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MANAGEMENT AND
ADMINISTRATION

Chapter VII

Consists of sections 88 to 122 as well as the Companies

(Management and Administration) Rules, 2014.
INTRODUCTION

A company is an artificial legal entity distinct from its

members. The affairs of the company are managed by the
members and directors through resolutions passed at the
validly held meetings.
The day-to-day affairs of the company are managed
by the directors who collectively act through Board of
Directors. The Board performs its role within the powers
granted to it.

The provisions relating to maintaining the various

registers as per the Companies Act, 2013 are contained
REGISTERS in Sections 88 – 91. Along with these provisions, the
Companies (Management & Administration) Rules, 2014
are also applicable to the maintenance of registers by a
company.

Section 88 (1) of the Companies Act, 2013 requires that

every company shall keep and maintain the following

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registers:
REGISTER OF
MEMBERS, ETC.  Register of Members (holding of each class of
[SECTION 88] equity and preference shares of each member
residing in or outside India shall be shown
separately in the register).

 Register of Debenture-holders (DH); and

 Register of any other security holders (OSH).

a) Every company limited by shares shall, from the date

of its registration, maintain a register of its members
in Form No. MGT-1.
However, in case of a company existing on the
Maintenance of commencement of the Companies Act, 2013, the
Register of particulars as available in the register of members
Members maintained under the Companies Act, 1956 shall be
transferred to the new register of members in Form
No. MGT-1.

b) In case of a company not having share capital, the

register shall contain the following particulars, in
respect of each member–
 Name of the member, address (registered
office address in case the member is a body
corporate); email address; Permanent Account
Number or Corporate Identity Number (‗CIN‘);
Nationality; in case member is a minor – name
of his guardian and the date of birth of the
member, name and address of the nominee;

 Date of becoming the member;

 Date of cessation;
 Amount of guarantee, if any;

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 Any other interest, if any; and

 Instructions, if any, given by the member with
regard to sending of notices, etc. [Rule 3 (2)].

Maintenance of
Every company which issues or allots debentures or any
Register of Debenture
other security shall maintain a separate register for
Holders (DH) or any
debenture holders or security holders, as the case may
Other Security Holders
be, for each type of debentures or other securities in
Form MGT-2. [Rule 4]

 Time period for making entries in Register

Other Requirements As per Rule 5 (1), entries have to be made in the

applicable to all the Register within 7 days of the date of approval by
the Board or Committee thereof by approving the
Registers
allotment or transfer of shares, debentures or any
other securities, as the case may be.

According to Rule 5 (3), consequent upon any

forfeiture, buy-back, reduction, sub-division,
consolidation or cancellation of shares, issue of sweat
equity shares, transmission of shares, shares issued
under any scheme of arrangements, mergers,
reconstitution or employees stock option scheme or
any of such scheme provided under this Act or by
issue of duplicate or new share certificates or new
debenture or other security certificates, entry shall be
made within seven days after approval by the Board
or committee, in the register of members or inthe
respective registers, as the case may be.

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 Place of maintaining Register

 According to Rule 5 (2), the registers shall be
maintained at the registered office of the
company
 unless a special resolution is passed ina general
meeting authorising the keeping of the register
at any other place within the city, town or village
in which the registered office is situated or any
other place in India in which more than
1/10th of the total members entered in the
register of members reside.

 Other information also to be referred in register

a) In terms of Rule 5 (6), if any order is passed by any
judicial or revenue authority or by Security and
Exchange Board of India (SEBI) or competent
authority attaching the shares, debenturesor other
securities and giving directions for remittance of
dividend or interest, the necessary reference of
such order shall be indicated in the respective
register.

b) According to Rule 5 (7), in case of companies

whose securitiesare listed on a stock exchange in
or outside India, the particulars of any pledge,
charge, lien or hypothecation created by the
promoters in respect of any securities of the
company held bythe promoter including the names
of pledgee/pawnee and any revocation therein shall
be entered in the register within fifteendays from
such an event.

c) According to Rule 5 (8), if promoters of any listed

company, which has formed a joint venture
company with another company have pledged or
hypothecated or created charge or lien in respect of

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any security of the listed company in connection

with such joint venture company, the particulars
ofsuch pledge, hypothecation, charge and lien shall
be entered inthe register members of the listed
company within fifteen days from such an event.

Updating of change in status of members

Rule 5 (4) states that if any change occurs in the status of

a member or debenture-holder or any other security
holder: - whether due to death or insolvency or change of
name or due to transfer to Investor Education Protection
Fund (IEPF) or due to any other reason, entries thereof
explaining the change shall be made in the respective
registers.

Rectification in register

According to Rule 5 (5), if any rectification is made in the

register maintained under section 88 by the company
pursuant to any order passed by the competent authority
under the Act, the necessary reference of such order shall
be indicated in the respective register.

Maintenance of Foreign Register:

A company which has share capital or which has issue

debentures or any other security may, if so authorised by
its articles, keep in any country outside India, a part of the
register of members or debenture holders or of any other

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security holders or of beneficial owners, resident in that

country. The register shall be called ―Foreign Register‖.
Foreign Register
[Section 88(4) read
with rule 7]
Other requirements relating to Foreign Register:

In case a company decides to keep a Foreign Register, it

shall comply with the following requirements:

1. Filing of notice of the situation of the office:

Within 30 days from the date of the opening of any
Foreign Register, the company shall file with the
Registrar of Companies, notice of the situation of
the office where such register is kept. The notice
shall be filed in Form No. MGT–3 along with the
requisite fee.

2. Filing of notice in case of change or

discontinuance:
In the event of any change in the situation of such
office or of its discontinuance, the company shall,
within 30 days from the date of such change or
discontinuance, as the case may be, file notice in
Form No. MGT-3 with the Registrar of Companies,
of such change or discontinuance.

3. Foreign Register part of company‘s register:

A foreign register shall be deemed to be part of the
company‘s register (to be called ‗principal register‘)
of members or of debenture-holders or of any other
security holders or beneficial owners, as the case
may be.

4. Format of Foreign Register:

The foreign register shall be maintained in the

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same format as the principal register.

5. Inspection, etc. of Foreign Register:

 A foreign register shall be open to inspection
and may be closed, and extracts may be
taken there from and copies thereof may be
required, in the same manner, as is
applicable to the principal register.
 However, advertisement before closing the
register shall be inserted in at least two
newspapers circulating in the place wherein
the foreign register is kept.

6. Decision of the appropriate competent authority

binding in regard to the rectification:
If a foreign register is kept by a company in any
country outside India, the decision of the
appropriate competent authority in regard to the
rectification of the register shall be binding.

7. Making of Entries in Foreign Register:

Entries in the foreign register shall be made after
the Board of Directors or its duly constituted
committee approves the allotment or transfer of
shares, debentures or any other securities, as the
case may be.

8. Transmission of a copy every entry:

The company shall transmit to its registered office
in India, a copy of every entry in any foreign register
within 15 days after the entry is made.

9. Keeping of Duplicate Foreign Register at

Registered Office:
The company shall keep at the Registered Office a
duplicate register of every foreign register duly
updated from time to time.

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10. Duplicate Foreign Register to be part of

Principal Register:
Every duplicate foreign register shall be deemed to
be the part of the principal register, for all purposes
of the Companies Act.

11. Transactions not to be registered in any other

Register:
No transaction with respect to any shares or as the
case may be, debentures or any other security,
registered in a foreign register shall, during
thecontinuance of that registration, be registered in
any other register.

12. Transfer of Entries on discontinuation:

The company may discontinue the keeping of any
foreign register and thereupon all entries in that
register shall be transferred to some other foreign
register kept by the company outside India or to the
principal register.

If a company does not maintain a register of members or

debenture-holders or other security holders or fails to
Penalty for failure to
maintain them in accordance with the provisions of sub-
maintain register in
section (1) or sub-section (2), the company shall be liable
accordance with the
to a penalty of 3,00,000 rupees and every officer of the
provisions of
company who is in default shall be liable to a penalty
Section 88(1) and 88(2) of 50,000 rupees.

 The entries in the registers maintained under section

88 and index included therein shall be authenticated

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Authentication of by the company secretary of the company or by any

entries other person authorised by the Board for the purpose,
and the date of the board resolution authorising the
[Rule 8] same shall be mentioned.

 The entries in the foreign register shall be

authenticated by the company secretary of the
company or person authorised by the Board by
appending his signature to each entry.

Declaration by registered holder of shares:

 A person whose name is entered in the register of

DECLARATION IN members of a company as the holder of shares in
RESPECT OF that company but
BENEFICIAL  who does not hold the beneficial interest in such
INTEREST IN ANY shares (hereinafter referred to as ―the registered
SHARE [SECTION owner‖),
89]  shall file with the company, a declaration to that
effect in Form No. MGT-4, specifying the name and
other particulars of the person who holds the
beneficial interest in such shares.
 The declaration MGT-4 shall be made within a
period of 30 days from the date on which his name
is entered in the register of members of such
company. [Section 89 (1) and Rule 9 (1)].

Declaration by person holding beneficial interest in

shares:

 Every person who holds or acquires a beneficial

interest in share of a company
 shall make a declaration to the company in form

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MGT-5, within 30 days after acquiring such

beneficial interest,
 specifying the nature of his interest, particulars of
the person in whose name the shares stand
registered in the books of the company and such
other particulars as may be prescribed.

Declaration in case of change in beneficial interest:

 Where any change occurs in the beneficial interest

in any shares in respect of which a declaration has
been filed under section 89 (1) by the registered
owner and under section 89 (2) by the beneficial
owner then,
 within 30 days of such change, a declaration is to
be made to the company.

Filing of return by the company with the Registrar:

 Where any declaration under section 89 is made to

a company,
 the company shall make a note of such declaration
in the register concerned and shall file,
 within 30 days from the date of receipt of
declaration by it,
 a return in Form No. MGT-6 with the Registrar in
respect of such declaration with fee. [Section 89 (6)
and Rule 9 (3)].

Consequence of non-filing of declaration:

 Where a declaration required to be made under

section 89 is not made by the beneficial owner,

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then, any right with respect to such shares shall not

be enforceable by the beneficial owner or by any
person claiming through him. [Section 89 (8)].

Exemption: Rule 9 shall not apply

 to a trust which is created to set up a Mutual Fund

or Venture Capital Fund or such other fund as may
be approved by SEBI.
 Accordingly, such entities need not file the
declarations as envisaged by this rule.

Duty of the Company to pay dividend not affected:

 Nothing contained in this section shall be deemed

to prejudice the obligation of a company to pay
dividend to its members under this Act and the said
obligation shall, on such payment, stand
discharged.

Meaning of beneficial interest:

For the purposes of section 89 and section 90, beneficial

interest in a share includes, directly or indirectly, through
any contract, arrangement or otherwise, the right or
entitlement of a person alone or together with any other
person to—

 exercise or cause to be exercised any or all of the

rights attached to such share; or
 receive or participate in any dividend or other
distribution in respect of such share. [Section

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89(10)].

The Central Government may, by notification,

Exemption from the  exempt any class or classes of persons from
provisions of section complying with any of the requirements of this
89 [Section 89(11)] section,
 except sub- section (10), if it is considered
necessary to grant such exemption in the public
interest and
 any such exemption may be granted either
unconditionally or subject to such conditions as
may be specified in the notification.

Two kinds of penal provisions as described below are

included under section 89 –
Penalty for default
[Sections 89 (5) & 89
I. Relating to Default made by persons required to
(7)]
make a declaration –

If any person fails to make a declaration as required

under sub-section (1) or sub- section (2) or sub-
section (3), he shall be liable to a penalty of
50,000 rupees and in case of continuing failure,
with a further penalty of 200 rupees for each
day after the first during which such failure
continues, subject to a maximum of 5,00,000
rupees. [Section 89(5)].

II. Relating to Default made by a company –

If a company, required to file a return under sub-

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section (6), fails to do so before the expiry of the

time specified therein, the company and every
officer of the company who is in default shall be
liable to a penalty of one thousand rupees for each
day during which such failure continues, subject to
a maximum of 5,00,000 rupees in the case of a
company and 2,00,000 rupees in case of an officer
who is in default. [Section 89(7)].

Definition of Significant Beneficial Owner:

The term 'significant beneficial owner' ―SBO‖ has been

REGISTER OF defined in section 90 of the Act
SIGNIFICANT
BENEFICIAL OWNERS  as every individual, who acting alone or together, or
IN A COMPANY through one or more persons or trust, including a
[SECTION 90] trust and persons resident outside India,
 holds beneficial interests, of not less than twenty-
five per cent. or such other percentage as may be
prescribed, in shares of a company or the right to
exercise, or
 the actual exercising of significant influence or
control as defined in clause (27) of section 2, over
the company (herein referred to as "significant
beneficial owner").

However, the Companies (Significant Beneficial Owners)

Amendment Rules, 2019 ("Amendment Rules") has
amended the definition of the term SBO. In terms of Rule
2(1) (h) of the SBO Rules, the term ‗Significant Beneficial
Owner‘ (SBO) isdefined as an individual who—

I. acting alone or together, or

II. through one or more persons or trust, possess one

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or more of the following rights or entitlements in the

Reporting Company (i.e. the company in respect of
which SBO declaration is required to be filed):
 holds indirectly, or together with any direct
holdings, not less than 10% of the shares;
 holds indirectly, or together with any direct
holdings, not less than 10% of the voting rights
in the shares;
 has the right to receive or participate in not less
than 10% of the total distributable dividend, or
any other distribution, in a financial year through
indirect holdings alone, or together with any
direct holdings;
 has the right to exercise, or actually exercises,
significant influence or control, in any manner
other than through direct holdings alone.

