1 P a g e K N O W L E D G E E X P R E S S C O L A W L D R

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1 1 P a g e K N O W L E D G E E X P R E S S C O L A W L D R CHAP 1 INTRODUCTION Definition & Meaning of a Company: company is derived from the Latin word (Com=with or together; panis =bread) a joint stock enterprise in which the capital is contributed by several people. corporate body, a legal person,status and personality distinct and separate from members. an association of both natural and artificial persons. Corporate personality: has a seal of its own and its assets are separate and distinct from those of its members. capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued. Limited Liability: 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. Perpetual Succession: incorporated company never dies, except when it is wound up as per law. unaffected by death or departure of any member and it remains the same entity Separate Property: capable of owning, enjoying and disposing of property in its own name. no member can claim himself to be the owner of the company s property. Transferability of Shares: shares are said to be movable property. freely transferable, so that no shareholder is permanently or necessarily wedded to a company. Capacity to Sue and Be Sued: can sue and be sued in its own name. legal proceedings against the company are to be instituted in its name. Separate Management: company is administered and managed by its managerial personnel. DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL: separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Court will break through the corporate shell and apply the principle/doctrine of what is called as lifting of or piercing the corporate veil. make the members or the controlling persons liable for debts and obligations of the company. Is Company a Citizen?: though a legal person, is not a citizen under the Citizenship Act, ILLEGAL ASSOCIATION: An unincorporated company, association or partnership consisting of large number of persons has been declared illegal. Rule 10 of Companies( Miscellaneous) Rules, 2014 prescribes 50 persons in this regard. The number of persons which may be prescribed under this section shall not exceed 100. an illegal association: (i) cannot enter into any contract; (ii)cannot sue any member, or outsider, not even if the company is subsequently registered; (iii) cannot be sued by a member, or an outsider for recovery of any debts; (iv) cannot be wound up by an order of the Court. An illegal association is liable to be taxed. CHAP 2 on the basis of Incorporation: Statutory Companies, Registered Companies, TYPES OF COMPANY on the basis of Liability: Unlimited Liability Companies, Companies limited by guarantee, Companies limited by shares. Other Forms of Companies: (a) Associations not for profit (b)government Companies; (c) Foreign Companies; (d) Holding and Subsidiary Companies; (e) Associate Companies/Joint Venture Companies (f) Investment Companies (g) Producer Companies. (h) Dormant Companies PRIVATE COMPANY : restricts the right to transfer its shares, except in case of One Person Company, limits the number of its members to two hundred (following persons shall not be included in the number of members: persons who are in the employment of the company; and 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.) prohibits any invitation to the public to subscribe for any securities. If the pvt company alters its articles and removes any of the above clauses then it cease to function as a pvt company, it will be regarded as a pub company. Min no members=2

2 2 P a g e K N O W L E D G E E X P R E S S C O L A W L D R 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. ONE PERSON COMPANY (OPC) : (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. (2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company (3) No minor shall become member or nominee of the One Person Company (4) cannot be converted into OPC (5) cannot carry out Non-Banking Financial Investment activities. SMALL COMPANY: other than a public company, (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; or (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this definition shall apply to (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act; PUBLIC COMPANY: (a) is not a private company; (b) has a minimum paid-up share capital of such amount paid-up capital, as may be prescribed. Min no members=7 Subsidiary of a pub comp is deemed to be a pub comp. LIMITED COMPANY : (a) a company limited by shares: liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. ; or (b) a company limited by guarantee: 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. or (c) an unlimited 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 ASSOCIATION NOT FOR PROFIT : Section 8 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. the company prohibits payment of any dividend to its members but intends to apply its profits or other income in promotion of its objects. No capital- No Ltd/Pvt Ltd in name. Require CG approval for changing Object clause in MOA GOVERNMENT COMPANIES: 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. employees of Government companies are not Government servants, they have no legal right to claim that the Government should pay their salary. Auditor Appointed by Comptroller & Auditor General FOREIGN COMPANIES: 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 Holding company: means a company of which such companies are subsidiary companies. Subsidiary 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 share capital either at its own or together with one or more of its subsidiary companies Subsidiary company not to hold shares in its holding company: Following are the circumstances, where a subsidiary can hold the shares of its holding company: (a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or (b) where the subsidiary company holds such shares as trustee; or (c) where the subsidiary

