee
As per section 2(21) “company limited by guarantee” means a company having the liability of
its members limited by the memorandum to such amount as the members may respectively
undertake to contribute to the assets of the company in the event of its being wound up.
Clubs, trade associations and societies for promoting different objects are examples of such a
company. It should be noted that a special feature of this type of company is that the liability
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of members to pay their guaranteed amounts arises only when the company has gone into
liquidation and not when it is a going concern.
A guarantee company may or may not have a share capital.
The Memorandum of Association of every guarantee company must state that every member
of the company undertakes to contribute to assets of the company in the event of its being
wound up while he is a member for the payment of the debts and liabilities of the company
contracted before he ceases to be a member, and of the charges, costs and expenses of winding
up, and for adjustment of the rights of the contributories among themselves, such amount as
may be required, not exceeding a specified amount.
The Memorandum of a company limited by guarantee must state the amount of guarantee. It
may be of different denominations.
Unlimited Company
As per section 2(92), “unlimited company” means a company not having any limit on the
liability of its members. Thus, the maximum liability of the member of such a company, in the
event of its being wound up, might stretch up to the full extent of their assets to meet the
obligations of the company by contributing to its assets.
However, the members of an unlimited company are not liable directly to the creditors of the
company, as in the case of partners of a firm. The liability of the members is only towards the
company and in the event of its being wound up only the Liquidator can ask the members to
contribute to the assets of the company which will be used in the discharge of the debts of the
company.
An unlimited company may or may not have share capital.
ASSOCIATION NOT FOR PROFIT
Section 8(1) permits the registration, under a licence granted by the Central Government, of
associations not for profit with limited liability without being required to use the word
“Limited’ or the words ‘Private Limited” after their names. This is of great value to companies
not engaged in business like bodies pursuing charitable, educational or other purposes of great
utility.
The Central Government may grant such a licence if:
(i) it is intended to form a company for promoting commerce, art, science, sports, education,
research, social welfare, religion, charity protection of environment or any such other object;
and
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(ii) the company prohibits payment of any dividend to its members but intends to apply its
profits or other income in promotion of its objects.
The company is registered without paying any stamp duty on its Memorandum and Articles.
On registration, the Association enjoys all the privileges of a limited company, and is subject
to all its obligations.
A Company, which has been granted licence under Section 8 cannot alter the provisions of its
Memorandum or articles except with the previous approval of the Central Government.
GOVERNMENT COMPANIES
Section 2(45) defines a “Government Company” as any company in which not less than fifty
one per cent. of the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more
State Governments, and includes a company which is a subsidiary company of such a
Government company.
Foreign Companies
As per section 2(42), “foreign company” means any company or body corporate incorporated
outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner
Section 380 of the Act lays down that every foreign company which establishes a place of
business in India must, within 30 days of the establishment of such place of business, file with
the Registrar of Companies for registration:
(a) a certified copy of the charter, statutes or memorandum and articles, of the company or
other instrument constituting or defining the constitution of the company and, if the instrument
is not in the English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be
prescribed;
(d) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other
documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal
place of business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or
occasions;
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(g) declaration that none of the directors of the company or the authorised representative in
India has ever been convicted or debarred from formation of companies and management in
India or abroad; and
HOLDING, SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES
On the basis of control companies can be classified into holding, subsidiary and associate
companies.
Holding company
As per Section 2(46), holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.
Subsidiary company
Section 2(87) provides that subsidiary company or subsidiary, in relation to any other company
(that is to say the holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:
According to section 2(27), control shall include the right to appoint majority of the
directors or to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or in any
other manner.
Subsidiary company not to hold shares in its holding company
Section 19(1) seeks to provide that subsidiary company shall not either by itself or through its
nominees hold shares in its holding company and no holding company shall allot or transfer its
shares to any of its subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.
Associate company
As per Section 2(6), “Associate company”, in relation to another company, means a company
in which that other company has a significant influence, but which is not a subsidiary company
of the company having such influence and includes a joint venture company.
the expression "significant influence" means control of at least twenty per cent. of total
voting power, or control of or participation in business decisions under an agreement;
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6. Promoters
Section 2(69) of the Companies Act, 2013 defines the term ‘promoter’ as under:“Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual
return; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act.
Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional
capacity.
By virtue of above definition, persons in accordance with whose advice, directions or
instructions the Board of Directors of the company is accustomed to act are also treated as
promoters. 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.
Is a director/officer/employee of the issuer a promoter?
A director/officer/employee who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise is considered as a promoter. As per
section 2(27), “control” shall include the right to appoint majority of the directors or to control
the management or policy decisions exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of their shareholding or management rights
or shareholders agreements or voting agreements or in any other manner.
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.
7. Formation of Companies
Section 3(1) states that a company may be formed for any lawful purpose by—
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company
by subscribing their names or his name to a memorandum and complying with the requirements
of this Act in respect of registration.
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(a) Application for Availability of Name of company
As per section 4(4) a person may make an application, to the Registrar for the reservation of a
name set out in the application as the name of the proposed company; or
An application for reservation of name shall be made through the web service available at
www.mca.gov.in by using form RUN (Reserve Unique Name) along with fee.
According to section 4(2), the name stated in the memorandum of association shall not be
identical with or resemble too nearly to the name of an existing company registered under the
Companies Act; or
Section 4(3) provides that a company shall not be registered with a name which contains (a)
any word or expression which is likely to give the impression that the company is in any way
connected with, or having the patronage of, the Central Government, any State Government,
or any local authority, corporation or body constituted by the Central Government or any State
Government under any law for the time being in force.
Section 4(5)(i) lays down that Upon receipt of an application under sub-section (4), the
Registrar may, on the basis of information and documents furnished along with the application,
reserve the name for a period of twenty days from the date of approval.
b) Preparation of Memorandum and Articles of Association
The Memorandum of Association is the charter of a company. It is a document, which
amongst other things, defines the area within which the company can operate.
Section 5(1) states that the articles of a company shall contain the regulations for
management of the
company.
FILING OF DOCUMENTS WITH REGISTRAR OF COMPANIES
Section 7(1) states that there shall be filed with the Registrar within whose jurisdiction the
registered office of a company is proposed to be situated, the following documents and
information for registration, namely:—
(a) Application for Incorporation of Companies: An application for registration of a
company shall be filed, with the Registrar within whose jurisdiction the registered office of the
company is proposed to be situated, in Form No.INC-32 (SPICe) along with the fee;
Memorandum and Articles of Association of the company duly signed
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(b) Section 7(1)(a) deals with the filing of the memorandum and articles of the company
duly signed by all the subscribers to the memorandum.
(c) Declaration from professional
Section 7(1)((b) requires filing of an affidavit by an advocate, a chartered accountant, cost
accountant or company secretary in practice, who is engaged in the formation of the
company, and by a person named in the articles as a director, manager or secretary of
the company, that all the requirements of this Act and the rules made thereunder in respect of
registration and matters precedent or incidental thereto have been complied with;
(h) Power of Attorney
With a view to fulfilling the various formalities that are required for incorporation of a
company, the promoters may appoint an attorney empowering him to carry out the
instructions/requirements stipulated by the Registrar. This requires execution of a Power of
Attorney on a non-judicial stamp paper of a value prescribed in the respective State Stamp
Laws.