In simple terms, SBO is an individual who either alone or

together with other individuals or trust, exercises rights or
entitlements in the Reporting Company byway of holding
10% shares or 10% voting rights or right to receive 10%
or more dividend, both indirect and direct holdings or right
taken together or such individual exercises significant
influence or control, indirectly or along with direct holding
in the Reporting Company.

The amended Rules further explain that if an individual

does not hold any indirect right or entitlement as
mentioned in (i), (ii)or (iii) above, he will not be considered
to be a 'significant beneficial owner'.

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Majority stake:

The Amendment Rules inserted a new term, ―Majority

Stake,‖ which means:

I. holding more than one-half of the equity share

capital in the body corporate; or
II. holding more than one-half of the voting rights in
the body corporate; or (iii) having the right to
receive or participate in more than one-half of the
distributable dividend or any other distribution by
the body corporate. [Rule 2 (1) (d)]

The Amendment Rules provide that when an individual

holds any rights or entitlement directly in the reporting
Direct and Indirect
company, the said individual shall not be considered as
shareholding:
SBO. An individual will be considered to hold a right or
entitlement directly in the Reporting Company, if he
satisfies anyof the following criteria:

a) the shares in the Reporting Company representing

such right or entitlement are held in the name of
such individual;

b) the individual holds or acquires a beneficial interest

in the shares of the Reporting Company under
section 89 (2), and has made a declaration in this
regard to the Reporting Company.

Indirect shareholding

is, when a shareholder is a

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(a) body corporate;

(b) Hindu Undivided Family;

(c) Partnership entity;

(d) Trust;

(e) Pooled investment vehicle.

According to section 90 (2) and 90 (3) read with Rule 5,

every company shall maintain a register of significant
Maintenance of beneficial owners in Form No. BEN-3 which shall be
Register of SBO and open for inspection during business hours, at such
Inspection thereof: reasonable time of not less than two hours, on every
working day as the board may decide, by any member of
the company on payment of such fee as may be specified
by the company but not exceeding fifty rupees for each
inspection.

The company shall, —

Application to the a) Where that person fails to give the company, the
Tribunal information required by the notice within the time
[Section 90 (7)] specified therein. (According to Rule 7 notice shall
be given in Form No. BEN-4 for providing
information within 30 daysof date of notice); or

b) Where the information given is not satisfactory,

apply to the Tribunal within a period of fifteen days of the

expiry of the period specified in the notice, for an order

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directing that the shares in question besubject to

restrictions with regard to transfer of interest, suspension
of all rights attached to the shares and such other matters
as may be prescribed.

Note:

According to Rule 7, the reporting company shall apply to

the Tribunal in accordance with section 90 (7), for order
directing that the shares in question be subject to
restrictions including-

a) restrictions on the transfer of interest attached to

the shares in question;

b) suspension of the right to receive dividend or any

other distribution in relation to the shares in
question;

c) suspension of voting rights in relation to the shares

in question;

d) any other restriction on all or any of the rights

attached with the shares in question.

Section 90 (8) states that on any application made under

sub-section (7), the Tribunal may, after giving an
opportunity of being heard to the parties concerned, make
such order restricting the rights attached with the shares
within a period of sixty days of receipt of application or
such other period as may be prescribed.

According to section 90 (9), the company or the person

aggrieved by the order of the Tribunal may make an
application to the Tribunal for relaxation or lifting of the

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restrictions placed under section 90 (8) within a period of

one year from the date of such order.

Provided that if no such application has been filed within a

period of one year from the date of the order such shares
shall be transferred, without any restrictions, to the
authority constituted under sub-section (5) of section 125
(i.e. Investor Education and Protection Fund Authority), in
such manner as may be prescribed.

As regards declaration of significant beneficial ownership

under section 90, Rule 3 of SBO Rules, 2018 states as
Declaration by SBO
under:
under Section 90:

a) Every individual who is a significant beneficial owner

(SBO) in a Reporting Company, as on the date of
commencement of the Amendment Rules, 2019 (i.e. 8-
2-2019), is required to file a declaration in Form No.
BEN-1 with the Reporting Company within 90 days
from such commencement.

Note:
According to Rule 4, the Reporting Company shall be
required to file a return in Form No. BEN-2 with the
Registrar in respect of such declaration within 30 days
of its receipt from the SBO.

b) Any individual, who subsequently becomes a

significant beneficial owner (SBO) in the Reporting
Company or whose significant beneficial ownership
undergoes any change, shall be required to file a

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declaration in Form No. BEN-1 with the Reporting

Company in within 30 days of such acquisition or
change.

Explanation:
If an individual becomes a significant beneficial owner
in the Reporting Company or if his significant beneficial
ownership undergoes any change within ninety days of
the commencement of the Companies (Significant
Beneficial Owners) Amendment Rules, 2019 (i.e. 8-2-
2019), it shall be deemed that such individual became
the significant beneficial owner or any change therein
happened on the date of expiry of ninety days from
the date of commencement of said rules, and the
period of thirty days for filing will be reckoned
accordingly.

Rule 8 of The Companies (Significant Beneficial Owner)

Amendment Rules, 2018 states that the ‗SBO‘ Rules shall
Non-Applicability of
not be made applicable to the extent the share of the
SBO Rules
Reporting Company is held by:

a) the Investor Education and Protection Fund Authority

[constituted under section 125 (5)];
b) its holding reporting company provided that the details
of such holding reporting company shall be reported in
Form No. BEN-2;
c) the Central Government, State Government or any
local authority;
d) (i) a reporting company or (ii) a body corporate or (iii)
an entity, controlled wholly or partly by the Central
Government and/ or State Government(s);

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e) investment vehicles such as mutual funds, alternative

investment funds (AIFs), Real Estate Investment
Trusts (REITs) and Infrastructure Investment Trusts
(InVITs) registered with and regulated by the
Securities and Exchange Board of India; and
f) investment vehicles regulated by Reserve Bank of
India, Insurance Regulatory and Development
Authority of India or Pension Fund Regulatory and
Development Authority.

a) By SBO: If any person fails to make a declaration as

required under sub- section (1), he shall be liable to a
Penalty for penalty of 50,000 rupees and incase of continuing
Contravention failure, with a further penalty of 1,000 rupees for each
day after the first during which such failure continues,
subject to a maximum of 2,00,000 rupees. [Section
90(10)].

b) By Reporting Company: If a company, required to

maintain register under sub-section (2) and file the
information under sub-section (4) or required to take
necessary steps under sub-section (4A), fails to do so
or denies inspection as provided therein, the
company shall be liable to a penalty of 1,00,000
rupees and in case of continuing failure, with a further
penalty of 500 rupees for each day, after the first
during which such failure continues, subject to a
maximum of 5,00,000 rupees and every officer of the
company who is in default shall be liable to a penalty
of 25,000 rupees and in case of continuing failure,
with a further penalty of 200 rupees for each day,
after the first during which such failure continues,
subject to a maximum of one lakh rupees.

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POWER TO CLOSE Section 91 (1) deals with the time limits for which the
REGISTER OF respective registers of members, debenture-holders and
MEMBERS OR other security holders are allowed to be closed. Section
DEBENTURE- 91 (2) mentions the penalty for contravention of the
HOLDERS OR OTHER
provisions of sub- section (1).
SECURITY HOLDERS
[SECTION 91]

 Closure Period: A company may close its register of

Section 91 (1) members or register of debenture-holders or register of
other security holders for an aggregate period of 45
days in each year but not exceeding 30 days at any
one time.

 Notice Period: The respective registers of members,

debenture-holders or other security holders may be
closed by giving minimum 7 days‘ notice or such lesser
period as may be specified by Securities Exchange
Board of India (‗SEBI‘) for listed companies or those
companies which intend to get their securities listed.

 Exemption to Private Companies: It is to be noted

that a private company has been exempted from
issuing a public notice in newspapers, provided it
issues minimum 7 days‘ notice to its members prior to
closure of the registers. [Rule 10 (2)].

Section 91 (2) contains penalty provisions as stated

below:
Section 91 (2)
In case of contravention of provisions of section 91(1) (i.e.
if the respective registers are closed without giving notice,
or after giving a shorter notice than that so provided, or for

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a continuous or an aggregate period in excess of the

specified limits), section 91 (2) states following penalty:

 the company and every officer of the company who

is in default shall be liable to a penalty of ` 5,000
per day subject to a maximum of ` 1,00,000
during which the register is kept closed.

Provisions with regard to Annual Return are contained in

section 92 of the Companies Act, 2013 and Rules 11 and
12 of the Companies (Management & Administration)
ANNUAL RETURN Rules, 2014.
[SECTION 92 AND
94]
As per Rule 11, every company shall file its annual return
in Form No. MGT-7 except One Person Company (OPC)
and Small Company.

One Person Company and Small Company shall file the

annual return from the financial year 2020-2021 onwards
in Form No. MGT-7A.

According to section 92(1), every company shall prepare

a return (referred to as the Annual Return) in the
Contents of Annual prescribed form containing the particulars as they stood
Return on the close of the financial year regarding—

a) its registered office, principal business activities,

particulars of its holding, subsidiary and associate
companies;

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b) its shares, debentures and other securities and

shareholding pattern; 1
c) [Omitted]
d) its members and debenture-holders along with
changes therein since the close of the previous
financial year;
e) its promoters, directors, key managerial personnel
along with changes therein since the close of the
previous financial year;
f) meetings of members or a class thereof, Board and
its various committees along with attendance
details;

g) remuneration of directors and key managerial

personnel;

h) penalty or punishment imposed on the company, its

directors or officers and details of compounding of
offences and appeals made against such penalty or
punishment;
i) matters relating to certification of compliances,
disclosures as may be prescribed;
j) details, as may be prescribed, in respect of shares
held by or on behalf ofthe Foreign Institutional
Investors; and
k) such other matters as may be prescribed,

In terms of Second Proviso to Section 91 (1), the Central

Government may prescribe abridged form of annual
return for One Person Company, small company and
Abridged Form of such other class or classes of companies as may be
Annual Return prescribed. Accordingly, as per Rule 11 (1) One Person
Company and small company shall file the annual return

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from the financial year 2020-2021 onwards in Form No.

MGT-7A.

The annual return shall be signed by a director of the

company and the company secretary; and in case, there
is no company secretary, by a company secretary in
practice.
However, in relation to 3 One Person Company and small
Signing of Annual company, the annual return shall be signed by the
Return company secretary, or where there is no company
secretary, by the director of the company.

Section 92 (2) read with Rule 11 (2) of the Companies

(Management & Administration) Rules, 2014, provides
that the annual return, filed by:
Certification of Annual
Return by a Company
Secretary in practice in a) a listed company or
certain cases b) a company having paid-up share capital of ` 10
crore or more or a turnover of ` 50 crore or more,
shall be certified by a Company Secretary in
practice stating that the annual return discloses the
facts correctly and adequately and that the
company has complied with all the provisions of the
Companies Act, 2013.

Such certificate shall be in Form No. MGT – 8.

Every company shall place a copy of the annual return on

Placing of Annual its website, if any, and the web-link of such annual return
shall be disclosed in the Board's report. [refer Section 92

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Return on Website (3)]

A copy of annual return shall be filed with the RoC

within 60 days from the date on which the Annual
Time limit for Filing General Meeting (‘AGM’) is held. Where no annual
of Annual Return general meeting is held in any year, it shall be filed within
60 days from the date on which the annual general
meeting should have been held, along with the reasons
for not holding the AGM. [Section 92 (4) and Rule 12]

 Section 92(5) specifies as under:

if any company fails to file its annual return under
Penalty for
sub-section (4), before the expiry of the period
contravention specified therein, such company and its every officer
who is in default shall be liable to a penalty of 10,000
rupees and in case of continuing failure, with further
penalty of 100 rupees for each day during which
such failure continues, subject to a maximum of
2,00,000 rupees in case of a company and 50,000
rupees in case of an officer who is in default.

 Section 92(6) specifies penalty in case of a Company

Secretary in Practice as under: If a company
secretary in practice certifies the annual return
otherwise than in accordance with section 92 or the
rules made thereunder, he shall be liable to a penalty
of two lakh rupees.

In respect of place of keeping Registers and Returns

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Section 94 (1) and First Proviso state as under:

PLACE OF KEEPING  At Registered office:

AND INSPECTION The registers required to be kept and maintained by a
OF REGISTERS, company under section 88 and copies of the annual
RETURNS, ETC. return filed under section 92 shall be kept at the
[SECTION 94] registered office of the company.

 At any other place in India:

The registers or copies of return may also be kept at

any other place in India in which more than one-tenth
of the total number of members entered in the register
of members reside, if approved by a special resolution
passed at a general meeting of the company.

According to section 94 (2), the registers and their

indices, except when they are closed and the copies of all
the returns shall be open for inspection by any member,
debenture holder, other security holder or beneficial
Inspection of Registers, owner, during business hours without payment of any
etc. fees and by any other person on payment of such fees as
may be prescribed.

As per Rule 14 (1), the registers and indices maintained

pursuant to section 88 and copies of returns prepared
pursuant to section 92, shall be open for inspection during
business hours, at such reasonable time on every working
day as the Board may decide, by any member, debenture
holder, other security holder or beneficial owner without
payment of fee and by any other person on payment of
such fee as may be specified in the Articles of Association
of the company but not exceeding fifty rupees for each

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inspection.