3 3 P a g e K N O W L E D G E E X P R E S S C O L A W L D R company is a shareholder even before it became a subsidiary company of the holding company Associate company : means a company in which that other company has a significant influence, but which is not a subsidiary company. significant influence means control of at least twenty per cent. of total share capital, or of business decisions under an agreement. PUBLIC FINANCIAL INSTITUTIONS: (i) the Life Insurance Corporation of India (ii) the Infrastructure Development Finance Company Limited (iii) specified company referred to in the Unit Trust of India (iv) institutions notified by the Central Government. (v) such other institution as may be notified by the Central Government. Characteristics of Statutory Corporations Characteristics of Statutory Corporations: owned by the State, created by a special law of Parliament or State Legislature, statutory corporation is a body corporate and can sue and be sued. CHAP 3 PROMOTION &INCORPORATION OF COMPANIES "Promoter" means a person: named as such in a prospectus / identified by the company in annual return/ control over the affairs of the company/ whose advice, directions or instructions the Board of Directors of the company is accustomed to act.( shall not apply to a person who is acting merely in a professional capacity.) A promoter is not forbidden to make profit but he should not make any secret profit. promoter is neither an agent of, nor a trustee for, the company because it is not in existence. But he occupies a fiduciary position in relation to the company. Ratification of promoter's contracts: (Kelner v. Baxter) company cannot ratify contract made by a promoter before its incorporation. Specific performance may be enforced. other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation. LIABILITIES OF PROMOTERS : 1. Incorporation of company by furnishing false information 2. promoter(s) may be held liable for the non-compliance of the provisions of the Act. 3. Civil Liability for misstatements in prospectus. 4. Punishment for fraudulently inducing persons to invest money.5. Contravention of provisions relating to private placement. 6. Liability during Revival and Rehabilitation of companies. 7. Failure to cooperate with Company Liquidator during winding up Right Expenses to receive preliminary: A promoter has no legal right to claim promotional expenses for his services unless there is a valid contract. he is not even entitled to recover his preliminary expenses. articles will have provision for payment of preliminary expenses. such payments should not be Ultra Vires the articles of the company. 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 that is to say, a private company. HOW TO INCORPORATE A COMPANY UNDER COMPANIES ACT 2013: Apply to the registrar for name availability of the company. The registrar may reserve the name for 20 days for New & 60 days for existing companies from date of application. Memorandum shall state :- 1: Name of company. 2:- State of ROC 3:-Objectives of company 4:- Liability of members 5:- Share capital details. Articles of company shall contain the regulation for management. The certificate of incorporation is conclusive evidence.

