UNIT 6- MEMBERSHIP

S 2(55) of CA 2013, defines a member-

-subscribers to MOA of the Co, every person who agrees in writing to become a member of the Co &
whose name is entered in the register of members, every person holding shares of the Co &whose
name is entered as beneficial owner in the records of the depository.

Thus a person can become a member of the Co either as the subscriber to the MOA or by
subscribing to its shares, transfer of shares from an existing member, acquisition or purchase of
shares, acquisition by devolution.

(1)By Subscribing to the MOA: subscribers of the MOA are deemed to have agreed to become
members of the company by signing the MOA. They become members the moment the Co is
registered & its not necessary that their names are entered in the register of members-U.P Oil Mills
v. Jamna.

(2)By Agreement & Registration-every person who agrees in writing to become a member & whose
name is entered in the register of members shall be a member of the Co.

Herdilia Unimers Ltd v. Renu Jain-the moment the shares are allotted & share certificate signed &
name entered in the register of members, allottee becomes the shareholder irrespective of the
allottee receiving the shares or not.

 Except in the case of subscribers to the MOA, 2 conditions are to be satisfied to become
member of a Co-

-there is an agreement in writing to become a member

-the name is entered in the register of members of the company.

 Balakrishnan Gupta v. Swadeshi, lalithamba Bai v. Harrisons Malayalam Ltd. –the two
conditions are cumulative. both conditions have to be satisfied to enable him to exercise the
rights of a member.

 However for claiming relief under S 241(Oppression & mismanagement),it was held that the
requirement of application in writing was not an essential condition to file a petition for
relief.

 Registration of the name of a person as a member of a Co may arise-upon application &

allotment, by transfer, by transmission, by estoppel/holding out.

(3)By agreeing to purchase qualification shares –directors when they sign & deliver to the Registrar a
written undertaking to pay for qualification shares, they become a member automatically on
incorporation of the Co.

 legal heirs of a deceased shareholder can be regarded as members for the purpose of filing a
petition for prevention of oppression & mismanagement- Mrs. Margaret T. Desor v. World
Wide Agencies (P)Ltd.-even if the name of the legal heir has not been placed on the register
of members he can maintain a petition.

Who may become the member?

 Minor
  Company

 LLP

 Foreigner

 Society registered under the Societies Registration Act 1860

 Hindu undivided family

 Trade Union-a registered trade union could hold shares in its own name.

 In case of fully paid shares(by transfer or transmission), minor’s name may be entered in the
Register of members-Devan Singh v. Minerva Films Ltd, S.L Bagree v. Britania Industries Ltd.

Position of minor as a member

 A contract by a minor is void ab initio

 A minor can acquire fully paid up shares but the name of the guardian must be entered in
the register of members.

 A transfer or transmission of shares in the name of the minor must be registered by the Co.

If shares are allotted to a minor in response of his application & his name is entered on the register
of members, by ignorance, then the Co can repudiate the allotment & remove his name from the
register.

Termination of membership

 If the name of the minor continues on the Register of members & neither party repudiates
the allotment, minor does not incur any liability on the shares during his minority- Fazulbhoy
Jaffer v. Credit Bank of India.

 By transfer of shares

 Shares forfeited by the Company

 Surrender of shares

 Transmission

 Recession of contract on grounds of fraud or misrepresentation

 Buy back of shares by the Company

 Winding up

Rights of a share holder

 Contractual Rights

 Statutory Rights

 Contractual rights- members are entitled to have their names on the register of members, to
vote at the meeting of members, receive dividends when declared, exercise the right of pre-
emption, return of capital on winding up or on reduction of share capital of the company.

 Statutory rights-
 Right to vote at all meetings

 Right to requisition of an extraordinary general meeting of the Company.

 Right to receive notice of a general meeting

 Right to appoint proxy and inspect proxy register

 In case of a body corporate, the right to appoint a representative to attend a general

meeting on its behalf

 Right to require the company to circulate resolution

 Certificate of shares to be delivered to SH within two months from the date of allotment

 To transfer shares subject to the provision of the Act and AOA

 To inspect the Register of members and register of debenture holders

 To obtain on request minutes of proceedings at general meetings & to inspect the minutes.

 To participate in the removal of directors.

Other Rights-

-As per LIC v. Escorts Ltd

 To elect directors & participate in the management through them

 Enjoy profits of the company

 Apply to Tribunal for relief in case of Oppression

 Apply to Tribunal in case of mismanagement

 Apply to Tribunal for winding up of the company

 To share in the surplus on winding up

SEBI Regulation 2015

 Right to participate & be informed of the decisions

 Right to vote

 Being informed of rules & voting procedures

 Opportunity to ask Questions to BOD, to propose resolutions subject to reasonable

limitations

 Nomination & election of BOD (effective Corporate governance)

 Exercise of ownership rights

 Mechanism to address grievances

 Protection of minority SH from abusive actions

 Equitable treatment of same class of SH

 Duties & liabilities

 Members must pay the whole nominal values of shares in cash except in cases approved by
the Co.