As per Rule 14, Notwithstanding anything contained in

sub-rules (1) and (2), the following particulars of the
register or index or return in respect of the members of a
company shall not be made available for any inspection
under sub-section (2) or for taking extracts or copies
under sub-section (3) of section 94, namely: —

 address or registered address (in case of a body

corporate);
 e-mail ID
 Unique Identification Number
 PAN Number

 Preservation of register of members: The register of

members along with the index shall be preserved
permanently and shall be kept in the custody of
Preservation of company secretary of the company or any other
Register of person authorised by the Board for such purpose.
Members etc. and
Annual Return  Preservation of register of debenture holders/other
security holders: The register of debenture-holder or
any other security holder along with the index shall be
preserved for a period of 8 years from the date of
redemption of debentures or securities, as the case
may be, and shall be kept in the custody of the
company secretary of the company or any other
person authorized by the Board for such purpose.

 Preservation of Copies of documents filed with ROC:

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Copies of all annual returns prepared under section 92

and copies of all certificates and documents required
to be annexed thereto shall be preserved for a
period of 8 years from the date of filing with the RoC.

 Preservation of Foreign Register of Members: The

foreign register of members shall be preserved
permanently, unless it is discontinued and all the
entries are transferred to any other foreign register or
to the principal register. Foreign register of debenture-
holders or any other security holders shall be
preserved for a period of 8 years from the date of
redemption of such debentures or securities. The
foreign register shall be kept in the custody of the
company secretary or person authorised by the Board.

 If any inspection or the making of any extract or copy

Penalty for refusing required under this section is refused, the company
and every officer of the company who is in default shall
the inspection or
be liable for each such default, to a penalty of ` 1, 000
making any extract
for every day subject to a maximum of ` 1, 00,000
or copy required –
during which the refusal or default continues.
[Section 94 (4)]

 The Central Government* may also, by order, direct an

immediate inspection of the document, or direct that
the extract required shall forthwith be allowed to be
taken by the person requiring it. [Section 94 (5)]

According to Section 95, the registers, indices and copies

of annual return shall be prima facie evidence of any
REGISTERS, ETC.
matter directed or authorised to be inserted therein by or
TO BE EVIDENCE
under this Act.

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[SECTION 95]

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General Meetings
a) General Meeting:
 The general meeting can be an Annual General
Meeting (AGM) or an Extraordinary General
Meeting (EGM).
 An annual general meeting (AGM) is a
mandatory yearly gathering of a company's
shareholders.
 The objective of holding an AGM is to provide an
opportunity to members to discuss the
functioning of the company and take steps to
protect their interests.
 An Extraordinary General Meeting (EGM) can
be defined as a meeting of shareholders which
is not an AGM.
 The objective of holding an EGM is to discuss
any matter of urgent importance which cannot
be postponed till the next Annual
GeneralMeeting.

b) Board Meeting:
It is the meeting of the Board of Directors of a
company.

c) Class Meeting:
It is the meeting of particular class of persons, like,
creditors, preference shareholders, debenture-
holders, etc.

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The Act describes two types of general meetings to be

held by a company. They are–
GENERAL/ Members
MEETINGS  Annual General Meeting Section 96
 Extra-ordinary General Meeting Section 100 read
with Rule 17.

 Section 96(1) of the Companies Act, 2013 states

that every company, whether public or private,
except One Person Company, shall hold an annual
general meeting every year and that the gap
between two AGMs shall not be more than 15
months.
ANNUAL GENERAL
 The company shall specify the meeting as such [i.e.
MEETING (AGM)
Annual General Meeting (AGM)] in the notices
[SECTION 96] calling it.

Holding of Annual General Meeting (AGM)

 Annual general meeting should be held once every

year.(Calendar Year)

 First annual general meeting of the company

should be held within 9 months from the closing of
the first financial year. Hence it shall not be
necessary for the company to hold any annual
general meeting in the year of its incorporation.

 Subsequent annual general meetings of the

company should be held within 6 months from the
closing of the financial year.

 The gap between two annual general meetings

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should not exceed 15 months.

Extension of validity period of AGM

 In case, it is not possible for a company to hold an

annual general meeting within the prescribed time,
the Registrar may, for any special reason, extend
the time within which any annual general meeting
shall be held.
 Such extension can be for a period not exceeding
3 months. No such extension of time can be
granted by the Registrar for the holding of the first
annual general meeting.

Time and place for holding an annual general

meeting:

Section 96 (2) states that every annual general meeting

shall be called during business hours, i.e., between 9 a.m.
and 6 p.m. on any day that is not a National Holiday and
shall 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.

 If any default is made in holding the annual general

meeting of a company under section 96,
 the Tribunal may,
 notwithstanding anything contained in this Act or
the articles of the company,
 on the application of any member of the company,
call, or direct the calling of, an annual general

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POWER OF TRIBUNAL meeting of the company and

TO CALL ANNUAL  give such ancillary or consequential directions as
GENERAL MEETING the Tribunal thinks expedient:
[SECTION 97] Provided that such directions may include a
direction that one member of the company present
in person or by proxy shall be deemed to constitute
a meeting.

 A general meeting held in pursuance of sub-section

(1) shall, subject to any directions of the Tribunal,
be deemed to be an annual general meeting of the
company under this Act.

 If for any reason it is impracticable to call a meeting

POWER OF of a company,
TRIBUNAL TO CALL  other than an annual general meeting,
MEETINGS OF  in any manner in which meetings of the company
may be called, or to hold or conduct the meeting of
MEMBERS, ETC.
the company in the manner prescribed by this Act
[SECTION 98]
or the articles of the company,
 the Tribunal may, either suo motu or
 on the application of any director or member of the
company who would be entitled to vote at the
meeting,—
i. order a meeting of the company to be called,
held and conducted in such manner as the
Tribunal thinks fit; and
ii. give such ancillary or consequential
directions as the Tribunal thinks expedient,
including directions modifying or
supplementing in relation to the calling,
holding and conducting of the meeting, the
operation of the provisions of this Act or
articles of the company:

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Provided that such directions may include a

direction that one member of the company present
in person or by proxy shall be deemed to constitute
a meeting.

 Any meeting called, held and conducted in

accordance with any order made under sub-section
(1) shall, for all purposes, be deemed to be a
meeting of the company duly called, held and
conducted.

Section 99 lists out the punishment for contravention

of section 96 to 98.
PUNISHMENT FOR
DEFAULT IN
COMPLYING WITH  if any default is made in holding a meeting of the
THE PROVISIONSOF company in accordance with section 96 (i.e. AGM)
SECTION 96 TO 98 or
[SECTION 99]  section 97 (i.e. AGM called by Tribunal)or section
97 (a meeting of members other than AGM called
by Tribunal) or
 in complying with any the directions issued by the
Tribunal,
 then the company and every officer of the company
who is in default
 shall be punishable with fine which may extend to `
1,00,000 and in the case of a continuing default,
with a further fine which may extend to ` 5,000 for
every day during which the default continues.

a) the report under this section shall be prepared in

addition to the minutes of the general meeting;

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b) the report shall be signed and dated by the Chairman

of the meeting or in case of his inability to sign, by any
REPORT ON ANNUAL
two directors of the company, one of whom shall be
GENERAL MEETING
the Managing Director, if there is one and company
[SECTION 121]
secretary of the company;
c) the report shall contain the details in respect of the
following, namely:-
 the day, date, hour and venue of the AGM;
 confirmation with respect to appointment of
Chairman of the meeting;
 number of members attending the meeting;
 confirmation of Quorum;
 confirmation with respect to compliance of the Act
and the Rules, secretarial standards made
thereunder with respect to calling, convening and
conducting the meeting;
 business transacted at the meeting and result
thereof;
 particulars with respect to any adjournment,
postponement of meeting, change in venue; and

 any other points relevant for inclusion in the report.

d) the report shall contain fair and correct summary of the

proceedings of the meeting.

 If the company fails to file the report within 30 days

of conclusion of AGM,
 such company shall be liable to a penalty of
Penalty for default 1,00,000 rupees and in case of continuing failure,
with further penalty of 500 rupees for each day
after the first during which such failure continues,
subject to a maximum of 5,00,000 rupees and
 every officer of the company who is in default

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shall be liable to a penalty which shall not be less

than 25,000 rupees and in case of continuing
failure, with further penalty of 500 rupees for each
day after the first during which such failure
continues, subject to a maximum of 1,00,000
rupees.

EXTRA-ORDINARY All general meetings other than annual general meetings

GENERAL are called extra-ordinary general meetings (EGMs).
MEETINGS Section 100 of the Companies Act, 2013 contains
[SECTION 100] provisions regarding the calling of EGMs.

 By Board of Directors on its own –

Calling of EGM The Board may, whenever it deems fit, call an

extraordinary general meeting of the company.

Provided that an extraordinary general meeting of the

company, other than of the wholly owned subsidiary of
a company incorporated outside India, shall be held at
a place within India. [Section 100 (1)]

 By the Board of Directors at the requisition of –

a) In the case of company having a share capital,
such number of members who hold, on the date of
receipt of requisition, at least 1/10th of such
paidup share capital of the company as on that
date carries the right of voting;

b) In the case of company not having a share capital,

such number of members who have, on the date of
receipt of requisition, at least 1/10th of total
voting power of all the members having on the
said date a right to vote. [Section 100 (2)] .

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The requisition shall set out the matters for the

consideration of which the meeting is to be called
and shall be signed by the requisitionists and sent
to the registered office of the company. [Section
100 (3)]

 By requisitionists themselves:
 If the Board does not, within 21 days from the
date of receipt of a valid requisition in regard to
any matter, proceed to call a meeting for the
consideration of that matter on a day not later
than 45 days from the date of receipt of such
requisition, the meeting may be called and held
by the requisitionists themselves within a period
of three months from the date of the requisition.
[Section 100 (4)]

 A meeting under sub-section (4) by the

requisitionists shall be called and held in the
same manner in which the meeting is called and
held by the Board. [Section 100 (5)]

 Any reasonable expenses incurred by the

requisitionists in calling a meeting under sub-
section (4) shall be reimbursed to the
requisitionists by the company and

 The sums so paid shall be deducted from any

fee or other remuneration under section 197
payable to such of the directors who were in
default in calling the meeting. [Section 100 (6)]

 The members may requisition convening of an

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Rule 17 of the extraordinary general meeting in accordance with sub-

Companies section (4) of section 100, by providing such requisition
(Management and in writing or through electronic mode at least clear
Administration) twenty-one days prior to the proposed date of such
extraordinary general meeting.
Rules, 2014
 The notice shall specify the place, date, day and hour
of the meeting and shall contain the business to be
transacted at the meeting. - Explanation. - For the
purposes of this sub-rule, it is hereby clarified that
requisitionists should convene meeting at Registered
Office or in the same city or town where Registered
office is situated and such meeting should be
convened on any day except National Holiday.
 If the resolution is to be proposed as a special
resolution, the notice shall be given as required by
sub-section (2) of section 114.
 The notice shall be signed by all the requisitionists or
by a requisitionist duly authorised in writing by all other
requisitionists on their behalf or by sending an
electronic request attaching therewith a scanned copy
of such duly signed requisition.

 No explanatory statement as required under section

102 need be annexed to the notice of an extraordinary
general meeting convened by the requisitionists and
the requisitionists may disclose the reasons for the
resolution(s) which they propose to move at the
meeting.

 The notice of the meeting shall be given to those

members whose names appear in the Register of
members of the company within three days on which
the requisitionists deposit with the Company a valid
requisition for calling an extraordinary general meeting.

 Where the meeting is not convened, the requisitionists

shall have a right to receive list of members together

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with their registered address and number of shares

held and the company concerned is bound to give a
list of members together with their registered address
made as on twenty first day from the date of receipt of
valid requisition together with such changes, if any,
before the expiry of the forty-five days from the date of
receipt of a valid requisition.

 The notice of the meeting shall be given by speed post

or registered post or through electronic mode. Any
accidental omission to give notice to, or the non -
receipt of such notice by, any member shall not
invalidate the proceedings of the meeting.

NOTICE OF A
MEETING [ SECTION Section 101 (1) of the Companies Act, 2013 states that in
101] order to properly call a general meeting, a notice of at
least 21 clear days is required to be given either in
writing or through electronic mode in such manner as may
be prescribed.

Every notice of a meeting must state the place, date, day

and the hour of the meeting and shall contain a statement
Contents of the Notice of business to be transacted at that meeting.
[Section 101(2)]

The notice of every meeting of the company shall be

given to:

a) every member of the company, legal representative of

any deceased member or the assignee of insolvent
Persons entitled to member;
receive the Notice of
the General Meeting b) the auditor or auditors of the company;

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[Section 101(3)] c) every director of the company.

As per Rule 18 of the Companies (Management &

Administration) Rules, 2014 , sending of notices through
Sending of Notice of electronic mode has been statutorily recognized.
Meeting through Accordingly, it is permitted for a company to give notice
Electronic Mode: through electronic mode.

The expression ‗‗electronic mode‘‘ shall mean any

communication sent by a company through its authorized
and secured computer programme which is capable of
producing confirmation and keeping record of such
communication addressed to the person entitled to
receive such communication at the last electronic mail
address provided by the member.

 A notice may be sent through e-mail as a–

a) Text; or
b) As an attachment to e-mail; or
c) As a notification providing electronic link; or
d) UniForm Resource Locator for accessing such
notice.

 The e-mail shall be addressed to the person entitled to

receive such e-mail as per the records of the company
as provided by the depository.

 The subject line in e-mail shall state the name of the

company, notice of the type of meeting, place and the
date on which the meeting is scheduled.

 If notice is sent in the Form of a non-editable

attachment to e-mail, such attachment shall be in the
Rule 18(3) Portable Document Format or in a non-editable format
together with a ‗link or instructions‘ for recipient for
downloading relevant version of the software.

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 The company‘s obligation shall be satisfied when it

transmits the e-mail and the company shall not be held
responsible for a failure in transmission beyond its
control.