4 4 P a g e K N O W L E D G E E X P R E S S C O L A W L D R Name of company shall not : (a) be identical with or resemble too nearly to the name of an existing company or (b) be such that its use by the company- (i) will constitute an offence under any law or (ii) is undesirable in the opinion of the Central Government. (iii) 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 (iv) such word or expression, as may be prescribed. VETTING : Checking by ROC about Disclosures at incorporation not regarding correctness of information Documents : DIR-12, INC-22, INC-7,8,9 for consent of Director, registered office, declaration by professional, affidavit., power of attorney CHAP 4 MEMORANDUM & ARTICELS OF ASSOCIATION Memorandum of Association is a document which sets out the constitution of a company, foundation on which the structure of the company is built. It is to be noted that the Companies Act, 2013 shall override the provisions in the memorandum of a company, if the latter contains anything contrary to the provisions in the Act. CONTENTS OF MEMORANDUM: i) name of the company,ii) State in which the registered office of the company is to be situated, iii)objects for which the company incorporated, iv) liability of members of the company, v) company having a share capital: amount of share capital to be registered, number of shares, vi) in the case of a One Person Company, the name of the person who, in the event of the death of the subscriber, shall become the member of the company. DOCTRINE OF ULTRA VIRES: whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires, an act which is ultra vires is void, does not bind the company, company nor the contracting party can sue on it, act which is intra vires the company but outside the authority of the directors may be ratified by the company, (Rajendra Nath Dutta v. Shilendra Nath Mukherjee) Shareholders cannot ratify act ultra vires the memorandum. Effects of ultra vires Transactions : (i) Void ab initio (ii) Injunction (iii) Personal liability of Directors (iv) Ultra vires borrowing does not create the relationship of creditor and debtor. ALTERATION OF MEMORANDUM OF ASSOCIATION : a company shall, in relation to any alteration of its memorandum, file with the Registrar the special resolution passed by the company, no alteration made under this section shall have any effect until it has been registered, Name change clause: - Pass special resolution - approval of CG - To delete the word "private" approval from CG is not required. Change in Registered office:- Change within local limits: Pass Board resolution, pass SR, notice of change to registrar with 30 days. Change of state: Approval of CG, approval should be registered with registrar. Creditors Approval Change in jurisdiction of Registrar: confirmation with regional director to be communicated to the company within 30 days. Creditors approval Change in Object: Pass SR, file SR with registrar. Change in Liability: Pass SR, file with registrar. Change in Capital: Alteration to be authorized by articles. if not then pass OR and alter articles. CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES : memorandum and articles, when registered, become public documents, can be inspected by anyone on payment of nominal fee. person who enters into a contract with a company has the means of ascertaining and is consequently presumed to know the memorandum. is deemed to have a constructive notice DOCTRINE OF INDOOR MANAGEMENT : the principal of indoor management operates to protect the outsiders against the company., 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. eg: if SR is required for a particular transaction the outside party can assume that SR has been passed. Outsiders are bound to know the external position of the company, but are not bound to know its indoor management. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT : 1. Where the outsider had knowledge of

5 5 P a g e K N O W L E D G E E X P R E S S C O L A W L D R irregularity 2. No knowledge of memorandum and articles 3. Forgery 4.Negligence 5: the doctrine of indoor management does not apply where the question is in regard to the very existence of an agency 6. This Doctrine is also not applicable where a pre-condition is required to be fulfilled before company. DOCTRINE OF ALTER EGO : used by the courts to ignore the status of shareholders, officers, and directors of a company in reference to their liability in their respective capacity so that they may be held personally liable for their actions when they have acted fraudulently or unjustly. GENERAL PROCEDURE TO ALTER CLAUSES OF MOA & AOA Issue 7 days notice and call board meeting. Intimate stock exchange 2 days prior to board meeting. Conduct board meeting and discuss & take decision. Intimate stock exchange within 15 min about decision taken by board. Issue 21 days clear notice to call GM, draft resolution (If SR is needed), draft explanatory statement. Intimate stock exchange 2 days prior to GM. Conduct GM. Intimate stock exchange within 15 min about decision taken GM. CHAP 5 CONVERSION OF COMPANIES Private company to public company Public company to private company Section 8 company tp any other kind One person company to Private/Public company Private company to one person company Pass S.R File INC 27 with registrar File MGT 14 for S.R Pass S.R File form INC 27 with Registrar Get NCLT approval File MGT 14 for S.R Pass S.R Application to regional director in INC 18 Declaration that no dividend is paid NOC from authority No failure in filing financial statement Certificate for PCS/CA/CWA Voluntary after 2 years and not into sec 8 co. Compulsory if paidup capital exceeds 50 lakhs or turnover 2 crores Minimum number of member and directors to be increased Paidup capital less than 50 lakhs or turnover less than 2 crores NOC from member and creditors and then S.R in G.M Application in INC 6 Declaration by directors CHAP 6 USE OF THE WORD CAPITAL IN DIFFERENT SENSES CONCEPT OF CAPITAL AND FINANCING OF COMPANY (a) Nominal, Authorised or Registered Capital: capital authorised by the memorandum of a company to be the maximum amount of share capital of the company. (b) Issued Capital capital as the company issues from time to time for subscription. It is that part of the