 If a member is holding partly paid up shares & the Co goes into liquidation, then he becomes
liable as contributory to pay when called upon to do so.

 Member is bound by the Co by all covenants of AOA.(Co may have a lien on a member’s
shares for any amount due from him to Co.)

Member-Contributory

 In the event of winding up of a Co, members may be called upon to contribute towards the
assets of the Co. Therefore they are called as contributories.

 National Steel & General Mills v. Official Liquidator-a member does not cease to be a
member merely because winding up of the company has commenced. Till his name
continues to remain on the Register of members, he shall be a member of the company
entitled to the rights and obligations of a member.

Expulsion of a member

 Bajaj auto Ltd v. N.K Firodia-Company cannot by amending the AOA give itself the power to
expel a member.

 Such an act would be Ultra vires of the Company. It would be nugatory to the powers of the
Tribunal (S 48,58) under the Act & void.

 But many jurists have expressed a dissenting opinion to this proposition.

 Suspension is provided u/s 8-leela kumar v. Govt. of India.

Register

Statutory books to be kept by the co.

 Register of charges (S 85)

 Register of Index of members & debenture holders (S 88)

 Register of investments not held in Co name (S 187)

 Register of fixed deposits (S 73)

 Register of contracts or arrangements in which Directors are interested (S 189)

 Register of directors & key managerial personnel & their shareholding (S 170)

 Register of loans & investments by the Co. (S 186)

Penalty

 If a Company does not maintain a register of members or debenture holders or other

security holders or fails to maintain them in accordance with the provisions of the act the Co
 shall be punishable with a fine not less than 50,000 & can extend to 3 lakh & for a continuing
one, with a further fine which may extend to 1000 for every day of the failure.

Optional books

 Share application & allotment book

 Share call books

 Debenture application & allotment book

 Debenture call book

 Register of share transfers

 Shareholder’s dividend book

 Debenture interest book

 Debenture transfer register

 Register of share certificates

 Register of probates

 Proxies, Power of Attorney, lost share certificates

SHARES

 The capital of a Co is divided into a number of indivisible units of a fixed amount. These units
are known as shares.

 S 2(84) ‘share is a share in the share capital of a company and includes stock.’

 CIT v. Standard Vacuum Oil Co- ‘A share in a Co is meant not any sum of money but an
interest measured by a sum of money & made up of diverse rights conferred on its holders
by the AOA which constitutes a contract between him & the Co’.

 Bucha F.Guzdar v. Commissioner of Income Tax, Bombay- S.C defined a share as ‘ a right to
participate in the profits made by the Co, while it is a going concern & declares a dividend
and in the assets of the company when it is wound up.’

 Share does not merely represent an interest of a shareholder in a Co, it carries with it certain
rights & liabilities while the Co is a going concern or while the Co is being wound up.

 It represents a bundle of rights and obligations.

 Each share bears a distinguishing number.

 Borland’s Trustees v. Steel Bros & Co. Ltd-share is not a sum of money but is the interest of a
shareholder in a Co measured by a sum of money for the purpose of liability in the first place
and of interest in the second, but also consisting of a series of mutual covenants entered by
all the share holders.

 Share is regarded as goods in India.

 Share is not a negotiable instrument

 S 46 –a certificate of shares is given under the common seal of the Co, specifying any share
or stock held by any member and shall be the prima facie evidence of the title of the
member to such shares or stock that is specified.

 Share-Has a nominal value

 Distinctive number, which distinguishes it from other shares.

 Can be issued originally

 Either fully paid up or partly paid up.

 Cannot be transferred in fractions

 All classes of shares are of equal denomination

 Stock-Does not have a nominal value.

 Does not bear any such number.

 Stock cannot be issued originally, can be issued by converting fully paid up shares.

 Always fully paid up.

 Can be transferred in fractions

 May be of different denominations.

Types of Shares

 Equity shares

 Preference shares

S 43 of the Act provides that the share capital of a company limited by shares shall be of two
kinds-

 Equity share capital

 Preference share capital

 S 41, A Co may also issue Global Depository Receipts (GDR)

Global Depository Receipts

 S 41 along with Companies (issue of Global Depository Receipts) Rules 2014 allows a
company which is eligible to do so under Foreign Exchange Management Rules &
Regulations to issue depository receipts in any foreign country.

 Depository Receipts can be issued by way of public offering or private placement or in any
other manner prevalent abroad &may be listed or traded in an overseas listing or trading
platform. Depositary receipts allow investors to hold shares of a foreign public company.

Depository

 Defined u/s 2(1)(e)of the Depositories Act 1996.