 If a member entitled to receive notice fails to provide or

update relevant e-mail address to the company, or to
the depository participant as the case may be, the
company shall not be in default for not delivering
notice via e-mail.

 The company may send e-mail through in-house

facility or its registrar and transfer agent or authorise
any third-party agency providing bulk e-mail facility.

 The notice shall be placed simultaneously on the

website of the Company, if any, and on the website as
may be notified by Central Government.

According to Section 101(4) any accidental omission to

give notice to or the non-receipt of such notice by, any
Non-receipt of member or other person who is entitled to such notice for
Notice: any meeting shall not invalidate the proceedings of the
meeting. The onus is on the company to prove that
the omission was not deliberate.

As noted earlier, usually general meetings need to be

called by giving at least a notice of 21 clear days.

shorter notice of
less than 21 days However, a general meeting may be called after giving
shorter notice than that specified in sub-section (1) of
[Proviso to Section
Section 101, if consent, in writing or by electronic mode, is
101 (1)]
accorded thereto—

a) in the case of an annual general meeting, by not less

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than ninety-five per cent. of the members entitled to

vote thereat; and

b) in the case of any other general meeting, by members

of the company—
o holding, if the company has a share capital,
majority in number of members entitled to vote
and who represent not less than ninety-fiveper
cent. of such part of the paid-up share capital of
the company as gives a right to vote at the
meeting; or

o having, if the company has no share capital, not

less than ninety-five per cent. of the total voting
power exercisable at that meeting.

A general meeting (AGM or EGM) has to be called by

the Board of Directors. An individual director does not
Authority to call a
have the authority to call a General Meeting. Any notice of
General Meeting
General Meeting given without the sanction of the Board
is invalid; however, the same can be ratified by the Board.
For calling a General Meeting, the Board passes a
Board Resolution.

Section 102 of the Companies Act, 2013 mentions that

EXPLANATORY where any special business is to be transacted at the
STATEMENT TO BE company‘s general meeting, then an ‗Explanatory
ANNEXED TO NOTICE Statement‘ shall be annexed to the notice calling such
[SECTION 102] general meeting.
The ‗Explanatory Statement‘ must specify,

a) the nature of concern or interest, financial or

otherwise, if any, in respect of each items of—
i. every director and the manager, if any;

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ii. every other key managerial personnel; and

iii. relatives of the persons mentioned in sub-
clauses (i) and (ii);
b) any other information and facts that may enable
members to understand the meaning, scope and
implications of the items of business and to take
decision thereon.

Ordinary business and Special business:

Companies Act, 2013 sets out two types of businesses as

under:

 Ordinary business (OB)

 Special business. (SB)

Ordinary business includes the following business which

are transacted at the Annual General Meeting of a
company–
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.

 In the case of AGM, all business to be transacted

thereat except the ones stated above are special
business.
 At the EGM, every business transacted is a special
business. Explanatory statement is not required for
transacting Ordinary Business.

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 Proviso to section 102 (2) sets out that if any item of

special business relates to, or affects, any other
company, the extent of shareholding in that other
company of every promoter, director, manager and of
every other KMP shall be disclosed, if the extent of
shareholding is 2% or more of the paid-upshare capital
of that other company.

 In case any item of business refers to any document

which is to be considered at the meeting, then the time
and place where such documentcan be inspected
should also be specified in the explanatory statement.

 If as a result of non-disclosure or insufficient

disclosure in explanatory statement, any benefit
accrues to a promoter, director, manager, other key
Effect of non- managerial personnel or their relatives,
disclosure/insufficient  such person shall hold such benefit in trust for the
disclosure in
company, and shall,
Explanatory Statement
 without prejudice to any other action being taken
[Section 102(4)]:
against him under this Act or under any other law
for the time being in force,
 be liable to compensate the company to the extent
of the benefit received by him.

 if any default is made in complying with the

provisions of this section,
 every promoter, director, manager or other key
Penalty for managerial personnel of the company
contravention of the  who is in default shall be liable to a penalty of
provisions of section
50,000 rupees or 5 times the amount of benefit
102
accruing to the promoter, director, manager or other
key managerial personnel or any of his relatives,
whichever is higher. [Section 102 (5)]

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Quorum means the minimum number of members who

must be personally present in order to constitute a valid
QUORUM FOR meeting.
MEETINGS
Section 103 of the Companies Act, 2013 states that
[SECTION 103] unless the articles of the company provide for a larger
number, the quorum for the meeting shall be as follows–

 If number of members is not more than 1000, quorum

shall be 5 members personally present.

Public Company -  if the number of members is more than 1000 but upto
5000, then the quorum shall be 15 members
personally present.

 If the number of members exceed 5000, then quorum

shall be 30 members personally present.

Private Company - Two members personally present shall be the Quorum.

 It is to be noted that the term ‗members personally

present‘ as mentioned above refers to the members
entitled to vote in respect of the items of business
on the agenda of the meeting.

 One person can be an authorised representative of

more than one body corp. in such case his
presence is treated as more than one member for
Quorum counting.

 Quorum shall be present not only at the time of

commencement of the meeting but also while
transacting business.
 Remote e-voters shall be counted for the purpose

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of Quorum.
 Member who is not entitled to vote on any particular
item of businessbeing a related party, shall be
counted for the purpose of Quorum.
 Quorum rules not apply on postal ballots.

If the quorum is not present within half-an-hour from the

time appointed for holding a meeting of the company—

Adjournment of
Meeting for want of 1. the meeting shall stand adjourned to the same day
in the next week at the same time and place, or to
Quorum
such other date and such other time and placeas
the Board may determine; or
[Section 103 (2) and 2. the meeting, if called by requisitionists under
(3)] section 100, shall stand cancelled:

Provided that in case of an adjourned meeting or of a

change of day, time or place of meeting under clause (a),
the company shall give not less than three days‘ notice to
the members either individually or by publishing an
advertisementin the newspapers (one in English and one
in vernacular language) which is in circulation at the place
where the registered office of the company is situated.

Quorum not present at the adjourned meeting also:

Where quorum is not present in the adjourned meeting

also within half an hour, then the members present shall
form the quorum.

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REPRESENTATIVE (Sec. 112 and 113 of 2013 Act)

Representation of the President and Governors (Sec. 112 of 2013 Act)

 If the President of India or Governor of a State is a member in any other company, he

may authorise such person as he thinks fit to act as his representative at any GM or
class meeting of such company.
 A person appointed as a representative is entitled to exercise the same rights and
powers as if he were a member of the company.
Representation of corporations at meetings of companies (Sec. 113 of 2013 Act)

 If a body corporate is a member in any other company, it may, by resolution of its

Board of directors, authorise such person as it thinks fit to act as its representative at
any GM or class meeting of such company.
 A person appointed as a representative is entitled to exercise the same rights and
powers as if he were a member of the company.

Election of Chairman by Members:

Section 104 of the Companies Act, 2013 seeks to provide

that unless the Articles of Association of the Company
otherwise provide, the members, personally present, shall
elect among themselves to be the Chairman on a show of
hands.

Demand for Poll:

CHAIRMAN OF  The section further provides that if a poll is

MEETING demanded on the election of the Chairman,
 the Chairman elected by show of hands shall
[SECTION 104]
continue to be the Chairman of the meeting until

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some other person is elected as Chairman as a

result of poll, and
 such other elected person shall be the Chairman for
rest of the meeting.

Powers of Chairman:

 Chairman of the meeting is the person who

manages the meetings and ensures that the
required decorum of the meeting is maintained at
all times, till the meeting is concluded and
 post that, executes the minutes of the meeting.
 The Chairman has prima facie authority to decide
all questions which arise at a meeting and which
require decision at that time. In order to fulfil his
duty properly, he must observe strict impartiality.

Chairman to have ‗casting vote‘ if so provided in the

Articles:

 The Chairman has a casting vote in Board

Meetings and general meetings,
 if specifically empowered by the articles of the
company.
 The term ‗casting vote‘ means that in the event of
equality of vote on a particular business being
transacted at the meeting, the Chairman of the
meeting shall have a right to cast a second vote.
 If there is no provision in the articles for a casting
vote, an ordinary resolution on which there is
equality of votes is deemed to be dropped.

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Section 105 of the Companies Act, 2013 and Rule 19 of

the Companies (Management & Administration) Rules,
2014 contain provisions relating to the proxies.
PROXIES
[SECTION 105]

 Appointment of a proxy is an important right of a

member of the company. Section 105 (1) provides
that 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.
 However, a proxy shall not have the right to speak at
such meeting and shall not be entitled to vote except
on a poll.

 Applicability of the sub-section (1) –

Unless the articles of a company otherwise
provide, this sub-section shall not apply to a
company not having a share capital.
The Central Government may also prescribe a
class or classes of companies whose members shall
not be entitled to appoint another person as a proxy.
 According to Rule 19,
A member of a company registered under
section 8 shall not be entitled to appoint any other
person as his proxy unless such other person is
also a member of such company.

 A person can act as proxy on behalf of members not

exceeding 50 and holding in aggregate not more
than 10 per cent of the total share capital of the
company carrying voting rights.

 However, a member who is holding more than 10 per

cent of the total share capital of the company carrying

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voting rights may appoint a single person as a proxy

and such person shall not act as proxy for any other
person or shareholder. [Rule 19 (2)].

 As a compliance requirement,
In every notice calling a meeting of a company,
there shall appear with reasonable prominence a
statement that a member entitled to attend and vote
is entitled to appoint a proxy, or, where that is
allowed, one or more proxies, to attend and vote
instead of himself, and that a proxy need not be a
member. [Section 105 (2)]

 The appointment of proxy shall be in Form No. MGT-

11. [Rule 19(3)]

 If the instrument appointing a proxy is in the

prescribed Form, it shall not be questioned on the
ground that it fails to comply with any special
requirements specified for such instrument by the
articles of a company. [Section 105 (7)].

 The instrument appointing a proxy shall be in writing

and signed by the appointer or his attorney duly
authorised in writing.

If the appointer is a body corporate, the

instrument shall be under its seal or be signed by an
officer or an attorney duly authorised by the body
corporate. [Section 105 (6)].

 Section 105 (4) provides that a proxy received 48

hours before the meeting will be valid even if the
articles provide for a longer period.

 Section 105 (8) provides that every member entitled

to vote at a meeting of the company, or on any
resolution to be moved thereat, shall be entitled

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during the period beginning 24 hours before the time

fixed for the commencement of the meeting and
ending with the conclusion of the meeting, to inspect
the proxies lodged, at any time during the business
hours of the company, provided not less than 3
days' notice in writing of the intention so to inspect is
given to the company.

Penalty for default–

 If default is made in complying with section 105 (2),

every officer of the company who is in default shall
be liable to penalty of 5,000 rupees. [Section
105(3)]

 If for the purpose of any meeting of a company,

invitations to appoint as proxy a person or one of a
number of persons specified in the invitations are
issued at the company's expense to any member
entitled to have a notice of the meeting sent to him
and to vote thereat by proxy, every officer of the
company who issues the invitation as aforesaid or
authorises or permits their issue, shall be liable to a
penalty of 50,000 rupees.

Provided that an officer shall not be liable under

this sub-section by reason only of the issue to a
member at his request in writing of a form of
appointment naming the proxy, or of a list of
persons willing to act as proxies, if the form or list is
available on request in writing to every member
entitled to vote at the meeting by proxy. [Section
105(5)].

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The various modes through which a shareholder can

cast his vote are as follows:
VOTING
[SECTION 106-109]  Voting by show of hands – (section 107);
 Voting by electronic means – (section 108);
 Voting by demand of poll – (section 109);
 Voting by Postal Ballot – (section 110).

Section 106 (1) indicates the supremacy of Articles of

Association and specifies that the Articles of a company
may provide that:
RESTRICTION ON
VOTING RIGHTS
 no member shall exercise any voting right in
[SECTION – 106]
respect of any share registered in his name on
which any amount is due from him on calls or any
other sums presently payable by him to the
company have not been paid, or

 in regard to which the company has exercised any

right of lien.

Section 106 (2) requires that a company shall not prohibit

any member from exercising his voting rights on any other
ground except the grounds mentioned.

In case of joint shareholders, they must concur in voting

unless the articles provide to the contrary. Regulation 52
of Table F states as under:

a) In the case of joint holders, the vote of the senior

who tenders a vote, whether in person or by proxy,

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shall be accepted to the exclusion of the votes of

the other joint holders.
b) For this purpose, seniority shall be determined by
the order in which the names stand in the register
of members.

VOTING BY SHOW  According to section 107 (1) of the Companies Act,

2013, unless the voting is demanded by way of poll or
OF HANDS
by electronic means, the voting shall be done by way
[SECTION 107] of show of hands in the first instance.

 Section 107(2) states that the declaration by the

Chairman of the meeting of the passing of a
resolution by show of hands and an entry to that effect
in the minutes books shall be conclusive evidence that
the resolution has been passed.

Section 108 of the Companies Act, 2013 has introduced

the facility of e-voting in respect of prescribed classes of
VOTING THROUGH
companies. Accordingly, the members of such companies
ELECTRONIC
may exercise their right to vote by electronic means.
MEANS [SECTION
108]
Rule 20 of the Companies (Management &
Administration) Rules, 2014 provides a detailed procedure
for electronic voting.

Rule 20 (1) states that ―voting through electronic means‖

shall apply in respect of the general meetings for which
notices are issued on or after the date of commencement
of Rule 20.

Companies required to provide its members the

facility of exercising right to vote by electronic means

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[Rule 20 (2)]:

Every company which: -

 has listed its equity shares on a recognised stock

exchange; and
 has not less than 1000 members; shall provide to its
members facility to exercise their right to vote on
resolutions proposed to be considered at a general
meeting by electronic means.