6 6 P a g e K N O W L E D G E E X P R E S S C O L A W L D R 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. (d) Called up Capital: As per section 2(15), called-up capital means such part of the capital, which has been called for payment. (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. (g) Preference and Equity Share Capital: As per explanation to Section 43 equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital; preference share capital, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right S. No Preference capital Equity share capital 1 fixed rate of dividend. The rate of dividend on equity shares depends upon the amount of profit available 2 Dividend is paid in preference to the equity shares. 3 In case of winding up, preference share holder get preference over equity share holders The dividend on equity shares is paid only after the preference dividend has been paid. In case of winding up, equity share holder get payment of capital after the payment of capital to preference shareholders. 4 Dividend may be cumulative. The dividend on equity shares is not cumulative. 5 The voting rights of preference shareholders are restricted 6 No bonus shares/right shares are issued to preference share holders. 7 Redeemable preference shares may be redeemed by the company. 8 Voting right of a preference shareholders on a poll shall be in proportion to his share in the paid-up preference share capital of the company. An equity shareholder can vote on all matters affecting the company. A company may issue rights shares or bonus Equity shares cannot be redeemed except under a scheme involving reduction of capital or buy back of its own shares. Voting right of an equity shareholders on a poll shall be in proportion to his share in the paidup equity share capital of the company. Utilisation of Securities premium (a) issuing fully paid bonus shares to members; (b) writing off the balance of the preliminary expenses of the company; (c) writing off commission paid or discount allowed, or the expenses incurred on issue of shares or debentures of the company; (d) for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company; or (e) for the purchase of its own shares or other securities under section 68. Preferential issue Pass special resolution -Listed company shall follow SEBI regulations -Issue to be authorised by the articles -Securities to be made fully paid up on allotment -Disclosures to be made in explanatory statement to be annexed to the notice of general meeting -Allotment to get completed within 12 months if not completed a fresh

7 7 P a g e K N O W L E D G E E X P R E S S C O L A W L D R resolution is required - Price determination by the registered valuer s report ESOP Issue of shares at premium Pass special resolution -Disclosures to be made in explanatory statement -Free pricing in conformity with accounting policies -Separate resolution to be obtained for granting options to employees of holding/subsidiaries -Minimum 1 year period between grant of options and vesting of option -Company is free to set lock-in period -Option granted shall not be transferable, pledged, hypothecated, mortgaged in any manner -Disclosures to be made in board report -Register to be maintained in form sh-6 -Listed companies to comply with SEBI guidelines Share premium to be transferred to share premium account -Utilisation of share premium account should be as prescribed in section 52 Issue of shares with differential voting rights Issue/Redemption of preference shares Right issue/further issue of shares Bonus shares Articles to authorise the issue -Ordinary resolution to be passed and if shares are listed then approval through postal ballot. -Not to exceed 26% of total post issue paid up equity capital including shares with differential voting rights at any point of time -The company not to be penalised under specified legislature in last 3 years -No default in filing financial statements in the last 3 years. -No default in payment of dividend Issue to be authorised by special resolution -Explanatory statement to be annexed to the notice of general meeting containing the relevant material facts -No company shall issue irredeemable preference shares of redeemable preference shares with the redemption period beyond 20 years. - infrastructural companies may issue preference shares for a period exceeding 20 years but not exceeding 30 years Listed companies to inform concerned stock exchanges -Company to give notice to equity shareholder giving him days to decide -Company can issue shares to other than existing share holder for cash or other than cash if a special resolution is obtained -Price to be determined by the registered valuer s report -The provisions of section 62 are applicable to all type of companies -Authorised by articles -Authorised on recommendation of the board in general meeting -No default in payment of interest or principle in respect of debt securities and fixed deposits and in respect of payment to employees -Partly paid up shares to be made fully paid up on allotment -Listed companies to follow SEBI regulations -Once announced by the board about bonus issue no company shall withdraw the same CHAP 7 ALTERATION OF SHARE CAPITAL Section 61, a company if so authorized by its articles, alter, by an ordinary resolution, its memorandum in the following ways: (a) It may increase the authorized share (b) It may consolidate and divide, all or any of its