Issue of Certificate of Incorporation by Registrar
Section 7(2) states that the Registrar on the basis of documents and information filed, shall
register all the documents and information in the register and issue a certificate of incorporation
to the effect that the proposed company is incorporated under this Act. From the date of
incorporation mentioned in the certificate of incorporation, the entity is formed as a body
corporate by the name provided in the MoA.
Allotment of Corporate identity number
Section 7(3) states that on and from the date mentioned in the certificate of incorporation issued
under sub-section (2), the Registrar shall allot to the company a corporate identity number
(CIN), which shall be a distinct identity for the company and which shall also be included in
the certificate.
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.
The first step in the formation of a company is to prepare a document called the memorandum
of association. In fact memorandum is one of the most essential pre-requisites for incorporating
any form of company under the Companies Act, 2013.
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CONTENTS OF MEMORANDUM
As per Section 4(1), the memorandum of a limited company must state the following:
(a) Name Clause: A company being a legal entity must have a name of its own to establish its
separate identity. The name of the company is a symbol of its independent corporate existence.
The first clause in the memorandum of association of the company states the name by which a
company is to be known.
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;
This shall not apply in case of companies registered under section 8.
(b) Situation Clause / Registered Office Clause: The name of the State in which the
registered office of the company is to be situated must be given in the memorandum. But the
exact address of the registered office is not required to be stated therein. According to section
12 of the Act within 30 days of company’s incorporation, and at all times thereafter, the
company must have a registered office to which all communications and notices may be sent.
The company must also furnish to the Registrar verification of its registered office within a
period of thirty days of its incorporation.
(c) Object Clause: The third compulsory clause in the memorandum sets out the objects for
which the company has been formed. Under section 4(1)(c) of the Act, all companies must
state in their memorandum the objects for which the company is proposed to be incorporated
and any matter considered necessary in furtherance thereof.
The objects clause is of great importance because it determines the purpose and the capacity of
the company. It indicates the purpose for which the company has been set up and its actual
capability, besides its sphere of activities. It states affirmatively the ambit and extent of powers
of the company and, stated negatively, that nothing should be done beyond that ambit and that
no attempt shall be made to use the company for any other purpose than that which is specified.
The purpose of the objects clause is to enable the persons dealing with the company to know
its permitted range of activities. The acts beyond this ambit are ultra vires and hence void. Even
the entire body of shareholders cannot ratify such acts.
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. As a result, 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. Also, as stated earlier, the company cannot make it valid, even if every
member assents to it. The general rule is that an act which is ultra vires the company is
incapable of ratification. The rule is meant to protect shareholders and the creditors of the
company.
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Read the Case Study: Ashbury Railway Carriage and Iron Co. Ltd. v. Riche
(d) Liability Clause: The liability of members of the company is to be specifically mentioned
in the MoA. It is provided that the liability of member may either be limited or unlimited.
(e) Capital Clause: This clause shall state the amount of the capital with which the company
is registered. The shares into which the capital is divided must be of fixed value, which is
commonly known as the nominal value of the share. The capital is variously described as
“nominal”, “authorised” or “registered”.
The amount of nominal capital is determined having regard to the present as well as future
requirements of the company with reference to its objects. The usual way to state the capital in
the memorandum is: “The capital of the company is `10,00,000 divided into 1,00,000 equity
shares of `10 each”. This amount lays down the maximum limit beyond which the company
cannot issue shares without altering the memorandum as provided by Section 61 of the
Companies Act, 2013.
A company is not authorised to issue capital beyond its authorised/nominal/registered capital.
If it receives applications for shares beyond the shares covered by the authorised capital, the
amount received on excess number of shares should be returned
(f) Declaration for Subscription: The subscribers to the memorandum declare: “We, the
several persons whose names and addresses are subscribed below, are desirous of being formed
into a company in pursuance of this memorandum of association, and we respectively agree to
take the number of shares in the capital of the company set opposite our respective names”.
Then follow the names, addresses, description, occupations of the subscribers, and the number
of shares each subscriber has agreed to take and their signatures attested by a witness.
Alteration of Memorandum of Association
The provisions or conditions of the memorandum of association relating to the name clause,
registered office clause, the objects clause, limited liability clause, subscriber’s share clause,
can be altered by following the prescribed procedure laid down in the Act. Strict compliance
of the prescribed procedure is demanded by law. Failure to comply with the express provisions
made under the Act for the purpose of alteration of the provisions or conditions contained in
the memorandum will be deemed as a nullity.
Alteration of Name Clause
The name of the company can be altered by a special resolution and with the approval of the
Central Government in writing. Approval of the Central Government is not required, in case
where the change in the name of the company relates to the addition/deletion of the word
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‘Private’ to the name of the company consequent to the conversion of a company into a public
company and vice versa.
When any change in the name of a company is made under section 13(2), the Registrar shall
enter the new name in the register of companies in place of the old name and issue a fresh
certificate of incorporation with the new name and such change in the name shall be complete
and effective only on the issue of such a certificate.
The change of name shall not affect any rights or obligations of the company, or render
defective any legal proceedings by or against it, and any legal proceedings which might have
been continued or commenced by or against the company in its former name may be continued
by or against the company in its new name.
Alteration of Registered Office Clause
(a) Change within the local limits of same town
The change of registered office of the company within the local limits can be implemented by
the Board of Directors. A company by passing Board Resolution can change the situation of
its registered office within the limits of same city, town or village.
This does not involve alteration of memorandum.
(b) Change outside the local limits of any city, town or village
A company by passing Special Resolution in the Shareholders meeting can change the situation
of its registered office outside the local limits of any city, town or village.
This does not involve alteration of memorandum.
(c) Change from one State to another State
The change from one State to another State can be effected by passing a special resolution of
the company which must be confirmed by the Central Government on an application made to
it.
The Central Government shall dispose of the application within a period of sixty days and
before passing its order may satisfy itself that the alteration has the consent of the creditors,
debenture-holders and other persons concerned with the company or that a sufficient provision
has been made by the company either for the due discharge of all its debts and obligations or
that adequate security has been provided for such discharge.
This involve alteration of memorandum.
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Alteration of Object Clause
A company can change its objects by passing a special resolution in the shareholders meeting.
Alteration of Liability Clause
A company can change its lability clause by passing a special resolution in the shareholders
meeting.
Alteration of Capital Clause
A limited company having a share capital may make the following types of alterations in its
memorandum by an ordinary resolution, at its general meeting to (i) increase its authorised share capital
(ii) consolidate and divide all or any of its share capital into shares of a larger amount than its
existing shares
(iii) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;
(iv) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that the proportion between the amount paid and unpaid shall
remain the same.
(v) cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person, and diminish the amount of its share capital by the
amount of the shares so cancelled.
Articles Subordinate to Memorandum
The articles of a company are subordinate to and subject to the memorandum of association
and any clause in the Articles going beyond the memorandum will be ultra vires. But the
articles are only internal regulations, over which the members of the company have full control
and may alter them according to what they think fit. Only care has to be taken to see that
regulations provided for in the articles do not exceed the powers of the company as laid down
by its memorandum.
But neither the articles nor the memorandum can authorise the company to do anything so as
to contravene any of the provisions of the Act.
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Contents of Articles of Association
The articles must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to the memorandum and duly witnessed and filed along
with the memorandum. The articles must not contain anything illegal or ultra vires the
memorandum, nor should it be contrary to the provisions of the Companies Act 2013.