A member may exercise his right to vote through voting

Exercise of right to vote by electronic means on resolutions and the company shall
through voting by pass such resolutions in accordance with the provisions of
electronic means by a this rule.
member:

Procedure:

Rule 20 (4) states that a company which provides the

facility to its members to exercise voting by electronic
means shall comply with the following procedure:

 Notice of meeting:
The notice of the meeting shall be sent to all the
members, directors and auditors of the company
either-
i. by registered post or speed post; or
ii. through electronic means, namely, registered e-
mail ID of the recipient; or
iii. by courier service;

 Placing of Notice on website:

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The notice shall also be placed on the website, if any,

of the company and of the agency forthwith after it is
sent to the members;

 Particulars contained in Notice:

The notice of the meeting shall clearly state –
i. that the company is providing facility for voting
by electronic means and the business may be
transacted through such voting;

ii. that the facility for voting, either through

electronic voting system or ballot or polling
paper shall also be made available at the
meeting and members attending the meeting
who have not already cast their vote by remote
e-voting shall be able to exercise their right at
the meeting;

iii. that the members who have cast their vote by

remote e-voting prior to the meeting may also
attend the meeting but shall not be entitled to
cast their vote again;

 The Notice shall:

(a) indicate the process and manner for voting by
electronic means;
(b) indicate the time schedule including the time
period during which the votes may be cast by remote
e-voting;
(c) provide the details about the login ID;
(d) specify the process and manner for generating or
receiving the password and for casting of vote in a
secure manner.

 Publication of notice:
The company shall cause a public notice by way of an
advertisement to be published, immediately on
completion of dispatch of notices for the meeting under

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clause (i) of sub-rule (4) but at least 21 days before the

date of general meeting, at least once in a vernacular
newspaper in the principal vernacular language of the
district in which the registered office of the company is
situated, and having a wide circulation in that district,
and at least once in English language in an English
newspaper having country- wide circulation,

 Time for opening of e-voting:

 The facility for remote e-voting shall remain
open for not less than three days and
 shall close at 5.00 p.m. on the date preceding
the date of the general meeting;

 Option for remote e-voting:

 During the period when facility for remote evoting is
provided, the members of the company, holding
shares either in physical form or in dematerialized
form, as on the cut-off date, may opt for remote e-
voting.
 Provided that once the vote on a resolution is cast by
the member, he shall not be allowed to change it
subsequently or cast the vote again:

 When to block facility:

 At the end of the remote e-voting period, the facility
shall forthwith be blocked:

 Provided that if a company opts to provide the same

electronic voting system as used during remote e-
voting during the general meeting, the said facility shall
be in operation till all the resolutions are considered
and voted upon in the meeting and may be used for
voting only by the members attending the meeting and
who have not exercised their right to vote through
remote e- voting

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 Appointment of scrutinizer(s):
 The Board of Directors shall appoint one or more
scrutinizer, who may be Chartered Accountant in
practice, Cost Accountant in practice, or Company
Secretary in practice or an Advocate, or any other
person who is not in employment of the company
and is a personof repute who, in the opinion of the
Board can scrutinize the voting and remote e-voting
process in a fair and transparent manner.
 Provided that the scrutinizer so appointed may
take assistance of a person who is not in
employment of the company and who is well-versed
with the electronic voting system;

 Willingness of scrutinizer for appointment:

 the scrutinizer shall be willing to be appointed and
be available for the purpose of ascertaining the
requisite majority;

 Role of Chairman:
 The Chairman shall, at the general meeting, at the
end of discussion on the resolutions on which
voting is to be held, allow voting, as provided in
clauses (a) to (h) of sub-rule (1) of rule 21, as
applicable, with the assistance of scrutinizer, by use
of ballot or polling paper or by using an electronic
voting system for all those members who are
present at thegeneral meeting but have not cast
their votes by availing the remote e- voting facility.

 Counting of votes:
 The scrutinizer shall, immediately after the
conclusion of voting at the general meeting, first
count the votes cast at the meeting,
 thereafter unblock the votes cast through remote e-
voting in the presence of at least two witnesses not

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in the employment of the company and

 make a consolidated scrutinizer‘s report of the total
votes cast in favour or against, if any, not later than
three days of conclusion of the meeting,
 to the Chairman or a person authorized by him in
writing who shall countersign the same:
 Provided that the Chairman or a person
authorized by him in writing shall declare the result
of the voting forthwith;

 Scrutinisers to have access to details relating to

members:
 For the purpose of ensuring that members who
have cast their votes through remote e-voting do
not vote again at the general meeting,
 the scrutiniser shall have access, after the closure
of period for remote e-voting and
 before the start of general meeting, to details
relating to members, such as their names, folios,
number of shares held and such other information
that the scrutiniser may require, who have cast
votes through remote e-voting but not the manner
in which they have cast their votes:

 Maintenance of Register by scrutinisers:

The scrutiniser shall maintain a register either
manually or electronically to record
 the assent or dissent received,
 mentioning the particulars of name, address, folio
number or client ID of the members,
 number of shares held by them,
 nominal value of such shares and whether the
shares have differential voting rights;

 Safe Custody of register:

The register and all other papers relating to
voting by electronic means shall remain in the safe

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custody of the scrutiniser until the Chairman considers,

approves and signs the minutes and thereafter, the
scrutiniser shall hand over the register and other
related papers to the company.

 Results along with the report of the scrutiniser to

be placed on websites:
The results declared along with the report of
the scrutiniser shall be placed on the website of the
company, if any, and on the website of the agency
immediately after the result is declared by the
Chairman:

Provided that in case of companies whose equity

shares are listed on a recognised stock exchange, the
company shall, simultaneously, forward the results to
the concerned stock exchange or exchanges where its
equity shares are listed and such stock exchange or
exchanges shall place the results on its or their
website.

 Date when resolution shall be deemed to be

passed:
Subject to receipt of requisite number of votes,
the resolution shall be deemed to be passed on the
date of the relevant general meeting.

Explanation: For the purposes of this clause, the

requisite number of votes shall be the votes required to
pass the resolution as the ‗ordinary resolution‘ or the
‗special resolution‘, as the case may be, under section
114 of the Companies Act, 2013.

 Resolution not to be withdrawn:

A resolution proposed to be considered through
voting by electronic means shall not be withdrawn.

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 Members who can demand for poll:

i. In case of a company having a share capital, by
the members present in person or proxy, where
allowed, and having not less than 1/10th of the
total voting power or holding shares on which an
DEMAND FOR POLL aggregate sum of not less than ` 5,00,000 or
[SECTION 109] such higher amount as may be prescribed has
been paid–up.

ii. In case of any other company, by any member

or members present in person or by proxy,
where allowed, and having not less than 1/10th
of the total voting power.

 Withdrawal of demand for poll: The demand for a poll

may be withdrawn at any time by the persons who
made the demand before resolution passed/dropped.

 To take forthwith poll demanded for adjournment of

meeting or appointment of Chairman:

 When to take poll demanded on any other question: A

poll demanded on any question other than
adjournment of the meeting or appointment of
Chairman shall be taken at such time, not being later
than 48 hours from the time when the demand was
made, as the Chairman of the meeting may direct.

 Appointment of sufficient number of scrutinizers:

Where a poll is to be taken, the Chairman of the
meeting shall appoint sufficient number of scrutinizers
to scrutinize the poll process and votes given on poll
and toreport thereon to him.

 Duties of scrutinizer: The duties of a scrutinizer shall

be as follows–

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i. To ensure proper conduct of the polling process;

ii. To maintain proper records of the poll;
iii. To submit a report to the Chairman of the
meeting which shall contain the details of votes
cast in the favour and against the resolution; and
iv. To ensure the compliance of the provisions of
section 109 and Rule 21.

 Power of Chairman to regulate: The Chairman of the

meeting shall have the power to regulate the manner
in which the poll shall be taken.

Section 2(65) defines the term ―postal ballot‖ to mean

voting by post or through any electronic mode.
POSTAL BALLOT
[SECTION 110]
The provisions relating to passing of resolutions by means
of ‗postal ballot‘ are contained in Section 110.

Further, Rule 22 of the Companies (Management and

Administration) Rules, 2014 contains the provisions
relating to procedure to be followed for conducting
business through postal ballot.

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Extract of Section 110 of the Companies Act, 2013

―(1) Notwithstanding anything contained in this Act, accompany —
(a) shall, in respect of such items of business as the Central Government may, by
notification, declare to be transacted only by means of postal ballot; and
(b)may, in respect of any item of business, other than ordinary business and any
business in respect of which directors or auditors have a right to be heard at any
meeting, transact by means of postal ballot,
in such manner as may be prescribed, instead of transacting such business at a
general meeting.
Provided that any item of business required to be transacted by means of postal
ballot under clause (a), may be transacted at a general meeting by a company
which is required to provide the facility to members to vote by
electronicmeansundersection108, in the manner provided in that section.
(2)
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.”
 Section110 seeks to provide that the Central Government may declare certain
items of business that can be transacted only by postal ballot. In addition, in
respect of any other item of business (except ordinary business and any business in
respect of which directors or auditors have a right to be heard at any meeting)
postal ballot may be used.
 Sub-section (2) of Section 110 makes a deeming provision that if a resolution
is assented by requisite majority of share holders by means of postal ballot, it shall
be deemed to have been passed at a general meeting convened in that behalf.
 Manner in which postal ballot shall be conducted is prescribed in Rule 22 of
the Companies (Management & Administration) Rules, 2014. The same is described
as under:

Where a company is required or decides to pass any resolution by way of postal

ballot, it shall send a notice to all the share holders, along with a draft resolution

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explaining the reasons there for and requesting Them to send their assent or
dissent in writing on a postal ballot because postal ballot means voting by post or
through electronic means within a period of thirty days from the date of dispatch
of the notice.
 The notice shall be sent either:
(a) By Registered Post or speed post, or
(b) Through electronic means like registered e-mail id or
(c) through courier service for facilitating the communication of the assent or
dissent of the shareholder to the resolution within the said period of thirty days.
 An advertisement shall be published at least once in a vernacular newspaper
in the principal vernacular language of the district in which the registered office of
the company is situated, and having a wide circulation in that district, and at least
once in English language in an English news paper having a wide circulation in that
district, about having dispatched the ballot papers and specifying therein, inter
alia, the following matters, namely:-
(a) a statement to the effect that the business is to be transacted by postal ballot
which includes voting by electronic means;
(b) the date of completion of dispatch of notices;
(c) the date of commencement of voting;
(d) the date of end of voting;
(e) the statement that any postal ballot received from the member beyond the
said date will not be valid and voting whether by post or by electronic means shall
not be allowed beyond the said date;
(f) a statement to the effect that members, who have not received postal ballot
forms may apply to the company and obtain a duplicate thereof; and
contact details of the person responsible to address the grievances connected with
the voting by postal ballot including voting by electronic means.
 The notice of the postal ballot shall also be placed on the website of the
company forthwith after the notice is sent to the members and such notice shall

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remain on such website till the last date for receipt of the postal ballots from the
members.
 The Board of directors shall appoint one scrutinizer, who is not in
employment of the company and who, in the opinion of the Board can conduct the
postal ballot voting process in a fair and transparent manner.
 The scrutinizer shall be willing to be appointed and be available for the
purpose of ascertaining the requisite majority.
 Postal ballot received back from the shareholders shall be kept in the safe
custody of the scrutinizer and after the receipt of assent or dissent of the
shareholder in writing on a postal ballot, no person shall deface or destroy the
ballot paper or declare the identity of the shareholder.
 The scrutinizer shall submit his report as soon as possible after the last date of
receipt of postal ballots but not later than seven days thereof.
 The scrutinizer shall maintain a register either manually or electronically to
record their assent or dissent received, mentioning the particulars of name,
address, folio number or client ID of the shareholder, number of shares held by
them, nominal value of such shares, whether the shares have differential voting
rights, if any, details of postal ballots which are received in defaced or mutilated
form and postal ballot forms which are invalid.
 The postal ballot and all other papers relating to postal ballot including voting
by electronic means, shall be under the safe custody of the scrutinizer till the
Chairman considers, approves and signs the minutes and thereafter, the scrutinizer
shall return the ballot papers and other related papers or register to the company
who shall preserve such ballot papers and other related papers or register safely.

 The assent or dissent received after thirty days from the date of issue of
notice shall be treated as if reply from the member has not been received.
 The results shall be declared by placing it, along with the scrutinizer’s

report, on the website of the company.

 The provisions of rule 20 regarding voting by electronic means shall apply, as
far as applicable, mutatis mutandis to this rule in respect of the voting by

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electronic means.
 pursuant to clause (a) of sub-section (1) of section 110, the following items of
business shall be transacted only by means of voting through a postal ballot—
(a) alteration of the objects clause of the memorandum and in the case of the
company in existence immediately before the commencement of the Act,
alteration of the main objects of the memorandum;
(b) alteration of articles of association in relation to insertion or removal of
provisions which, under sub-section (68) of section 2, are required to be included
in the articles of a company in order to constitute it a private company;
(c) change in place of registered office outside the local limits of any city, town or
village as specified in sub-section (5) of section 12;
 change in objects for which a company has raised money from public through
prospectus and still has any unutilized amount out of the money so raised under
sub-section (8) of section13;
(a) issue of shares with differential rights as to voting or dividend or otherwise
under sub-clause(ii) of clause (a) of section 43;
(b) variation in the rights attached to a class of shares or debentures or other
securities as specified under section 48;
(c) buy-back of shares by a company under sub-section (1) of section 68;
(d) election of a director under section 151 of the Act;
(e) sale of the whole or substantially the whole of an undertaking of a company
as specified under sub-clause(a)of sub-section(1) of section 180;
(f) giving loans or extending guarantee or providing security in excess of the limit
specified under sub-section(3)of section186:

Provided that any aforesaid items of business under this sub-rule, required to be
transacted by means of postal ballot, may be transacted at a general meeting by a
company which is required to provide the facility to members to vote by electronic
means under section108, in the manner provided in that section.