8 8 P a g e K N O W L E D G E E X P R E S S C O L A W L D R existing shares into a larger denomination (c) It may convert all or any of its fully paid-up shares into stock or reconvert that stock into fully paid-up shares. (d)it may sub-divide its existing shares or any of them into smaller denomination. (e) It may cancel shares which have not been taken up or agreed to be taken by any person. Share Shares in physical form bear distinct numbers Shares may or may not be fully paid-up Shares have a nominal value All shares are of equal denomination It is not possible to transfer shares into fraction Shares comes into existence before the stock and it is issued initially Stock Stocks are the consolidated value of share capital Stock is always fully paid-up Stock does not have any nominal value Denomination of stocks varies Stock is divisible into any amount required. Thus, it is possible to transfer even into fractions Stock comes into existence after conversion of shares into stock and on conversion of shares into stock, the provisions of the Act governing the shares shall cease to apply to the share capital as it is converted into stock REDUCTION OF CAPITAL TO BE APPROVED BY SPECIAL RESOLUTION AND CONFIRMED BY THE TRIBUNAL [SECTION 66(1)] No Reduction of Capital would be allowed in case of Arrears In the Repayment of Deposits and Interest thereon [Proviso to Section 66(1)]. BUY BACK OF SECURITIES: Sources : (i) its free reserves; or (ii) the securities premium account; or (iii)the proceeds of any shares or other specified securities. no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. Authorisation : primary requirement is that the articles of association of the company, with the approval of the Board of directors at a board meeting and/or by a special resolution passed by shareholders. Quantum: Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves. Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves. Every buy-back shall be completed within a period of one year The buy-back may be a) from the existing shareholders or security holders on a proportionate basis; (b) from the open market; (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. Alteration of share capital Alteration of share capital is governed by the provisions of section 61 of the Companies Act, Alteration of share capital is required to be done by ordinary resolution. Alteration of share capital is not required to be confirmed by the Tribunal. Alteration of share capital may be done in the following manner:- (a) Increasing its nominal capital by issuing new shares (b) Consolidating and dividing all or any of its share capital into shares of large denomination (c) Converting fully paid up shares into stock or vice versa (d) Sub dividing its shares or any of them into shares of smaller amount (e) Canceling shares which have not been taken up and diminishing the amount of share capital by the amount of the shares so cancelled. Reduction of share capital Reduction of share capital is governed by the provisions of section 66 of the Companies Act, Reduction of share capital is required to be done by special resolution. Reduction of share capital is to be confirmed by the Tribunal. Reduction of share capital may be done in the following manner:- (a) Extinguishing or reducing the liability of members in respect of the capital not paid up (b) Writing off or canceling any paid up capital which is in excess of the needs of the company (c) Paying off any paid up share capital which is in excess of the needs of the company

9 9 P a g e K N O W L E D G E E X P R E S S C O L A W L D R CHAP 8 PRIVATE PLACEMENT AND PROSPECTUS MEANING AND DEFINITION OF PROSPECTUS : a document should have following ingredients to constitute a prospectus: (a) There must be an invitation to the public; (b) The invitation must be made by or on behalf of the company or in relation to an intended company ; (c) The invitation must be to subscribe or purchase ; (d) The invitation must relate to any securities of the company. An Offer or invitation for subscription to securities through issue of private placement Record of offer Information of the offer to be made to registrar Prohibition of advertisement of private placement offer Return of allotment to be filed with Reistrar PRIVATE PLACEMENT Offer Letter to be in Form No. PAS-4 The offer shall not be made to more than 200 persons excluding QIBs and the employees of the company in a financial year under the scheme of ESOS only the person addressed in the application can apply All monies payable on subscription shall not be paid by cash. The company making invitation shall allot the securities within 60 days from the date of receipt of allotment Money received shall be kept in a separate bank account in a scheduled bank. -Offer only to be made to those whose names are recorded by the company -The record shall be kept in Form No. PAS-5 Within 30 days of circulation of private placement offer letter inform Registrar The company shall not use: Any public advertisement Any media marketing or distribution channels Or any agents to advertise private placement offer Return of allotment of securities under section 42 in Form No. PAS-3 to be filed with registrar within 30 days along with fee Deemed Prospectus : Section 25(1) states that when a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of misstatements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. Shelf Prospectus "Shelf Prospectus" means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. Information Memorandum to be filed before the issue of a second or subsequent offer of securities under the shelf prospectus Red-Herring Prospectus : "Red Herring Prospectus" means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. Section 32 of the Act deals with Red Herring Prospectus. It provides that