The articles set out the rules and regulations framed by the company for its own working. The
articles should contain generally the following matters:
1. Issue of preference shares.
2. Allotment of shares.
3. Calls on shares.
4. Lien on shares.
5. Transfer and transmission of shares.
6. Nomination.
7. Forfeiture of shares.
8. Alteration of capital.
9. Buy back.
10. Share certificates.
11. Dematerialisation.
12. Conversion of shares into stock.
13. Voting rights and proxies.
14. Meetings and rules regarding committees.
15. Directors, their appointment and delegations of powers.
16. Nominee directors.
17. Issue of Debentures and stocks.
18. Audit committee.
19. Managing director, Whole-time director, Manager, Secretary.
20. Additional directors.
21. Seal.
22. Remuneration of directors.
23. General meetings.
24. Directors meetings.
25. Borrowing powers.
26. Dividends and reserves.
27. Accounts and audit.
28. Winding up.
29. Indemnity.
30. Capitalisation of reserves.
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Alteration of Articles of Association
A company has a statutory right to alter its articles of association. A company may, by a special
resolution, alter its articles.
However, in spite of the power to alter its articles, a company can exercise this power subject
only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In the event of conflict
between the memorandum and the articles, it is the memorandum that will prevail.
2. The alteration must not be inconsistent with any provisions of the Companies Act or any
other statute.
On the other hand, articles may impose on the company conditions stricter than those provided
under the law; for example, they may provide that a matter should be passed by a special
resolution when the Act requires it to be passed by an ordinary resolution.
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
5. The alteration must not constitute a fraud on the minority by a majority. If the alteration is
not for the benefit of the company as a whole, but for majority of shareholders, then the
alteration would be bad. In other words, an alteration to the articles must not discriminate
between the majority shareholders and the minority shareholders so as to give the former an
advantage over the latter.
6. Articles cannot be altered so as to compel an existing member to take or subscribe for more
shares or in any way increase his liability to contribute to the share capital, unless he gives his
consent in writing.
7. By effecting alteration in its articles, a company cannot defeat escape from its contractual
obligation with any person. The company will always be liable in such a case.
8. The Articles of Association cannot be altered so as to have retrospective effects. The articles
only operate from the date of the amendment.
Difference between AOA and MOA
The main points of distinction between the memorandum and articles are given below:
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1. Memorandum of association is the charter of the company and defines the fundamental
conditions and objects for which the company is granted incorporation. Articles of association
are the rules and regulations framed to govern this internal management of the company.
2. Clauses of the memorandum cannot be easily altered. They can only be altered in accordance
with the mode prescribed by the Act. In some of the cases, alteration requires the permission
of the Central Government or the Court. In the case of articles of association, members have a
right to alter the articles by a special resolution. Generally there is no need to obtain the
permission of the Court or the Central Government for alteration of the articles.
3. Memorandum of association cannot include any clause contrary to the provisions of the
Companies Act. The articles of association are subsidiary both to the Companies Act and the
memorandum of association.
4. The memorandum generally defines the relation between the company and the outsiders,
while the articles regulate the relationship between the company and its members and between
the members inter se.
5. Acts done by a company beyond the scope of the memorandum are absolutely void and ultra
vires and cannot be ratified even by unanimous vote of all the shareholders. But the acts of the
directors beyond the articles can be ratified by the shareholders.
Doctrine of Constructive Notice
The memorandum and articles, when registered, become public documents and can be
inspected by anyone on payment of nominal fee. Therefore, every person who contemplates
entering into a contract with a company has the means of ascertaining and is consequently
presumed to know, not only the exact powers of the company but also the extent to which these
powers have been delegated to the directors, and of any limitations placed upon the exercise of
these powers. In other words, every person dealing with the company is deemed to have a
“constructive notice” of the contents of its memorandum and articles. In fact, he is regarded
not only as having read those documents but also as having understood them according to their
proper meaning. Consequently, if a person enters into a contract which is beyond the powers
of the company, as defined in the memorandum, or outside the limits set on the authority of the
directors, he cannot, as a general rule, acquire any rights under the contract against the
company. For example, if the articles provide that a bill of exchange to be effective must be
signed by two directors, a person dealing with the company must see that it is so signed;
otherwise he cannot claim under it.
Read the Case Study on the Doctrine of Constructive Notice
Doctrine of Indoor Management
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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, as laid down in Royal British Bank v. Turquand, persons dealing
with a company having satisfied themselves that the proposed transaction is not in its nature
inconsistent with the memorandum and articles, are not bound to inquire the regularity of any
internal proceedings. In other words, 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.
Read the Case Study on the Doctrine of Indoor Management
8. Membership in a Company
WHO ARE MEMBERS?
A company is composed of members, though it has its own separate legal entity. The members
of a company are the persons who, for the time being, constitute the company, as a corporate
entity.
In the case of a company limited by shares, the shareholders are the members. The terms
“members” and “shareholders” are usually used interchangeably, being synonymous, as there
can be no membership except through the medium of shareholding. Thus, generally speaking
every shareholder is a member and every member is a shareholder.
However, there may be exceptions to this statement, e.g., a person may be a holder of share(s)
by transfer but will not become its member until the transfer is registered in the books of the
company in his favour and his name is entered in the register of members. Similarly, a member
who has transferred his shares, though he does not hold any shares yet he continues to be
member of the company until the transfer is registered and his name is removed from the
register of members maintained by the company under Section 88 of the Companies Act, 2013.
Definition of ‘Member’
According to Section 2(55) of the Companies Act, 2013, member, in relation to a company,
means,
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(1) The subscribers to the memorandum of a company who shall be deemed to have agreed to
become members of the company, and on its registration, shall be entered as members in its
register of members;
(2) Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members shall, be a member of the company;
(3) Every person holding shares of a company and whose name is entered as a beneficial owner
in the records of a depository shall be deemed to be a member of the concerned company.
The person desirous of becoming a member of a company must have the legal capacity of
entering into an agreement in accordance with the provisions of the Indian Contract Act, 1972.
MODES OF ACQUIRING MEMBERSHIP
As per Section 2(55) of the Companies Act, 2013, a person may acquire the membership of a
company:
(a) by subscribing to the Memorandum of Association (deemed agreement); or
(b) by agreeing in writing to become a member:
(i) by making an application to the company for allotment of shares; or
(ii) by executing an instrument of transfer of shares as transferee; or
(iii) by consenting to the transfer of share of a deceased member in his name; or
(c) by holding shares of a company and whose name is entered as beneficial owner in the
records of a depository (Under the Depositories Act, 1996)
and on his name being entered in the register of members of company.
(a) Subscribers to the Memorandum
In the case of a subscriber, no application or allotment is necessary to become a member. By
virtue of his subscribing to the memorandum, he is deemed to have agreed to become a member
and he becomes ipso facto member on the incorporation of the company and is liable for the
shares he has subscribed.
(b) Agreement in Writing
(i) By an application and allotment
A person who applies for shares becomes a member when shares are allotted to him, a notice
of allotment is issued to him and his name is entered on the register of members. The general
law of contract applies to this transaction. There is an offer to take shares and acceptance of
this offer when the shares are allotted.
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(ii) By transfer of shares
Shares in a company are movable property as provided in Section 44 of the Companies Act,
2013 and are transferable in the manner as provided in the articles of the company and as
provided in Section 56 of the Companies Act, 2013. A person can become a member by
acquiring shares from an existing member and by having the transfer of shares registered in the
books of the company, i.e. by getting his name entered in the register of members of the
company.