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Provided further that One Person Companies and other companies having
members upto two hundred are not required to transact any business through
postal ballot.

Circulation of members‘ resolution and statements:

While the board enjoys the primacy in setting the

agenda of the meetings, the members are given a right
under section 111 to propose resolutions for consideration
CIRCULATION OF
at the general meetings. The number of members
MEMBERS‘
required to make a requisition under sub-section (1) of
RESOLUTIONS this section are as required to requisition a general
[SECTION 111] meeting in sub-section (2) of section 100.

Prerequisites of a valid Requisition:

The prerequisites for a valid requisition prescribed in sub-

section (2) of section 111 are as under:

i. in the case of a company having a share capital,

such number of members who hold, on the date of
the receipt of the requisition, not less than one-
tenth of such of the paid-up share capital of the
company as on that date carries the right of voting;

ii. in the case of a company not having a share

capital, such number of members who have, on the
date of receipt of the requisition, not less than one-
tenth of the total voting power of all the members
having on the said date a right to vote.

iii. Two or more copies of the said requisition are

required to contain signatures of all the
requisitionists.

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iv. The requisition must be deposited at the registered

office of the company not less than six weeks
before the meeting in the case of a requisition
requiring notice of a resolution. In case of other
resolutions, the same is to be deposited not less
than two weeks before the meeting.
v. A sum reasonably sufficient to meet the company‘s
expenses in giving effect to proposing the
resolution is deposited or tendered.
vi. When the money is tendered, no payment is made
but an unconditional offer is made to pay money.

vii. The proviso to sub-section (2) of section 111

provides that the time period provided above need
not be complied with in case an annual general
meeting is called on a date within six weeks after
the copy has been deposited. The copy of
requisition, in such a case, shall be deemed to have
been properly deposited for the purposes thereof
although not deposited within the time required by
this sub-section. The company is not duty bound to
circulate the notice of the resolution when the
prerequisites are not complied with.

Notice to members:

 As per section 111 of the Companies Act, 2013, a

company shall, on requisition in writing of such
number of members, as required in section 100
(calling of EGM), give notice to members of any
resolution which may properly be moved and
 is intended to be moved at a meeting; and circulate
to members any statement with respect to the
matters referred to in proposed resolution or
business to be dealt with at that meeting.

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Exemption from circulation of any statement:

The Company shall not be bound to circulate any

statement,
 if on the application either on behalf of the company
or
 of any other person who claims to be aggrieved, the
Central Government, by order, declares that the
rights conferred are being abused to secure
needless publicity for defamatory matter.

Order to bear the cost:

An order made as above by the Central Government

may also direct that the cost incurred by the company
shall be paid to the company by the requisitionists,
notwithstanding that they are not parties to the
application.

Default in complying with the provisions:

If any default is made in complying with the provisions of

this section, the company and every officer of the
company who is in default shall be liable to a penalty of
25,000 rupees.

RESOLUTIONS A motion which has obtained the necessary majority vote

in its favour becomes a resolution. When a resolution is
[SECTION 114–117]
passed, a company is bound by it.

Difference between Motion and Resolution—

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 Most matters come before a meeting by way of a

motion recommending that the meeting may express
approval or disapproval or take certain action or order
something to be done.

 A motion is a proposal, and a resolution is the

adoption of a motion duly made and seconded. But
every motion need not be followed by a resolution, e.g.
where a motion is made for the adjournment of the
meeting.

 A motion whether it is passed for the closure of

discussion or adjournment, etc. can be passed by an
ordinary resolution unless there is a specific provision
in the articles.

As per the Companies Act, 2013, resolutions are of two

types–

 Ordinary Resolutions – which are passed by simple

majority; and
 Special Resolutions – votes cast in favour are not less
ORDINARY AND than 3 times the number of the votes, if any, cast
SPECIAL RESOLUTION
against the resolution by members so entitled and
[SECTION 114] voting.

Section 114(1) states that a resolution shall be ordinary

resolution, if the notice required under this Act has been
duly given and it is required to be passed by the votes
Ordinary Resolution cast, whether on a show of hands, or electronically or on
a poll, as the case may be, in favour of the resolution,
including the casting vote, if any, of the Chairman, by
members, who, being entitled so to do, vote in person, or
where proxies are allowed, by proxy or by postal ballot,
exceed the votes, if any cast against the resolution by
members, so entitled and voting.

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Simply put, the votes cast in the favour of the resolution

by any mode of voting should exceed the votes cast
against it.

As per Section 114(2) of the Act, a resolution shall be a

special resolution, when–

a) The intention to propose the resolution as a special

Special Resolution resolution has been duly specified in the notice calling
the general meeting or other intimation given to the
members of the resolution;

b) The notice required under this Act has been duly

given; and

c) The votes cast in favour of the resolution, required to

be not less than 3 times the number of the votes, if
any, cast against the resolution.

whether on a show of hands, or electronically or on a

poll, as the case may be, by members who, being entitled
so to do, vote in person or by proxy or by postal ballot, are

 Specified Majority - 3 times of the number of votes cast

against.
 Resolution shall be set out in the notice
 Proper notice of 21 days is given for holding the
Characteristics of general meeting.
Special  Explanatory Statement should be annexed to the

Resolution— notice for conducting special business.

 Section 118 of the Companies Act, 2013, states that

every company shall prepare, sign and keep minutes
of every general meeting of any class of shareholders
or creditors, including the meeting called by the
requisitionists, and

 every resolution passed by postal ballot and every

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meeting of its Board of Directors or of every committee

of the Board, within 30 days of the conclusion of every
such meeting concerned, or passing of resolution by
MINUTES (SECTION postal ballot in books kept for that purpose with their
118) pages consecutively numbered.

 The minutes of each meeting shall contain a fair and

correct summary of the proceedings that took place at
the concerned meeting.

 All appointments made at any of the meetings

aforesaid shall be included in the minutes of the
meeting.

 In the case of a Board Meeting or a meeting of a

committee of the Board, the minutes shall also
contain–
a) the names of the directors present at the meeting;
and
b) in the case of each resolution passed at the
meeting, the names of the directors, if any,
dissenting from, or not concurring with the
resolution.

 There shall not be included in the minutes, any matter

which, in the opinion of the Chairman of the meeting–
a) is or could reasonably be regarded as defamatory
of any person; or
b) is irrelevant or immaterial to the proceedings; or
c) is detrimental to the interests of the company.

 The matter to be included or excluded in the

minutes of the meetings on the afore-said grounds
shall be at the absolute discretion of the Chairman
of the meeting.

 The minutes kept in accordance with the provisions of

Section 118 shall serve as the evidence of the

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proceedings recorded therein.

 Where the minutes have been kept in accordance with

Section 118 (1), then until the contrary is proved, the
meeting shall be deemed to have been duly called and
held,

 and all proceedings thereat to have duly taken place,

and the resolutions passed by postal ballot to have
been duly passed and

 in particular, all appointments of directors, key

managerial personnel, auditors or company secretary
in practice, shall be deemed to be valid.

 No document, purporting to be a report of the

proceedings of any general meeting of a company
shall be circulated or advertised at the expense of the
company, unless it includes the matters requires by
this section to be contained in the minutes of the
proceedings of such meeting.

 Every company shall observe Secretarial Standards

with respect to general and Board meetings, specified
by the Institute of Company Secretaries ofIndia and
approved as such by the Central Government.

 If any default is made in complying with the provisions

of this section in respect of any meeting, the company
shall be liable to a penalty of ` 25,000 and every
Penalty for officer of the company who is in default shall be liable
contravention– to a penalty of ` 5,000.

 If a person is found guilty of tampering with the

minutes of the proceedings of the meeting, he shall be
punishable with imprisonment for a term which may
extend to 2 years and with fine which shall not be
less than ` 25,000 but which may extend to `
1,00,000.

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 Distinct minute books to be maintained for each type of

meeting:

a) general meetings of the members;

Rule 25 of the b) meetings of the creditors
Companies c) meetings of the Board; and
(Management & d) meetings of each of the committees of the
Board.
Administration)
Rules, 2014 Note: Resolutions passed by postal ballot shall be
recorded in the minute book of general meetings as if it
has been deemed to be passed in the general
meeting.

 Maximum time allowed for entering minutes of

proceedings: the date of such entry within thirty days
of the conclusion of the meeting.

 Data to be entered when a resolution is passed by

Postal Ballot: within thirty days from the date of
passing of resolution.
 Signing of Minute Books: Each page of every such
book shall be initialled or signed and the last page of
the record of proceedings of each meeting or each
report in such books shall be dated and signed–

I. in the case of minutes of proceedings of a

meeting of the Board or of a committee thereof,
by the chairman of the said meeting or the
Chairman of the next succeeding meeting;

II. in the case of minutes of proceedings of a

general meeting, by the Chairman of the same
meeting within the aforesaid period of thirty days
or in the event of the death or inability of that
Chairman within that period, by a director duly
authorised by the Board for the purpose;

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III. In case of every resolution passed by postal

ballot, by the Chairman of the Board within the
aforesaid period of thirty days or in the event of
there being no Chairman of the Board or the
death or inability of that Chairman within that
period, by a director duly authorized by the
Board for the purpose.

 Place of keeping minute books of general

meetings and their preservation: kept at the
registered office of the company and shall be
preserved permanently and kept in the custody of the
company secretary or any director duly authorised by
the board.

 Place of keeping minute books of Board and

committee meetings and their preservation:
preserved permanently and kept in the custody of the
company secretary of the company or any director duly
authorized by the Board for the purpose and shall be
kept in the registered office or such place as Board
may decide.

Accordingly, the books containing the minutes of the

proceedings of any general meeting of a company shall–

 be kept at the registered office of the company; and

INSPECTION OF
MINUTES-BOOKS OF  be open for inspection, during business hours, by any
GENERAL MEETING member, without charge, subject to such reasonable
[SECTION 119] restrictions as specified in the articles of the company
or as imposed in the general meeting. However, at
least 2 hours in each business day shall be allowed for
inspection [Section 119 (1)].

Any member shall be entitled to be furnished, within

seven working days after he has made a request in that
behalf to the company, and on payment of such fees as

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may be prescribed, with a copy of any minutes. [Section

119 (2)].

In other words, within 7 working days of making a request

along with the requisite fees, the member shall be
furnished with a copy of any minutes.

If any inspection under sub-section (1), is refused by the

company to the member, or if the copy of minute-book is
Penalty for
not furnished within the time specified under sub - section
contravention
(2), then the company shall be liable to a penalty of `
[Section 119 (3)]
25,000 and every officer of the company who is in
default shall be liable to a penalty of ` 5,000 for each
such refusal or default, as the case may be.

 In case of any such refusal or default, the Tribunal

may, without prejudice to any action being taken
Power of Tribunal to under sub-section (3),
order inspection  by order, direct an immediate inspection of the
[Section 119 (4)] minute-books or direct that the copy required shall
forthwith be sent to the person requiring it.

 Any member shall be entitled to be furnished,

within seven working days
 after he has made a request in that behalf to the
Copy of minute company, with a copy of any minutes of any
book of general general meeting,
meeting [Rule 26]  on payment of such sum as may be specified in
the articles of association of the company, but not
exceeding a sum of ten rupees for each page or
part of any page:

Rule 27 of the Companies (Management and

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Administration) Rules, 2014 states as under:

Companies which may  Every listed company or a company having at least

maintain records in 1000 shareholders, debenture-holders and other
electronic form: security holders, may maintain its records, as required
to be maintained under the Act or rules made there
under, in electronic form.
Explanation. - For the purposes of this sub- rule, it is
hereby clarified that in case of existing companies,
data 1[may] be converted from physical mode to
electronic mode within six months from the date of
notification of provisions of section 120 of the Act.

 The records in electronic form shall be maintained in

such manner as the Board of directors may think fit:
Provided that
a) the records are maintained in the same formats and
in accordance with all other requirements as
provided in the Act or the rules made thereunder;

b) the information as required under the provisions of

the Act or the rules made thereunder should be
adequately recorded for future reference;
c) the records must be capable of being readable,
retrievable and reproducible in printed form;

Section 120 of the Companies Act, 2013 seeks to provide

MAINTENANCE AND that any document, record, register or minute, etc.,
INSPECTION OF required to be kept by a company or allowed to be
DOCUMENTS IN inspected or copies given to any person by a company
ELECTRONIC FORM under this Act, may be kept or inspected or copies given,
as the case may be, in electronic form in such form and
[SECTION 120]

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manner as may be prescribed.

Rule 28 sets out that the Managing Director, Company

Who is responsible for Secretary or any other director or officer of the
the maintenance and company as the Board may decide shall be
security of electronic responsible for the maintenance and security of electronic
records records. The person who is responsible for the
maintenance and security of electronic records shall-

a) provide adequate protection against unauthorized

access, alteration or tampering of records;
b) ensure against loss of the records as a result of
damage to, or failure of the media on which the
records are maintained;
c) ensure that the signatory of electronic records does
not repudiate the signed record as not genuine;
d) ensure that computer systems, software and hardware
are adequately secured and validated to ensure their
accuracy, reliability and consistent intended
performance;
e) ensure that the computer systems can discern invalid
and altered records;
f) ensure that records are accurate, accessible, and
capable of being reproduced for reference later;
g) ensure that the records are at all times capable of
being retrieved to a readable and printable form.
h) ensure that records are kept in a non-rewritable and
non-erasable format like pdf. version or some other

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version which cannot be altered or tampered;

i) ensure that at least one backup, taken at a periodicity
of not exceeding one day, are kept of the updated
records kept in electronic form, every backup is
authenticated and dated and such backups shall be
securely kept at such places as may be decided by the
Board;
j) limit the access to the records to the managing
director, company secretary or any other director or
officer or persons performing work of the company as
may be authorized by the Board in this behalf;
k) ensure that any reproduction of non-electronic original
records in electronic form is complete, authentic, true
and legible when retrieved;
l) arrange and index the records in a way that permits
easy location, access and retrieval of any particular
record; and
m) take necessary steps to ensure security, integrity and
confidentiality of records.