10 10 P a g e K N O W L E D G E E X P R E S S C O L A W L D R As per this section, a company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. 2.A company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. 3. A red herring prospectus shall carry the same obligations as are applicable to a prospectus. Any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus. 4. Upon the closing of the offer of securities, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board. Abridged prospectus : Abridged Prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board (a) where the offer is made in connection with the bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; (b) where the securities are not offered to the public; (c) where the offer is made only to the existing members or debenture holders of the company with or without a right to renounce; (d) where the shares or debentures offered are in all respects uniform with shares or debentures already issued and quoted on a recognized stock exchange. The Golden Rule Or Golden Legacy : Golden Rule was pronounced by Kinderseley, V.C. in New Brunswick, etc., Co. v. Muggeridge, and has come to be known as the golden legacy. Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representation contained in the prospectus. The public is at the mercy of company promoters. Everything must, therefore, be stated with strict and scrupulous accuracy. If concealment of any material fact has prevented an adequate appreciation of what was stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true, the prospectus may be false if by reason of the suppression of other material facts, it conveys a false impression. Onus for Proof of Mis-statement : (i) The misrepresentation was of a fact; (ii) It was in respect of a material fact. What is a material statement of fact will depend upon the circumstances of each case. (iii) He acted on the misrepresentation; and He suffered damages in consequence. Remedies for Misrepresentation in Prospectus The first remedy against the company is to rescind the contract.. The second remedy against the company is to sue for damages for deceit. CHAP 9 DEBT CAPITAL TYPES OF BORROWINGS 1A. Long Terms Borrowings - Funds borrowed for a period ranging for five years or more 1B. Short Term Borrowings - Funds needed to be borrowed for a short period say for a period up to one year 1C. Medium Term Borrowings - Where the funds to be borrowed are for a period ranging from two to five years, 2A Secured/unsecured borrowing - A debt obligation is considered secured, if creditors have recourse to the assets of the company 2B Unsecured debts comprise financial obligations, where creditors do not have recourse to the assets of the company to satisfy their claims. 3A 3B 4A Syndicated borrowing - if a borrower requires a large or sophisticated borrowing facility this is commonly provided by a group of lenders known as a syndicate under a syndicated loan agreement. Bilateral borrowing refers to a borrowing made by a company from a particular bank/financial institution. Private borrowing comprises bank-loan type obligations whereby the company takes loan from a

11 11 P a g e K N O W L E D G E E X P R E S S C O L A W L D R bank/financial Institution. 4B Public borrowing is a general definition covering all financial instruments that are freely tradable on a public exchange or over. Kinds of Debentures : (A) Non Convertible Debentures (NCD): These instruments retain the debt character and can not be converted into equity shares. (B) Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer (C) Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. (D) Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price. (E) Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. (F) Unsecured Debentures: These instrument are unsecured (G) Redeemable Debentures: It refers to the debentures which are issued with a condition that the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings. (H) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture.(i) A Registered Debentures: Registered debentures are made out in the name of a particular person, whose name appears on the debenture certificate and who is registered by the company as holder on the Register of debenture holders. (J) Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are negotiable instruments, and so transferable by mere delivery like share warrants. Distinction Between Debentures and Shares Debentures Shares 1 loan. part of the capital 2 Debenture holders are creditors. Shareholders are members/owners 3 fixed Interest dividends 4 generally have a charge do not carry any such charge. 5 can be issued at a discount cannot be issued at a discount. 6 do not have any voting right. enjoy voting right. 7 Interest paid on debenture is a Dividend is not allowable deduction as 8 business expenditure Return of allotment is not required for allotment of debentures. business expenditure. Return of allotment in e-form No. 2 is to be filed Appointment of Debenture Trustees Section 71 (5) states that no company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed. The following conditions : (a) the names of the debenture trustees shall be stated in letter of offer (b) before the appointment of debenture trustee or trustees, a written consent shall be obtained (c) A person shall not be appointed as a debenture trustee, if he- (i) beneficially; (ii) is a promoter, director or key managerial personnel or any other officer or an employee (iii) is beneficially entitled to moneys otherwise than as remuneration payable to the debenture trustee; (iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; (v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; (vi) has any pecuniary relationship with the company amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount (vii) is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel. (d) the Board may fill any casual vacancy When such vacancy is caused by the resignation of the debenture