(iii) By transmission of shares
A person may become a member of a company by operation of law i.e. if he succeeds to the
estate of a deceased member. Membership by this method is a legal consequence. On the death
of a member, his executor or the person who is entitled under the law to succeed to his estate,
gets the right to have the shares transmitted and registered in his name in the company’s register
of members. No instrument of transfer is necessary in this case. If the legal representative of
deceased member desires to be registered as a member in place of the deceased member, the
company shall do so or in the alternative he may request the company to transfer the shares in
the name of another person of his choice.
(c) Holding Shares as Beneficial Owner in the Records of Depository.
Every person holding shares of the company and whose name is entered as a beneficial owner
in the records of the depository shall be deemed to be a member of the concerned company.
WHO MAY BECOME A MEMBER
Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract)
except the company itself, can become a member of a company. However, it is important to
note the following points in relation to certain organizations and persons:
(a) Company as a member of another company: A company is a legal person and so is
competent to contract. Therefore, it can become a member of any other company. Also a
company cannot become a member of itself. As per section 19 of the Companies Act, 2013, a
subsidiary company cannot become a member of its holding company. However, a subsidiary
can hold shares in its holding company only where the subsidiary company is a shareholder
even before it became a subsidiary company of the holding company.
(b) Partnership firm as a member: A partnership firm is not a legal person and as such it
cannot, in its own name, become a member of a company.
(c) Limited Liability Partnership, being an incorporated body under the statute, can become
a member of a company.
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(d) Foreigners as members: A foreigner may take shares in an Indian company and become
a member subject to the provisions of the Foreign Exchange Management Act, 1999, but in the
event of war with his country, he becomes an alien enemy and his power of voting and his
rights to receive notices are suspended.
(e) Minor as member: A member who is not a sui juris e.g., a minor, is wholly incompetent
to enter into a contract and as such cannot become a member of a company. Consequently, an
agreement by a minor to take shares is void ab-initio.
Joint Members
If more than one person apply for shares in a company and shares are allotted to them, each
one of such applicant becomes a member.
MINIMUM NUMBER OF MEMBERS
Section 3(1) of the Companies Act, 2013 provides that a company may be formed for any
lawful purpose by seven or more persons, where the company to be formed is to be a public
company; or two or more persons, where the company to be formed is to be a private company;
or 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.
Restriction on Membership
By virtue of Section 2(68)(ii) of the Companies Act, 2013, the maximum number of members
of a private company except in the case of One Person Company is limited to two hundred
excluding the present and past employees of the company who continue to be members of the
company. There is no restriction with regard to the maximum number of members of a public
company.
CESSATION OF MEMBERSHIP
A person ceases to be a member of a company when his name is removed from its register of
members, which may occur in any of the following situations:
(a) He transfers his shares to another person, the transfer is registered by the company and his
name is removed from the register of members;
(b) His shares are forfeited;
(c) His shares are sold by the company to enforce a lien;
(d) He dies; (his estate, however, remains liable for calls);
(e) He is adjudged insolvent and the Official Assignee disclaims his shares;
(f) His redeemable preference shares are redeemed;
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(g) His shares are purchased either by another member or by the company itself under an order
of the Tribunal under Section 242 of the Companies Act, 2013;
(h) The member is a company which is being wound-up in India, and the liquidator disclaims
the shares;
(i) The company is wound up; or
Expulsion of a Member
A controversy had arisen as to whether a public limited company had powers to insert an article
in its Articles of Association relating to expulsion of a member by the Board of Directors of
the company where the directors were of the view that the activities or conduct of such a
member was detrimental to the interests of the company.
The Ministry of Corporate Affairs clarified that an article for expulsion of a member is opposed
to the fundamental principles of the Company Jurisprudence and is ultra vires the company,
the reason being that such a provision against the provisions of the Companies Act relating to
the rights of a member in a company.
The Ministry of Corporate Affairs has, therefore, clarified that any assumption of the powers
by the Board of Directors to expel a member by alteration of Articles of Association shall be
illegal and void.
RIGHTS OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights of a member
until he ceases to be a member in accordance with the provisions of the Act. So long a person’s
name stands registered in the books as a member, even if he has sold the share and has given
the share certificates and the blank transfer deed duly signed, he alone is entitled to exercise
the rights of membership.
These rights are derived by virtue of the membership contract between the company and the
member and the general law. Some of these rights can be exercised by him individually and
others alongwith other members
Individual Rights
Members of a company enjoy certain rights in their individual capacity, which they can enforce
individually. These rights are contractual rights and cannot be taken away except with the
written consent of the member concerned. These rights can be categorised as under:
(1) Right to receive copies of the following documents from the company:
(i) Abridged financial statement and auditor’s report in the case of a listed company (Section
136).
(ii) Report of the Cost Auditor.
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(iii) Notices of the general meetings of the company
(2) Right to inspect statutory registers/returns (Register of Members / Register of Charges /
Register of Directors and Shareholders Minute Books) and get copies thereof without payment
on any fee or on payment of prescribed fee.
(3) Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy.
(4) Other rights.
(i) To transfer shares (Sections 44 and 56 and Articles of Association of the company).
(iii) To resist and safeguard against increase in his liability without his written consent.
(iv) To receive dividend when declared.
(v) To have rights shares (Section 62).
(vi) To appoint directors (Section 152).
(vii) To share the surplus assets on winding up (Section 320).
(viii) Right of dissentient shareholders to apply to Tribunal (Section 48).
(ix) Right to be exercised collectively by passing a special resolution and intimating the same
to the Central Government for investigation of the affairs of the company (Section 210).
(x) Right to make application collectively to the Tribunal for relief in cases of oppression and
mismanagement (Sections 241).
(xi) Right to file class action suits before the Tribunal (Section 245)
(xi) Right of Nomination. (Section 72)
(xii) Right to file a suit or take any other action in case of any misleading statement or the
inclusion or omission of any matter in the prospectus. (Section 37)
Collective Membership Rights
1. To apply to NCLT for relief in cases of oppression or for relief in cases of mismanagement
(If and when the majority becomes oppressive or is accused of mismanagement of the affairs
of the company).
2. To make an application to the Board to call an extraordinary general meeting of the company.
If the Board does not, proceed to call a meeting of shareholders, the meeting may be called and
held by the shareholders themselves within a period of 3 months from the date of the
requisition.
Voting Rights of Members
The right of attending shareholders’ meetings and voting thereat is the most important right of
a member of a company, as shareholders’ meetings play a very important role in the company’s
life. Directors are appointed by the shareholders, who direct the affairs of the company,
formulate short-term plans and long-term policies of the company, appoint management
personnel to constitute organisation to implement their plans and policies in order to achieve
the objects of the company.
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In view of the importance of the general meetings of a company, the Companies Act has not
left the members to the will of the directors to call general meetings. If the members feel that
the affairs of the company are not being properly managed by the directors and the directors
are avoiding to call a general meeting of the company, Section 100 of the Companies Act
confers right on members specified therein to deposit a requisition setting out the matters for
the consideration of which the meeting is to be called and if the Board of directors does not
proceed within twenty-one days of the requisition to call a meeting within forty-five days of
the requisition, the requisitionists may themselves call the meeting.
Section 47 provides that every member of a company limited by shares ad holding equity share
capital therein, shall have right to vote on every resolution placed before the company and his
voting right on a poll shall be in proportion to his share in the paid up equity share capital of
the company.