Rule 29 states that the records maintained in electronic

Inspection and copies form shall be made available for inspection by the
of records maintained company in electronic form. Copies of the records
in electronic form: maintained in electronic form, containing a clear
reproduction of the whole or part thereof, shall be
provided on payment of not exceeding ` 10 per page.

1. Section 122 (1) of the Companies Act, 2013 states

that the provisions of section 98 and section 100 to
111 shall not apply to a One Person Company
(OPC).

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APPLICABILITY OF
THIS CHAPTER TO Section No. Heading of Section
ONE PERSON
COMPANY Section 98 Power of Tribunal to call meetings of
members, etc.
[SECTION 122]
Section 100 Calling of EGM

Section 101 Notice of meeting

Section 102 Statement to be annexed to notice

Section 103 Quorum for meetings

Section 104 Chairman of meetings

Section 105 Proxies

Section 106 Restrictions on voting rights

Section 107 Voting by show of hands

Section 108 Voting through electronic means

Section 109 Demand for poll

Section 110 Postal ballot

Section 111 Circulation of Members‘ Resolution

2. The ordinary businesses as mentioned under

section 102 (2) (a), which a company is required to
transact at an AGM, shall be transacted in the case
of One Person Company, as provided in sub-
section (3). [Section 122 (2)]

3. For the purposes of section 114, any business

which is required to be transacted at an annual

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general meeting or other general meeting of a

company by means of an ordinary or special
resolution, it shall be sufficient if, in case of One
Person Company, the resolution is communicated
by the member to the company and entered in the
minutes-book required to be maintained under
section 118 and signed and dated by the member
and such date shall be deemed to be the date of
the meeting for all the purposes under this Act.
[Section 122 (3)]

4. Simply stated, in case OPC has only one director,

following procedure shall be adopted for any
business to be transacted at the meeting of Board
of Directors:
i. The resolution by such director shall be
entered in the relevant minutes book.
ii. The minutes book shall be signed and dated
by such director.

Note: The date on which the minutes book is signed by

the director shall be deemed to be the date of the meeting
for all the purposes.

If any default is made in compliance with any of the

provisions of this rule,
Penalty
 the company and every officer or such other
person who is in default shall be punishable
with fine
 which may extend to 5000 rupees and
 where the contravention is a continuing one,
with a further fine which may extend to 500
rupees for every day
 after the first during which such

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contravention continues. [Rule 30]

RESOLUTIONS REQUIRING SPECIAL NOTICE [SECTION115]

Section 115 of the Companies Act, 2013 read with rule 23 of

Companies
(Management and Administration) Rules, 2014 deals with resolutions
requiring special notice
• According to Section 115 where, by any provision contained in this Act or in
the Articles of a company, special notice is required for passing any
resolution,

• then the notice of the intention to move such resolution shall be given to
the company by such number of members holding not less than 1% of the
total voting power, or

• holding shares on which such aggregate sum not exceeding five lakh
rupees, as may be prescribed, has been paid-up.
Special notice for passing a resolution is required in the following
cases–
(a) Resolution for appointment of an auditor other than the retiring auditor at an
annual general meeting. [Section 140 (4)]

(b) Resolution at an annual general meeting providing expressly that a retiring

auditor shall not be re-appointed. [Section 140(4)]
(c) Resolution to remove a director before the expiry of his period of office. [Section
169 (2)]
(d) Resolution to appoint another personas director in place of the removed director
at the meeting at which he is removed. [(Section169(2)]
Further, the articles may provide for certain additional matters which require special
notice.

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Rule 23 specifies the procedure to be followed in respect of Special Notice

as under:

1. A special notice required to be given to the company shall be signed, either

individually or collectively by such number of members holding not less than one
percent of total voting power or holding shares on which an aggregate sum of not less
than 5,00,000 rupees has been paid upon the date of the notice.
2. The afore-mentioned notice shall be sent by members to the company not earlier
than 3 months but at least 14 days before the date of meeting at which the resolution is
to be moved, exclusive of the day on which the notice is given and the day of the
meeting.
3. The company shall immediately after receipt of the notice, give its members
notice of the resolution at least seven days before the meeting, exclusive of the day of
dispatch of notice and day of the meeting, in the same manner as it gives notice of any
general meetings.
4. Where it is not practicable to give the notice in the same manner as it gives notice
of any general meetings, the notice shall be published in English language in English
newspaper and in vernacular language in a vernacular newspaper, both having wide
circulation in the State where the registered office of the Company is situated and such
notice shall also be posted on the website, if any, of the Company.
5. The notice shall be published at least seven days before the meeting, exclusive of
the day of publication of the notice and day of the meeting.

RESOLUTION SPASSED AT ADJOURNED MEETING

[SECTION116]
As per Section 116 of the Companies act, 2013, where a resolution is passed at an
adjourned meeting of:
(a) A company; or
(b) The holders of any class of shares in a company; or
(c) The Board of Directors of a company,
The resolution shall be treated as having been passed on the day on which it
was actually passed and not on any earlier date.

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RESOLUTIONS AND AGREEMENTS TO BE FILED WITH ROC WITHIN 30 DAYS

FROM THE PASSING OF SUCH RESOLUTION, IN FORM MGT – 14 ALONG WITH

FEE,
[SECTION117]

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CHAPTER *8*
DECLARATION AND PAYMENT OF
DIVIDEND

MEANING OF DIVIDEND
 Section 2(35) of the Companies Act, 2013, while defining the term dividend
simply states that “dividend” includes any interim dividend.
 In common parlance, “Dividend” implies a distribution of any sums to
members out of profits and wherever permitted out of free reserves available
for the purpose.
 Dividend is the shareholders return on their investment / capital in the
company.
 The company in general meeting may declare dividends, but no dividend shall
exceed the amount recommended by the Board.
 Dividend is recommended by Board of Directors in the Board’s Report and
approved by Shareholders at the Annual General Meeting.
 Dividend is not a liability unless it is declared by the shareholders at a validly
constituted general meeting by passing an ordinary resolution at the rates
recommended by the Board or such lower rates as they may decide.
 Declaration of dividend by the company at a rate higher than the rate
recommended by the Board is not permitted.
Dividend is Declared as a proportion of Nominal or Face Value of a share.
Example : AB Ltd. has issued equity shares having face value of Rs. 10 per share. The shares
are currently quoting on the NSE at Rs. 250/- per share. The Company at its AGM held on
27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000 shares which he purchased at
Rs. 300/- per share. What is the amount of dividend he will receive?

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The dividend is to be calculated on F. Value i.e. Rs. 10/-. So dividend per share is 20% of Rs.
10/- = Rs. 2/- per share. So, Mr. Shekar will receive Rs. 2 * 1000 shares = Rs. 2000/-.
Example : The shareholders at an annual general meeting unanimously passed a resolution
for payment of dividend at a rate higher than that recommended by the directors. Discuss
the validity of the resolution.
Articles of Association companies usually contain provisions with regard to declaration of
dividend on the pattern of regulations 80 to 85 of Table F to Schedule I of the Companies
Act, 2013. Under regulation 80, although the power to declare a dividend vests with the
shareholders however under no circumstances they can declare dividend exceeding the
amount recommended by the Board of Directors.

TYPES OF DIVIDEND
Classification based on time i.e. when declared

Dividend

Interim Dividend Final Dividend

Interim Dividend
Section 123 (3) and also section 123 (4) contain provisions regarding interim dividend.
Following points are noteworthy:
 Interim dividend may be declared by the Board of Directors at any time during the
period from closure of financial year till holding of the annual general meeting.
The declaration of interim dividend is done out of profits before the final adoption of
the accounts by the shareholders and therefore, interim dividend is said to be
declared and paid between two AGMs.
 The sources for declaring interim dividend include:
• Surplus in the profit and loss account; or
• Profits of the financial year in which such dividend is sought to be declared;
or

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• Profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend.
 If the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such
interim dividend shall not be declared at a rate higher than the average (rate of)
dividend declared by the company during the immediately preceding three financial
years.
Example : If a company declared dividend at the rate of 16% during the immediately
preceding three financial years, then in case the company incurs loss in the current
financial year, it is permitted to declare interim dividend at a rate which is not higher
than 16%.
 The amount of the dividend, including interim dividend, shall be deposited in a
separate account maintained with a scheduled bank within five days from the date of
declaration.
 All provisions which are applicable to the payment of dividend shall also apply in case
of interim dividend.

Final Dividend

 When the dividend is declared at the Annual General Meeting of the company, it is
known as ‘final dividend’.
 The rate of dividend recommended by the Board cannot be increased by the
members.
The table given below provides a quick summary of the above concepts of Interim
Dividend and Final Dividend.

BASIS FOR INTERIM DIVIDEND FINAL DIVIDEND

COMPARISON

Definition Interim dividend is declared Final dividend is the dividend

and paid during an recommended by the board of directors,
accounting year, i.e. before and approved by shareholders at the
the finalization of accounts company's Annual General Meeting, after
for the year. the close of financial year.

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Announcement Announced by Board of Recommended by Board of Directors and

Directors. approved by shareholders.

Time of Before preparation of After preparation of financial

Declaration financial statements. statements.

Revocation It can be revoked with the It cannot be revoked.

consent of all shareholders.

Classification based on Nature of Shares does not require any specific

provision in the articles.

Shares can be classified into two categories i.e. preference shares and equity shares.
The manner of payment of dividend is dependent upon the nature of shares.
(i) Preference Shares: According to Section 43 of the Companies Act, 2013, shareholders
holding preference shares are assured of a preferential dividend at a fixed rate during
the life of the company.
Preference dividend unless otherwise agreed as cumulative in nature need not be paid
every year i.e. a company may decide not to declare any dividend where there is deficiency
of profits.
Classification of preference shares on the basis of payment of dividend is as follows:

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(a) Cumulative Preference Shares: A cumulative preference share is one in respect

of which dividend gets accumulated and any arrears of such dividend arising due
to insufficiency of profits during the current year is payable from the profits
earned in the later years..
(b) Non-cumulative Preference Shares: A non-cumulative preference share is one
where the dividend is payable only in a year of profit. There is no accumulation of
profit as in the case of cumulative preference shares. In case no dividend is
declared in a year due to any reason, the right to receive such dividend for that
year lapses and the holder of such a share is not entitled to be paid arrears of
dividend out of future year profits.
(ii) Equity Shares: Equity shares are those shares, which are not preference shares. They
do not enjoy any preferential rights in the matter of payment of dividend or
repayment of capital. The rate of dividend on equity shares is recommended by the
Board of Directors and may vary from year to year. Rate of dividend depends upon the
dividend policy and the availability of profits after satisfying the rights of preference
shareholders.

123. PROVISIONS REGARDING DECLARATION AND PAYMENT OF DIVIDEND

Sources for Declaration of Dividend
According to Section 123 (1), the dividend for any financial year shall be declared or
paid from the following sources:
(a) Profits of the current financial year- Profits arrived at after providing for depreciation
in accordance with Schedule II.
(b) Profits of any previous financial year or years- Profits of any previous financial year(s)
arrived at after providing for depreciation in accordance with Schedule II and
remaining undistributed i.e. credit balance in profit and loss account and free reserves.
It is to be noted that only free reserves and no other reserves are to be used for
declaration or payment of dividend.
(c) Both (a) and (b).
(d) Provision of money by the Government- Money Provided by the Central Government
or a State Government for the payment of dividend by the company in pursuance of a
guarantee given by that Government.

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Note 1: Before declaration of any dividend, carried over previous losses and
depreciation not Provided in previous year or years are required to be set off against
profit of the company for the current year.
Note 2: In computing profits any amount representing unrealised gains, notional gains
or revaluation of assets and any change in carrying amount of an asset or of a liability
on measurement of the asset or the liability at fair value shall be excluded.
Note 3: Capital profits are not same as distributable profits because they are not
earned in the normal course of business; and therefore, normally not available for
distribution as dividend.

Need for providing for depreciation out of profits before declaring dividend
"Depreciation" is a notional estimate of the reduction in the value of an asset due to
i. wear and tear,
ii. efflux of time,

iii. improvements in technology etc.

If depreciation is not Provided for there will be two consequences:
i. The value of the asset will be overstated in Balance Sheet
ii. The profits of the current year will be overstated.

Example : Shreyas Mechanics Limited owns a plot of land which was purchased long
before. As the property rates are going up, it is decided to revalue the plot at fair value
which is moderately ten times the original price, thus resulting in a revaluation profit of
Rs. 20,00,000. The Board of Directors is keen to utilize this Rs. 20,00,000 along with
free reserves of Rs. 24,00,000 for declaration of dividend at the forthcoming Annual
General Meeting (AGM) to be held on 28th September, 2023. But according to Proviso
to Section 123 (1) (a), the amount of Rs. 20,00,000 cannot be considered as it does not
form part of Free Reserves as the same cannot be utilized towards declaration of
dividend.