 Depositories has been established to record ownership details in book entry forms.
 securities- a certificate attesting credit, the ownership of stocks or bonds, or the right to
ownership connected with tradable derivatives.
 Investors in securities have the option to continue with the existing system of ownership and
transfer through share certificates or to come under the depository mode.

 Each depository would have to register with SEBI & to obtain from it a certificate for
commencement of business. ( 2 depositories only in India-NSDL & CDSL)

 Each depository has its agents known as participants. (DP’s)

 Before the passing of Depositories Act 1996,it caused a lot of problems like wrong delivery,
forged, stolen shares which also used to delay transfer of shares affecting the market &
exposing it to risks which in turn restricted the growth & development of capital market in
India.

 A depository (e.g CDSL) facilitates holding of securities in the electronic form & enables
securities transactions to be processed by book entry. It is a place where the financial
securities are held in dematerialized form. The Depository participant (DP) who is the agent
of the depository offers depository services to investors.

 According to SEBI guidelines F.I, banks, stock brokers are eligible to function as DP’s.

 The investor who is known as Beneficial Owner (BO) will have to open a demat account with
the DP & DP also execute their instructions with regard to transfer, pledge, lien,
dematerialization of shares.

 Banks, financial institutions or large corporate brokerage firms can be such agents.

 The shares of a shareholder who joins the participant will be dematerialized & his name will
be entered in a book showing him as a beneficial owner.

 In the company’s records the depository will be shown as the registered member. But all the
benefits of shareholding will remain vested in the individual shareholders. A shareholder will
have the right to withdraw from the scheme after joining it. His share certificate will be
restored to him & his name brought back to the register of members.

Types of shares

Equity shares

 No fixed rate of dividend

 No preference on dividends

 No preference on repayment of capital

 Have voting rights

 Rights shares or bonus shares may be issued to them

 Cannot be redeemed

Preference shares

 Fixed rate of dividend

 Dividend is paid in preference to equity shares

 Preference with regard to repayment of capital on winding up

 If Pr. shares are cumulative the dividend not paid in a year is accumulated &until the arrears
are paid equity S.H are not paid.

 Restricted voting rights

 Not allowed

 Redeemable P. shares can be redeemed.

Preference Share Capital

 During the life of the Co it must be assured of a preferential dividend. The preferential
dividend may consist of a fixed amount payable to preference shareholders before anything
else is payable to equity shareholders.

 On the winding up of the Co it must carry a preferential right to be paid; the amount paid up
on preference shares must be paid back before anything is paid to the equity shareholders.

 Types

 Participating & non participating

 Cumulative & non cumulative

 Redeemable & Irredeemable

Participating &non participating

 Participating preference shares are those shares which are entitled to a fixed preferential
dividend and carry a right to participate in the surplus profits along with equity shareholders
after dividend at a certain rate has been paid to equity share holders.

 Unless expressly stated in the MOA & AOA preference shareholders are non-participating.

 Will v. United Lanket Plantations Co.Ltd

 Scottish Insurance Corpn Ltd v. Wilsons & Clyde Coal Co Ltd.

Cumulative & non cumulative

 Cumulative preference share confers a right on its holder to claim dividend fixed at a sum or
a percentage for the past and the current years, out of future profits.

 The fixed dividend keeps on accumulating until it is fully paid.

 Under non-cumulative the preference share holder gets a fixed amount of dividend out of
the profits of each year. If no profits are available in any year or no dividend is declared,
then he gets nothing & cannot claim unpaid dividend in any subsequent year.

 Preference shares are cumulative unless expressly stated to be non cumulative.

 Foster v. Coles-In the absence of a clear provision to the contrary preference shares are
presumed to be cumulative.

 Staples v. Eastman Photographic Materials Co-the provision in the AOA stated that the
holders of preference shares shall be entitled out of the net profits of each year to a
preference dividend at the rate of 10% per annum. It was held that the preference
shareholders were not entitled to a cumulative dividend.
 Buenos Aires Great Southern Railway Co,re-preference SH cannot compel the directors to
pay dividends whatever be the amount of accumulation.

Redeemable & Irredeemable

 Paying back is called as Redemption. Preference shares are generally redeemable.

 conditions under S 55(2)

-shares to be redeemed must be fully paid. only fully paid shares can be redeemed

-shares can be redeemed only out of profits of the company which would otherwise be
available for dividends.

-sum equivalent to the amount paid on redemption must be transferred to a reserve fund
called as capital redemption reserve account.

 S 55-No Co limited by shares can issue any preference shares which are irredeemable.

 The Amendment Act of 1988 abolished the category of irredeemable preference shares.

 A Co limited by shares may if authorized by its articles, issue preference shares which are
liable to be redeemed within a period not exceeding 20 yrs from the date of issue.