Preference shareholders ordinarily vote only on matters directly affecting the rights attached to
preference share capital and on any resolution for winding up of the company or for the
repayment or reduction of the equity or preference share capital. The voting right of a
preference shareholder on poll shall be in proportion to his share in the paid-up preference
share capital of the company. In respect of a resolution on a matter affecting both equity
shareholders and preference shareholders, the proportion of the voting rights of equity
shareholders to the voting rights of the preference shareholders shall be in the same proportion
as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of
the preference shares. However, where the dividend in respect of a class of preference shares
has not been paid for a period of two years or more, such class of preference shareholders shall
have a right to vote on all the resolutions placed before the company (Section 47).
Section 50 of the Act lays down that a company may, if authorised by its articles, accept from
any member the whole or a part of the amount remaining unpaid on any shares held by him
although no part of that amount has been called up. Such advance payment, however, shall not
confer on the member concerned any voting rights.
Variation of Member’s Rights
Section 48 (1) of the Companies Act, 2013 lays down that the rights attached to the shares of
any class may be varied with the consent in writing of the holders of not less than three-fourths
of the issued shares of that class or by means of a special resolution passed at a separate meeting
of the holders of the issued shares of that class.
LIABILITY OF MEMBERS
The liability of a member depends on the nature of the company.
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If the company is registered with unlimited liability, every member is liable in full for all the
debts of the company contracted during the period of his membership.
Where the company is limited by guarantee, each member will be bound to contribute in the
event of winding up a sum specified in the liability clause of the memorandum of association.
In case of company limited by shares, each member is bound to contribute the full nominal
value of shares and his liability ends there. If before the full nominal value of the shares is paid,
the company goes into liquidation, the member becomes liable as contributory to pay the
balance when called upon to pay, by the liquidator of the company.
9. Directors or Board of Directors of a Company
Introduction
On incorporation, a company becomes an artificial person in the eyes of law, it has a perpetual
succession, its members may come and may go but the company lives till its death as
aforementioned. It is empowered to hold all properties in its own name and in its own right. It
can sue others and can be sued by others in its own name.
In order to enable a company to achieve its objects as enshrined in the objects clause of its
Memorandum of Association, it has necessarily to depend upon some agency, known as Board
of directors.
The Board of directors of a company is a nucleus, selected according to the procedure
prescribed in the Act and the Articles of Association. Members of the Board of directors are
known as directors, who unless especially authorised by the Board of directors of the Company,
do not possess any power of management of the affairs of the company. Acting collectively as
a Board of directors, they can exercise all the powers of the company except those, which are
prescribed by the Act to be specifically exercised by the company in general meeting.
The directors formulate policies and establish organisational set up for implementing those
policies and to achieve the objectives as contained in the Memorandum, muster resources for
achieving the company objectives and control, guide, direct and manage the affairs of the
company.
The Companies Act 2013 does not contain an exhaustive definition of the term “director”.
Section 2(34) of the Act prescribed that “director” means a director appointed to the Board of
a company.
Section 2(10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in
relation to a company, means the collective body of the directors of the company.
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The term ‘Board of Directors’ means a body duly constituted to direct, control and supervise
the affairs of a company.
As per Section 149 of the Companies Act, 2013, the Board of Directors of every company shall
consist of individual only. Thus, no body corporate, association or firm shall be appointed as
director.
Again Section 166 of Companies Act, 2013, prohibits assignment of office of director to any
other person. Any assignment of office made by a director shall be void.
Minimum/Maximum Number of Directors in a Company
Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum
number of 3 directors in the case of a public company, two directors in the case of a private
company, and one director in the case of a One Person Company.
A company can appoint maximum 15 fifteen directors. A company may appoint more than
fifteen directors after passing a special resolution in general meeting and approval of Central
Government is not required.
Number of Directorships
Maximum number of directorships, including any alternate directorship, a person can hold is
20. It has come with a rider that number of directorships in public companies/ private
companies that are either holding or subsidiary company of a public company shall be limited
to 10 i.e., a person cannot be a director of more than 10 public companies.
Indian Resident Director
Every company shall have at least one director who stays in India for a total period of not less
than one hundred and eighty-two days during the financial year.
Woman Director
The following class of companies shall appoint at least one-woman director(i) every listed company;
(ii) every other public company having :(a)paid–up share capital of one hundred crore rupees or more; or
(b)turnover of three hundred crore rupees or more .
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Independent Directors
Independent Directors function as an oversight body in monitoring the performance and should
raise red flags whenever suspicion occurs. They are expected to be more aware and question
the company on relevant issues in their position as trustees of stakeholders.
The institution of independent directors is a critical instrument for ensuring good corporate
governance and it is necessary that the functioning of the institution is critically analysed and
proper safeguards are made to ensure efficacy.
Companies Act 2013 mandates appointment of independent directors by listed companies and
other class of companies. It also prescribes other aspects such as maximum tenure of
independent directors, separate meeting of independent directors, tenure, their qualifications,
liability, appointment, remuneration etc. The Central Government has exempted section 8
companies from the requirement of appointment of Independent Director.
Section 149(6) of the Companies Act, 2013, provides that:
Independent Director, in relation to a company, means a director other than a managing director
or a whole time director or a nominee director (a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience;
In case of Government company, instead of Board, the Ministry or Department of the Central
Government which is administrative incharge of the company.
(b) (i)who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii)who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c)who has or had no pecuniary relationship, other than remuneration as such director or having
transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,
with the company, its holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years or during the current financial
year;
(d) none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate
company during the two immediately preceding financial years or during the current financial
year:
Provided that the relative may hold security or interest in the company of face value not
exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding,
subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters,
or directors,
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(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company or their promoters,
or directors of such holding company,; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or
its holding or associate company amounting to two per cent. or more of its gross turnover or
total income;
(e) who, neither himself nor any of his relatives—
(i)holds or has held the position of a key managerial personnel or is or has been employee of
the company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
(ii)is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of
such firm;
(iii)holds together with his relatives two per cent. or more of the total voting power of the
company; or
(iv)is a Chief Executive or director, by whatever name called, of any nonprofit organisation
that receives twenty-five per cent. or more of its receipts from the company, any of its
promoters, directors or its holding, subsidiary or associate company or that holds two per cent.
or more of the total voting power of the company; or
An independent director is required to possess appropriate skills, experience and knowledge in
one or more fields of finance, law, management, sales, marketing, administration, research,
corporate governance, technical operations or other disciplines related to the company’s
business. Explanation.—For the purposes of this section, “nominee director” means a director
nominated by any financial institution in pursuance of the provisions of any law for the time
being in force, or of any agreement, or appointed by any Government, or any other person to
represent its interests.
Number of Independent Directors
Every listed public company shall have at least one-third of the total number of directors as
independent directors. Any fraction contained in such one third numbers shall be rounded off
as one.
The following class or classes of companies are required to have at least two directors as
independent directors (i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding fifty crore rupees.
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Tenure of Independent Director
An independent director shall hold office for a term up to five consecutive years on the Board
of a company. No independent director shall hold office for more than two consecutive terms
An independent director shall be eligible for appointment after the expiration of three years of
ceasing to become an independent director. During the said period of three years, an
independent director shall not be appointed in or be associated with the company in any other
capacity, either directly or indirectly.
Liability of Independent Director
An independent director; a non-executive director not being promoter or key managerial
personnel, shall be held liable, only in respect of such acts of omission or commission by a
company which had occurred with his knowledge, attributable through Board processes, and
with his consent or connivance or where he had not acted diligently.