12 12 P a g e K N O W L E D G E E X P R E S S C O L A W L D R trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders. (e) any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than three fourth in value of the debentures outstanding, at their meeting. Duties of debenture trustees (a) satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed; (b) satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders; (c) call for periodical status or performance reports from the company; (d) ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach; (e) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed (f) take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held; CHAP 10 CREATION AND REGISTRATION OF CHARGES Charge means an interest or lien created on the property or assets of a company or any of its undertaking or both as security and includes a mortgage Kinds of Charges A charge on the property of the company as security for debts may be of the following kinds, namely: (i) (ii) Fixed or specific charge- A charge is called fixed or specific when it is created to cover assets which are ascertained and definite or are capable of being ascertained and defined, at the time of creating the charge e.g., land, building, or plant and machinery. Floating charge.-. A floating charge is not attached to any definite property but covers property of a fluctuating type e.g., stock-in-trade and is thus necessarily equitable. A floating charge is a charge on a class of assets present and future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of charge take steps to enforce their security. Crystallisation of Floating Charge A floating charge crystallises and the security becomes fixed in the following cases: (a) when the company goes into liquidation; (b) when the company ceases to carry on its business; (c) when the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver to take possession of the property charged; (d) on the happening of the event specified in the deed. Postponement of a Floating Charge: (a) a landlord who distrains for rent; (b) a creditor who obtains a garnishee order absolute*; (c) a judgement creditor who attaches goods of the company and gets them (d) the employees of the company, as well as other preferential creditors in the event of winding-up of the company; (e) the supplier of goods to the company under a hire-purchase Difference between Mortgage and Charge: S.No Mortgage Charge 1 the act of the parties. either through the act of parties or by operation of law. 2 requires registration A charge created by operation of law does not require registration But a charge created by act of parties requires registration. 3 A mortgage is for a fixed term. The charge may be in perpetuity. 4 a transfer of an interest in specific immovable property. A charge only gives a right to receive payment out of a particular property.

13 13 P a g e K N O W L E D G E E X P R E S S C O L A W L D R good against subsequent transferees. good against subsequent transferees with notice. 6 carries personal liability In case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy. Points to be remembered: (i) Any charge created (a) within or outside India, (b) on its property or assets or any of its undertakings, (c) whether tangible or otherwise, and situated in or outside India Shall be registered. (ii) Particulars of charges that is being filed with Registrar of Companies is to be signed by the company creating the charge and the charge holder in form CHG-1 or Form CHG-9 as the case may be. (iii) The Charge has to be registered within 30 days of its creation Condonation of delay by Registrar- within 300 days from the date of creation of charge/its modification Condonation of delay by the Central Government beyond 300 days from the date of creation CHAP 11 ALLOTMENT OF SECURITIES AND ISSUE OF SHARE CERTIFICATES GENERAL PRINCIPLES REGARDING ALLOTMENT (1) The allotment should be made by proper authority, (2) Allotment of securities must be made within a reasonable time (3) The allotment should be absolute and unconditional.. (4) The allotment must be communicated. (5) Allotment against application only (6) Allotment should not be in contravention of any other law Provisions relating to allotment of securities - Companies Act 2013 Allotment of Securities Conditions Section 39(1) states that no allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed Minimum Application Money [Section 39(2)] The amount payable on application on every security shall not be less than five per cent. Money to be returned if minimum application money is not received If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days the amount so received shall be returned within 15 days from the closure of the issue. If any such money is not so then liability with interest at 15% P.A. Company to file Return of allotment In Form PAS-3 What is a share certificate? A share certificate is a certificate issued to the members by the company under its common seal specifying the number of shares held by him and the amount paid on each share When can a company issue Duplicate Share Certificate? (a) is proved to have been lost or destroyed; or (b) has been defaced, mutilated or torn and is surrendered to the company. Split Certificate -A split certificate means a separate certificate claimed by a shareholder for a portion of his holding. Legal Effect of Share Certificate A share certificate once issued by the company binds it in two ways, namely: (a) by estoppel as to title, and (b) by estoppel as to payment. Estoppel as to Title: In the first place, it is a declaration by the company to the entire world that the person in whose name the certificate is made out and to whom it is given is a shareholder in the company. In other words the company is estopped from denying is title to the shares. Estoppel as to Payment: If the certificate states that on each of the shares full amount has been paid, the company is estopped as against a bona fide purchaser of the shares, from alleging that they are not fully paid. Calls