Remuneration of Independent Director
An independent director shall not be entitled to any stock option and may receive remuneration
by way of fee provided, reimbursement of expenses for participation in the Board and other
meetings and profit related commission as may be approved by the members.
APPOINTMENT OF DIRECTORS
First Director
The first directors of most of the companies are named in their articles. If they are not so named
in the articles of a company, then subscribers to the memorandum who are individuals shall be
deemed to be the first directors of the company until the directors are duly appointed.
General provisions relating to appointment of directors
1. Every director shall be appointed by the company in general meeting.
2. Director Identification Number (DIN) is compulsory for appointment of director of a
company.
3. Every person proposed to be appointed as a director shall furnish his Director Identification
Number and a declaration that he is not disqualified to become a director under the Act.
Appointment by Shareholders
Directors are appointed at the Annual General Meeting of the company.
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Appointment of Additional Director
The board of directors can appoint additional directors. The number of directors and additional
directors together shall not at any time exceed maximum strength fixed for the Board by the
articles.
Board appoints a director (termed as ‘alternate director) to act in the absence of an original
director during his absence for a period of not less than three months from India.
The right to appoint an alternate director vests in the Board. The original director has no right
to appoint an alternate director. The members have no right to appoint an alternate director.
Appointment of Directors by Nomination
Appointed by the investors, creditors or the financial institutions.
The main objective of appointment of a nominee director is to ensure that borrower company
complies with all legal requirements under various laws. In other words, nominee directors are
watchdogs of the financial institutions to safeguard their investments.
Appointment of Directors in causal vacancy
A ‘casual vacancy’ means any vacancy occurring by reason of death, resignation,
disqualification, removal or for any other reason other than retirement or expiry of tenure of
office of a director. In simple words, if the office of a director comes to an end otherwise than
in the normal course, such vacancy is called as a casual vacancy.
Disqualifications for appointment of director
(1) Grounds of disqualification:
A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence
If a person has been convicted of any offence and sentenced in respect thereof to imprisonment
for a period of seven years or more, he shall not be eligible to be appointed as a director in any
company;
(e) an order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
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(f) he has not paid any calls in respect of any shares of the company held by him, whether alone
or jointly with others, and six months have elapsed from the last day fixed for the payment of
the call;
(g) he has been convicted of the offence dealing with related party transactions under section
188 at any time during the last preceding five years; or
(h) he has not been allotted DIN.
(2) Disqualification by reason of default made by a company:
No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three
financialyears; or
(b) has failed to
-repay the deposits accepted by it or pay interest thereon; or
-redeem any debentures on the due date or pay interest due thereon; or
-pay any dividend declared
and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company
for a period of five years from the date on which the said company fails to do so.
Duties of directors
The duties of directors as contained in section 166 of the Companies Act, 2013 are described
as follows.
1. Duty to act as per the articles of the company
The director of a company shall act in accordance with the articles of the company.
2. Duty to act in good faith
A director of a company shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment.
3. Duty to exercise due care
A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
4. Duty to avoid conflict of interest
A director of a company shall not involve in a situation in which he may have a direct or indirect
interest that conflicts, or possibly may conflict, with the interest of the company.
5. Duty not to make any undue gain
A director of a company shall not achieve or attempt to achieve any undue gain or advantage
either to himself or to his relatives, partners, or associates and if such director is found guilty
of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
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6. Duty not to assign his office
A director of a company shall not assign his office and any assignment so made shall be void.
Removal of directors
1. By the Shareholders
2. By the Central Government
Directors Remuneration
Just as profits drive business, incentives drive the managers of business. Not surprisingly then,
in a fiercely competitive corporate environment, managerial remuneration is an important piece
in the management puzzle. While it is important to incentivize the workforce performing the
challenging role of managing companies, it is equally important not to go overboard with the
perks and the pay. In India, to keep a check on unnecessary profit squandering by companies
and, at the same time, to ensure adequate and reasonable compensation to managerial
personnel, the law intervenes to do the balancing act.
The overall remuneration to the Directors including managing director, whole time director
and Executive Director is summarized as under:
Persons entitled for remuneration
Maximum remuneration
financial year
in
any
Directors including managing director, 11% of the net profits of the company for
whole time director and Executive that financial year
Director of public companies
One Managing director/ Whole time 5% of the net profits of the company for
director/ Executive Director
that financial year
More than one Managing director/ Whole 10% of the net profits of the company for
time director/ Executive Director
that financial year
All the Non-Executive Directors, if the 3% of the net profits of the company for
company do not have any MD / WTD / ED that financial year
All the Non-Executive Directors, if the 1% of the net profits of the company for
company have MD / WTD / ED also
that financial year
The company may pay remuneration in excess of the limits prescribed above, subject to the
Approval by a special resolution of the company in general meeting.
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Sitting Fees to Directors for Attending the Meetings
A director may receive remuneration by way of fee for attending the Board/Committee
meetings or for any other purpose.
The Central Government prescribed that the amount of sitting fees payable to a director for
attending meetings of the Board or committees thereof shall not exceed the sum of rupees 1
lakh per meeting of the Board or committee thereof.
Monthly Remuneration to Director
A director may be paid remuneration either by way of a monthly payment or at a specified
percentage of the net profits of the company or partly by one way and partly by the other.
[Section 197 (6)]
Remuneration to Directors in other Capacity
The remuneration payable to the directors including managing or whole-time director shall be
inclusive of the remuneration payable for the services rendered by him in any other capacity
except the following:
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee or the Board of Directors
in other cases, the director possesses the requisite qualification for the practice of the
profession.
10. General Meetings
A meeting may be generally defined as a gathering or assembly or getting together of a number
of persons for transacting any lawful business.
There must be atleast two persons to constitute a meeting. Therefore, one shareholder usually
cannot constitute a company meeting even if he holds proxies for other shareholders.
It is to be noted that every gathering or assembly does not constitute a meeting. Company
meetings must be convened and held in perfect compliance with the various provisions of the
Companies Act, 2013 and the rules framed thereunder.
A company is composed of members, though it has its own entity distinct from members. The
members of a company are the persons who, for the time being, constitute the company, as a
corporate entity. However, a company, being an artificial person, cannot act on its own. It,
therefore, expresses its will or takes its decisions through resolutions passed at validly held
Meetings.
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The primary purpose of a Meeting is to ensure that a company gives reasonable and fair
opportunity to those entitled to participate in the Meeting to take decisions as per the prescribed
procedures.
The decision making powers of a company are vested in the Members and the Directors and
they exercise their respective powers through Resolutions passed by them.
General Meetings of the Members provide a platform to express their will in regard to the
management of the affairs of the company. Convening of one such meeting every year is
compulsory. Holding of more general meetings is left to the choice of the management or to a
given percentage of shareholders to exercise their power to compel the company to convene a
meeting.
A company is required to hold meetings of the members to take approval of certain business
items, as prescribed in the Act. The meetings to be held for seeking approval to ordinary
business and special business are called annual general meeting and extraordinary general
meeting. In certain cases, a company may have to hold a meeting of the members of a particular
class of members.
There are three kinds of Meetings:
1. Annual General Meeting
2. Extra General Meeting
3. Class Meeting
Annual General Meetings
Annual general meeting (AGM) is an important annual event where members get an
opportunity to discuss the activities of the company.
Section 96 provides that every company, other than a one person company is required to hold
an annual general meeting every year.