14 14 P a g e K N O W L E D G E E X P R E S S C O L A W L D R Board of Directors to make call(s) on shares The Board, in making a call, must observe the provisions of the articles, otherwise the call will be invalid, and the shareholder is not bound to pay 2. Call(s) to be made bonafide in the interest of the company The power to make call is in the nature of trust and must be exercised only for the benefit of the company, and not for the private ends of the directors. 3. Call(s) must be made on uniform basis Calls on same class of shares must be made on a uniform basis. Hence a call cannot be made only on some of the members unless they constitute a separate class. 4. Notice of call(s) 5. Time limitations for receiving the call money If the issuer proposes to receive subscription monies in calls, it shall ensure that the outstanding subscription money is called within twelve months from the date of allotment of the issue. Interest on calls due but not paid A member is generally made liable to pay interest on the calls made but not paid Quantum and Interval between two calls Proviso to Regulation 13(i) to the Table F of Schedule I of the Companies Act, 2013 provides that no call shall exceed 25% of the nominal value of the share or be payable at less than one month from the date fixed for the payment of the last proceeding call Forfeiture of Shares Forfeiture may be termed as penalty for violation of terms of contract. Forfeiture of shares means taking back of shares by the company from the shareholders 1. Articles of Association must authorise the forfeiture of shares. 2. Resolution for Forfeiture 3. Proper Notice 4. Power of forfeiture must be exercised bona fide and for the benefit of the company Re-issue of Forfeited Shares Shares forfeited by a company may either be cancelled or re-issued to another person at the discretion of the Board. This is done by a Board resolution. After the money due is received from the new member(s), the company executes a transfer deed and issues a share certificate, and if the original holder has already surrendered the share certificate, it is duly transferred, otherwise after a public notice in a newspaper, a new share certificate is issued. Surrender of shares A company cannot accept a surrender of its shares as every surrender of shares, whether fully paid-up or not involves a reduction of capital which is unlawful...forfeiture is a statutory exception and is the only exception CHAP 12 MEMBERSHIP IN A COMPANY WHO ARE MEMBERS? A company is composed of members, though it has its own separate legal entity.. In the case of a company limited by shares, the shareholders are the members. generally speaking every shareholder is a member and every member is a shareholder. However, there may be exceptions to this statement Definition of Member According to Section 2(55) of the Companies Act, 2013: (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

15 15 P a g e K N O W L E D G E E X P R E S S C O L A W L D R WHO MAY BECOME A MEMBER (a) Company as a member of another company:-yes it can be member except a subsidiary company cannot become a member of its holding company. However, a subsidiary can hold shares in its holding company only under the following exceptional circumstances- (i) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or (ii) where the subsidiary company holds such shares as a trustee; or (iii) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company (b) Partnership firm as a member-no it cannot be member (c) Limited Liability Partnership-Yes (d) Section 8 company-no (e) Foreigners as members-yes as per FEMA act (f) Minor as member-no (g) Insolvent as member-yes but loses beneficial interest in shares (h) Pawnee-No (i) Receiver-yes only if his name is entered in registrar of member (j) Trade Union as member-yes MINIMUM NUMBER OF MEMBERS 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. 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; (g) He rescinds the contract of membership on the ground of fraud or misrepresentation or a genuine mistake; (h) 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; (i) The member is a company which is being wound-up in India, and the liquidator disclaims the shares; (j) The company is wound up; Expulsion of a Member The Department of Company Affairs (now MCA) 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 Register prima facie evidence The registers, their indices and copies of annual returns maintained under sections 88 and 94 shall be prima facie evidence of any matter directed or authorised to be inserted therein by or under this Act. LIABILITY OF MEMBERS 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. CHAP 13 TRANSFER AND TRANSMISSION OF SECURITIES Securities or other interest of any member in a public company shall be freely transferable. Transmission of securities : company shall have power to register on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.