Following are the key provisions regarding the holding of an annual general meeting: Holding
of annual general meeting
1. Annual general meeting should be held once in each calender year.
2. Subsequent Annual general meeting of the company should be held within 6 months from
the date of closing of the relevant financial year.
3. The gap between two annual general meetings shall not exceed 15 months.
The three time limits given above are separate and cumulative. Non-compliance of any of them
would constitute an offence. Therefore, the last date for holding AGM shall be the earliest of
the above three limits.
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A one person company is exempt from holding an AGM.
Date, Time and place for holding an annual general meeting
An annual general meeting can be called during business hours, that is, between 9 a.m. and 6
p.m. on any day that is not a National Holiday.
It should be held either at the registered office of the company or at some other place within
the city, town or village in which the registered office of the company is situated.
Annual general meeting of an unlisted company may be held at any place in India if consent is
given in writing or by electronic mode by all the members in advance.
Business to be transacted at annual general meeting:
Following Ordinary Business is transacted at any Annual General Meeting:
(i)
the consideration of financial statements and the reports of the Board of Directors
and auditors;
(ii)
the declaration of any dividend;
(iii) the appointment of directors in place of those retiring;
(iv)
the appointment of, and the fixing of the remuneration of, the auditors.
All business except specified above shall be deemed as special business at an AGM.
In case of any other Meeting, all business shall be deemed to be special.
Extra Ordinary General Meeting (Section 100)
There are so many matters relating to the business of a company, which requires approval
or consent of members in general meeting. It is always not possible for consideration of
such matters to wait until the next annual general meeting. The articles of association of
the company of the company make provisions for convening general meeting other than
the annual general meeting. All general meetings other than annual general meeting are
called extraordinary general meetings.
Who Can Call Shareholders Meetings
1. By the Board: The Board may, whenever it deems fit, call an extraordinary general
meeting of the company
2. By the Board on the request / demand / requisition of Shareholders: The Board
shall, call an extraordinary general meeting on receipt of the requisition / demand /
request from the shareholders (holding minimum one tenth of the equity share capital
or voting rights).
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3. By the Shareholders themselves: If the Board does not within 21 days from the date
of receipt of a valid requisition / demand or request, proceed to call a meeting, the
meeting may be called and held by the shareholders themselves.
4. By National Company Law Tribunal: Section 98 provides that if for any reason it is
impracticable to call or conduct a meeting of a company, the Tribunal may order a
meeting to be called.
Class Meetings
Class meetings are meeting of shareholders, holding a particular class of share which is held to
pass resolution which will bind only the members of the class concerned. Only members of the
class concerned may attend and vote at meeting.
These class meetings must be convened whenever it is necessary to alter or change the rights
or privileges of that class as provided by the articles. For effecting such changes, it is necessary
that these are approved at a separate meeting of the holders of those shares and supported by a
special resolution.
Procedure for convening of a valid general meeting
The business at a meeting is said to have been “validly transacted” if the members of the
organisation or body concerned, whether or not they were present, are bound by the decision
made there at. They cannot be so bound unless the meeting is validly held.
The essentials of a valid meeting are that the meeting should be:
(a) Properly convened:
(i) The meeting must be called by proper authority; and
(ii) Proper notice must be served
(b) Properly constituted:
(i) Proper quorum must be present in the general meeting
(ii) Proper chairman must preside the meeting
(c) Properly conducted:
(i) The business must be validly transacted at the meeting i.e. resolutions must be properly
moved and passed, and voting by show of hands and on poll.
(ii) Proper minutes of the meeting must be prepared.
Notice of Meeting (Section 101)
A general meeting of a company may be called by giving not less than 21 clear days’ notice
either in writing or through electronic mode.
Notice through electronic mode shall be given in such manner as may be prescribed.
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‘Clear days’ means days exclusive of the day of the notice of service and of the day on which
the meeting is held. Where a notice of general meeting is sent by post, it shall be deemed to be
served at the expiration of 48 hours after the letter containing the same is posted
Each of the 21 days must be full or complete days. The day on which the notice is deemed to
be served on the member, and the day of the general meeting have to be in addition to the 21
days.
Persons entitled to receive Notice
Notice of every meeting of the company must be given to:
(a) every member of the company;
(b) the auditor or auditors of the company; and
(c) every director of the company.
Quorum for Meetings
Quorum refers to the minimum number of members required to constitute a valid meeting.
Following are the minimum numbers for various categories of companies.
(a) Public company:
─5 members personally present if the number of members as on the date of meeting is not more
than 1000;
─15 members personally present if the number of members as on the date of meeting is more
than 1000 but up to 5000;
─30 members personally present if the number of members as on the date of the meeting
exceeds 5000.
(b) Private company:
─2 members personally present, shall be the quorum for a meeting of the company
However, the Articles of Association of the company may provide for a higher number.
Proxies
A person who is appointed by a member to attend and vote at a meeting in the absence of the
member at the meeting is termed as proxy.
Thus, proxy is an agent of the member appointing him. The term ‘proxy’ is also used to refer
to the instrument by which a person is appointed as proxy.
Section 105 of the Companies Act, 2013 provides that a member, who is entitled to attend to
vote, can appoint another person as a proxy to attend and vote at the meeting on his behalf.
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This section also provides the manner of appointing proxy. The provisions are as follows.
(1) Who can appoint a proxy: Any member of a company who is entitled to attend and vote at
a meeting of the company shall be entitled to appoint another person as a proxy to attend and
vote at the meeting on his behalf.
(2) Disabilities of proxy: A proxy shall not have the right to speak at the meeting. A proxy
cannot vote on a show of hands. A proxy is not counted for the purpose of quorum.
(3) Rights of proxy: A proxy has the right to attend the meeting. A proxy has the right to vote
only on a poll.
(4) Time limit for deposit of proxy forms: The instrument appointing the proxy must be
deposited with the company, 48 hours before the meeting.
Voting by Show of Hands
At any general meeting, a resolution put to the vote of the meeting shall in the first instance be
decided on a show of hands, unless a poll is demanded or (b) Voting is carried out
electronically.
A declaration by the Chairman of the meeting of the passing of a resolution (that the resolution
has been passed or failed, as the case may be) on show of hands and an entry to that effect in
the minutes book shall be conclusive evidence of the fact of passing of such resolution. No
proof of numbers of votes casts in favor of and against the resolution is required.
Voting through Electronic Means
General meetings of companies are held at their registered offices and it is not possible for
every member specially members holding minor shares to travel up to the registered office of
the company and participate in the general meetings of the company. To eliminate this type of
difficulty and to enhance the participation of minority members, concept of e-voting has been
introduced by the Companies Act 2013. Now a member can cast his vote easily through
electronic mode without physically attending the general meeting.
E-voting do not eliminate members right to physically attend and vote at the general meeting.
However member can cast his vote through one mode only. A member after casting his vote
through e-voting can go and attend the general meeting but cannot cast vote in that general
meeting. The facility of Remote e-voting does not dispose with the requirements of holding a
General Meeting by the company.
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Demand for Poll
Before or on the declaration of the result of the voting on any resolution on show of hands, a
poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall
be ordered to be taken by him on a demand made in that behalf by the members (having not
less than one-tenth of the total voting power).
Where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons,
as he deems necessary, to scrutinise the poll process. The result of the poll shall be deemed to
be the decision of the meeting on the resolution on which the poll was taken.
Postal Ballot
Meaning of postal ballot: As per section 2(65) “postal ballot” means voting by post or through
any electronic mode. It includes voting by shareholders by postal or electronic mode instead of
voting personally for transacting businesses in a general meeting of the company.
A company shall send a notice and draft resolution by registered post to all shareholders
explaining the reasons and requesting them to send their assent or dissent in writing on a postal
ballot.
If a resolution is assented to by the requisite majority of the shareholders by means of postal
ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf.
Ordinary and Special Resolutions
Ordinary Resolution:
A resolution shall be an ordinary resolution if it is required to be passed by the votes cast, in
favour of the resolution, by members, exceed the votes, if any, cast against the resolution by
members.
Special Resolution:
A resolution shall be a special resolution when the votes cast in favour of the resolution, by
members are required to be not less than three times the number of the votes, if any, cast against
the resolution by members.
11. Share Capital
MEANING OF THE TERM “CAPITAL”
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The term “Capital” has variety of meanings. A layman views capital as the money, which a
company has raised by issue of its shares. It uses this money to meet its requirements by way
of acquiring business premises and stock-in-trade, which are called the fixed capital and the
circulating capital respectively. In relation to a company limited by shares, the word “capital”
means the share capital i.e., the capital in terms of rupees divided into specified number of
shares of a fixed amount each. For e.g. share capital of a company is `1,00,000 which can be
divided into 10,000 shares of `10 each or 1,000 shares of `100 each, whichever is feasible to
the company.
In Company Law, the “Capital” is the share capital of a company, which is classified as:
(a) Nominal, Authorised or Registered Capital: As per section 2(8), “authorised capital” or
“nominal capital” means such capital as is authorised by the memorandum of a company to be
the maximum amount of share capital of the company.
(b) Issued Capital: As per section 2(50), “issued capital” means such capital as the company
issues from time to time for subscription. It is that part of the authorised or nominal capital
which the company issues for the time being for public subscription and allotment. This is
computed at the face or nominal value.
(c) Subscribed Capital: According to Section 2(86), “subscribed capital” means such part of
the capital which is for the time being subscribed by the members of a company. It is that
portion of the issued capital at face value which has been subscribed for or taken up by the
subscribers of shares in the company. It is clear that the entire issued capital may or may not
be subscribed.
(d) Called up Capital: As per section 2(15), “called-up capital” means such part of the capital,
which has been called for payment. It is that portion of the subscribed capital which has been
called up or demanded on the shares by the company
(e) Paid-up Share Capital: As per section 2(64), “paid-up share capital” or “share capital
paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the
amount received as paid-up in respect of shares issued and also includes any amount credited
as paid-up in respect of shares of the company, but does not include any other amount received
in respect of such shares, by whatever name called.
(g) Preference and Equity Share Capital:
‘Equity share capital’’, with reference to any company limited by shares, means all share
capital which is not preference share capital;
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‘‘Preference share capital’’, with reference to any company limited by shares, means that part
of the issued share capital of the company which carries or would carry a preferential right with
respect to (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up.
A preference share has a preference in regard to payment of fixed amount of dividend or fixed
rate of dividend and preferential right of the repayment of capital in the event of winding up of
company
KINDS OF SHARES
Section 43 of the Companies Act, 2013 permits a company limited by shares to issue two
classes of shares, namely:
(a) Equity share capital –
(i)
(ii)
With voting rights; or
With differential rights as to dividend, voting or otherwise.
(b) Preference Share Capital
ISSUE OF SECURITIES AT A PREMIUM
A company may issue securities at a premium when it is able to sell them at a price above par
or above nominal value. The Companies Act, 2013, does not stipulate any conditions or
restrictions regulating the issue of securities by a company at a premium. However, the
Companies Act does impose conditions regulating the utilization of the amount of premium
collected on securities.
Section 52 (1) states that when a company issues shares at a premium, whether for cash or
otherwise, a sum equal to the aggregate amount of the premium received on those shares shall
be transferred to a “securities premium account”.
PROHIBITION TO ISSUE THE SHARES AT DISCOUNT
Section 53 states that a company shall not issue shares at a discount (exception - the issue of
sweat equity shares).
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ISSUE OF SWEAT EQUITY SHARES
According to section 2(88), sweat equity shares mean equity shares issued by a company to its
directors or employees at a discount or for consideration, other than cash for providing knowhow or making available rights in the nature of intellectual property rights or value additions,
by whatever name called.
SHARES WITH DIFFERENTIAL VOTING RIGHTS
While Section 43 enables companies to issue equity shares with differential rights as to
dividend, voting rights etc.
Right Shares (Right Issue)
Whenever at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares shall be offered to the existing holders of
equity shares in proportion to the paid-up share capital on their shares at the time of further
issue by sending a letter of offer.
The company must give notice to each of the equity shareholders, giving him option to take
the shares offered to him by the company. The shareholder must be informed of the number of
shares he has opted to buy giving him at least 15 days but not more than 30 days to decide.
If the shareholder does not convey to the company his acceptance of the company’s offer of
further shares he shall be deemed to have declined the offer.
If a shareholder has neither renounced in favour of another person nor accepted the shares, the
Board of directors may dispose of the shares so declined in such manner which is not disadvantageous to the shareholders and the company.
BONUS SHARES
A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.
The issue of bonus shares by a company is a common feature. When a company is prosperous
and accumulates large distributable profits, it converts these accumulated profits into capital
and divides the capital among the existing members in proportion to their entitlements.
Members do not have to pay any amount for such shares. They are given free. The bonus shares
allotted to the members do not represent taxable income in their hands.
Issue of bonus shares is a bare machinery for capitalizing undistributed profits.
Advantages of Issuing Bonus Shares
1. Fund flow is not affected adversely.
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2. Market value of the Company’s shares comes down to their nominal value by issue of
bonus shares.
3. Market value of the members’ shareholdings increases with the increase in number of
shares in the company.
4. Bonus shares is not an income. Hence it is not a taxable income.
5. Paid-up share capital increases with the issue of bonus shares.
EMPLOYEE STOCK OPTION SCHEME
The term ‘Employee Stock Option’ (ESOP) means the option given to the directors, officers or
employees of a company or of its holding company or subsidiary company or companies, if
any, which gives such directors, officers or employees, the benefit or right to purchase, or to
subscribe for, the shares of the company at a future date at a pre-determined price.
Rule 12(6)(a) states that there shall be a minimum period of one year between the grant of
options and vesting of option.
Rule 12(6)(c) states that the Employees shall not have right to receive any dividend or to vote
or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till
shares are issued on exercise of option.
Rule 12(8) states the following conditions:
• The option granted to employees shall not be transferable to any other person.
• The option granted to the employees shall not be pledged, hypothecated, mortgaged or
otherwise encumbered or alienated in any other manner.
• No person other than the employees to whom the option is granted shall be entitled to exercise
the option.
ISSUE OF SHARES ON PREFERENTIAL BASIS
Section 62(1)(c) deals with issue of shares to persons other than existing shareholders and
provides that a company can issue further shares to persons other than existing shareholders
either for cash or for a consideration other than cash.
BUY BACK OF SECURITIES
According to Section 68(1) of the Companies Act, 2013, a company may purchase its own
shares or other specified securities out of:
(i)
its free reserves; or
(ii)
the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
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Thus, the company must have at the time of buy-back, sufficient balance in any one or more of
these accounts to accommodate the total value of the buy-back.
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back
is not more than twice the paid-up capital and its free reserves.
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