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B. Transfer to Reserves
Transfer of profits to reserves for any financial year has been left to the discretion of
the company. Therefore, a company is free to transfer any portion of its profit to
reserves as it may deem fit. It may also decide not to transfer any amount to reserves.

Que: For the current year, Alma Watches Limited proposes to transfer more than 10%
of its profits to the reserves before declaration of dividend at the rate of 12%. Can the
company do so?
Answer: The amount to be transferred to reserves out of profits for any financial year
before the declaration of dividend has been left to the discretion of the company.
Therefore, Alma Watches Limited is free to transfer any part of its profits to reserves as
it may deem fit.
Que: Brix Shipyards Limited has earned a profit of Rs. 1,000 crores for the financial year
2018-19. It has proposed a dividend @ 8.75%. However, it does not intend to transfer
any amount to the reserves out of the profits earned. Can the company do so?
Answer: The amount to be transferred to reserves out of profits for any financial year
has been left to the discretion of the company. The company is free to transfer any
part of its profits to reserves as it may deem fit or it may even not transfer any profits
to reserve if it is deemed appropriate before the declaration of dividend. Thus, Brix
Shipyards Limited is justified in its action if it does not transfer any amount of profits to
the reserves.

C. Declaration of Dividend when there is inadequacy or Absence of

Profits (Second Proviso to Sec. 123)
Where in any year there are no adequate profits for declaring dividend, the company
may declare dividend out of the accumulated profits earned by it in previous years and
transferred by it to the free reserves only in accordance with the procedure laid down
in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.
Free Reserves means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend:
The following shall not be treated as free reserves;
Any amount representing unrealized gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or

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Any change in carrying amount of an asset or of a liability recognized in equity,

including surplus in profit and loss account on measurement of the asset or the liability
at fair value.
Under Rule 3 such declaration shall be subject to the following conditions:

CONDITION I
The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately preceding three years.

Rate of Dividend ≤ (RD1 +RD2 + RD3)/3

Where, RD1, RD2, RD3 are rates at which dividend was declared by the company in the
immediately preceding three years.

However, this condition shall not apply if the company has not declared any dividend
in each of the three preceding financial year.
CONDITION II
The total amount to be drawn from such accumulated profits shall not exceed 10% of
its paid-up share capital and free reserves as appearing in the latest audited financial
statement. In other words:
Total amount that can be drawn from 10% of (paid up share
≤ accumulated profits capital + free reserves)

CONDITION III
The amount so drawn shall first be utilised to set off the losses incurred in the financial
year in which dividend is declared and only thereafter, any dividend in respect of
equity shares shall be declared.
CONDITION IV
The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.
Free Reserves – Amount drawn for >= 15 % of paid up share capital
payment of dividend
It may be noted that all the above three conditions have to be satisfied.

Que: Capricorn Industries Limited has a paid-up capital of Rs. 200 lakhs and
accumulated Reserves of Rs. 240 lakhs. Loss for the year ending 31 st March 2020 is

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Rs. 30 Lakhs. Dividend was declared at the following rates during the three years
immediately preceding.
Year 1 9%
Year 2 10%
Year 3 12%
What is the maximum rate at which the company can declare dividend for the current
year?
Answer: In the given case, Capricorn Industries Limited has not made adequate profits
during the current year ending on 31st March, 2020, but it still wants to declare
dividend. Let us apply the conditions:

Condition I:

Average rate = =10.33%

Therefore, the rate of dividend shall not exceed 10.33%.
i.e. 10.3% of Paid up Capital i.e. Rs. 200 lakhs = Rs. 20.6 lakhs

Condition II:
Paid-up capital + Free reserves = Rs. (200+240) Lakhs
(Assuming all reserves are free) Rs. 440 Lakhs
10% thereof = Rs. 44 Lakhs
Less: loss for the year = Rs. 30 Lakhs
Amount available = Rs. 14 Lakhs
Hence, the quantum of dividend is further restricted to Rs. 14 lakhs.

Condition III:
Accumulated Reserves Rs. 240 Lakhs
Proposed withdrawal declaration of dividend Rs. 14 Lakhs
Balance of Reserves Rs. 226 Lakhs
This is more than 15% of paid-up capital (i.e 15% of Rs. 200 Lakhs) i.e. Rs. 30 lakhs.
Thus, the company can declare a dividend of Rs. 14 lakhs i.e. at a rate of 7% on its paid-
up capital of Rs. 200 lakhs.
Que: Shipra Sugar Mills Limited has been regularly declaring dividend at the rate of
20% on its equity shares for the past 3 years. However, the company has not made

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adequate profits during the current year ending on 31st March, 2020, but it has got
adequate free reserves which can be utilized for maintaining the rate of dividend at
20%.
Advise the company as to how it should proceed in the matter if it wants to declare
dividend at the rate of 20% for the year 2019-20, as per the provisions of the
Companies Act, 2013.
Answer: The company can declare a dividend out of its Accumulated Free Reserves
subject to satisfaction of the following conditions:
• The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately preceding three years.
However, this condition shall not apply if the company has not declared any dividend
in each of the three preceding financial year.
• The total amount to be drawn from free reserves shall not exceed 10% of its paid-up
share capital and free reserves as per the latest audited financial statement.
• The amount so drawn shall first be utilised to set off the losses incurred in the
current financial year and only thereafter, dividend at 20% shall be declared.
• After such withdrawal from free reserves, the residual reserves shall not fall below
15% of its paid-up share capital as per the latest audited financial statement.
The company is advised to get the desired dividend recommended by the Board of
Directors and propose the same for the approval of the members at the ensuing
Annual General Meeting as the authority to declare dividend lies with the members of
the company.

D. Depositing of Amount of Dividend

In terms of section 123(4), the amount of the dividend (including interim dividend),
shall be deposited in a separate account maintained with a scheduled bank. This is to
be done within 5 days from the date of declaration of dividend.
Example : The authorised and paid-up share capital of Avantika Ayurvedic Products
Limited is Rs. 50.00 lacs divided into 5,00,000 equity shares of Rs. 10 each. At its Annual
General Meeting (AGM) held on 24th September, 2019, the company declared a
dividend of Rs. 2 per share by passing an ordinary resolution. The amount of dividend
must be deposited in a scheduled bank in a separate account latest by 29 th September,
2019.

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E. Payment of Dividend
Section 123(5) contains provisions regarding payment of dividend. These are stated as
under:
(a) Dividend shall be payable only to the registered shareholder or to his order or to
his banker.
In case a shareholder informs the company to pay dividend to a particular banker and
if the payment is so made by the company, then it shall be deemed to be made to the
shareholder himself.
A purchaser of shares whose name is not entered in the Register of Members cannot
claim payment of dividend to him though he might have made full payment to the
seller of shares.

Que: The Directors of East West Limited proposed dividend at 15% on equity shares for
the financial year 2022-2023. The company announced 28th September 2023 as the
record date for payment of dividend. The dividend was approved in the Annual General
Meeting held on 30th September 2023.
Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but he
transferred the shares to Mr. Mohan, whose name has been entered in the register of
members on 18th June, 2023. Who will be entitled to the above dividend?

Answer: According to section 123, dividend shall be paid by a company only to the
registered shareholder of such share.
Record date is the date announced by the company for determining entitlement to
dividend. All those persons whose name is included in the register of members on that date
shall be entitled to dividend.
In the instant case, on the date announced by the company as the record date, Mr. Mohan’s
name is present in the register of members (i.e. Mr. Binoy’s name is NOT present therein).
Therefore, the dividend should be paid to Mr. Mohan who is the registered shareholder on
the record date.
Que : The Board of Directors of Som Mechanical Toys Limited proposed a dividend at
12% on equity shares for the financial year 2022-23. The same was approved at the
Annual General Meeting of the company held on 25th June, 2023.
Mr. Nitin Jha was holding 1,000 equity shares as on 31st March, 2023, but the same
were transferred by him to Mr. Raj, whose name was registered on 20 th April, 2023 in

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the Register of Members. State as to who will be entitled to the dividend declared by
the company.
Answer: According to section 123(5), dividend shall be payable only to the registered
shareholder of the shares or to his order or to his banker. Facts in the given case state that
Mr. Nitin Jha, the holder of equity shares transferred his shares to Mr. Raj whose name was
registered on 20th April, 2023. Since, Mr. Raj became the registered shareholder before the
declaration of the dividend in the Annual General Meeting of the company held on 25th
June, 2023, he will be entitled to the dividend.

Note: In terms of Section 51, a company may, if so authorised by its articles, pay dividend in
proportion to the amount paid-up on each share. Suppose, some of the shareholders have
paid only Rs. 5 (face value Rs. 10) on each share held by them. In case of declaration of
dividend at the rate of Rs. 5 per share, the company, if authorised by its articles, shall be
justified in paying dividend of Rs. 2.50 per share in respect of such partly paid shares.
(b) Dividends are payable in cash and not in kind. Dividends that are payable to the
shareholders in cash may also be paid by cheque or dividend warrant or through
any electronic mode.
Section 127 requires that the declared dividend must be paid to the entitled shareholders
within the prescribed time limit of thirty days from the date of declaration of dividend. In
case dividend is paid by issuing dividend warrants, such warrants must be posted at the
registered addresses within the prescribed time.

Note: But you may note that while Declaration of dividend does not affect the
company’s power to issue fully paid up bonus shares, such shares cannot be issued in
lieu of dividend.

(c) Applicability of Section 123 (5) to Nidhis: This sub-section shall apply to the Nidhis,
subject to the modification that any dividend payable in cash may be paid by crediting
the same to the account of the member, if the dividend is not claimed within 30 days
from the date of declaration of the dividend.

F. Prohibition on Declaration of Dividend

In the following cases declaration and payment of dividend is prohibited.
(i) Prohibition in case of any Defaulting Company: A company which fails to comply with
the provisions of section 73 (Prohibition on acceptance of deposits from public) and
section 74 (Repayment of deposits, etc., accepted before the commencement of this

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Act of 2013) shall not, so long as such failure continues, declare any dividend on its
equity shares.
(ii) Prohibition in case of Section 8 Companies: According to section 8 (1), a company
having licence under Section 8 (Formation of companies with charitable objects, etc.) is
prohibited from paying any dividend to its members. Its profits are intended to be
applied only in promoting the objects for which it is formed.

124. UNPAID DIVIDEND ACCOUNT (UDA)

Section 124 of the Act contains the provisions relating to Unpaid Dividend Account
(UDA). These are as follows:
(i) Unpaid or Unclaimed Dividend to be transferred to the Unpaid Dividend Account-
Where a dividend has been declared by a company but has not been paid or claimed
within thirty (30) days from the date of declaration, the company shall, within seven
(7) days from the expiry of the said period of 30 days, transfer the total amount of
unpaid or unclaimed dividend to a special account called the Unpaid Dividend Account
(UDA). The UDA shall be opened by the company in any scheduled bank.
(ii) Preparing of Statement of the Unpaid Dividend- Within 90 days of transferring any
amount to the Unpaid Dividend Account, the company shall prepare a statement
containing the names, last known addresses and the amount of unpaid dividend to be
paid to each person and place such statement on its web-site, if any, and also on any
other web-site approved by the Central Government for this purpose.
(iii) Payment of Interest if default is made in transferring the Amount- If any default is
made in transferring the total unpaid dividend amount or any part thereof to the
Unpaid Dividend Account, the company shall pay, from the date of such default,
interest at the rate of 12% per annum on the amount not so transferred to the said
account. The interest accruing on such amount shall ensure i.e. be available to the
benefit of the members of the company in proportion to the amount remaining unpaid
to them.
(iv) Claimant to apply for payment of Claimed Amount- Any person claiming to be entitled
to any money transferred to the Unpaid Dividend Account may apply to the company
concerned for payment of the money so claimed.

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(v) Transfer of Unclaimed Amount to Investor Education and Protection Fund (IEPF)- Any
money transferred to the Unpaid Dividend Account which remains unpaid or
unclaimed for seven (7) years from the date of such transfer shall be transferred by the
company along with interest accrued thereon to the Investor Education and Protection
Fund.
Further, the company shall send a prescribed statement containing the details of such
transfer to the IEPF Authority and in turn, the Authority shall issue a receipt to the
company as evidence of such transfer.
(vi) Transfer of Shares to IEPF- All shares in respect of which dividend has not been paid or
claimed for 7 consecutive years or more shall be transferred by the company in the
name of Investor Education and Protection Fund along with a statement containing the
prescribed details.
(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares so
transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor
Education and Protection Fund in accordance with the prescribed procedure and on
submission of prescribed documents.
(viii) Punishment for Contravention-

 If a company fails to comply with any of the requirements of this section, such
company shall be liable to a penalty of one lakh rupees and in case of
continuing failure, with a further penalty of 500 rupees for each day after the
first during which such failure continues, subject to a maximum of ten lakh
rupees and

 every officer of the company who is in default shall be liable to a penalty of

25,000 rupees and in case of continuing failure, with a further penalty of 100
rupees for each day after the first during which such failure continues, subject
to a maximum of two lakh rupees.

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125. INVESTOR EDUCATION AND PROTECTION FUND (IEPF)

This fund, being established by the Central Government, shall be credited with
specified amounts and utilized for refund of unclaimed and unpaid amounts,
promotion of investors’ awareness and protection of the interests of investors, etc.
The relevant provisions are discussed below:
1. Credit of Specified Amounts to the Fund: Following specified amounts shall be
credited to the Fund:
(a) Amount given by the Central Government- The amount given by the Central
Government by way of grants after due appropriation made by Parliament;
(b) Donations by the Central Government- Donations given by the Central Government,
State Governments, companies or any other institution for the purposes of the Fund;

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(c) Amount lying in the Unpaid Dividend Account- The amount lying in the Unpaid
Dividend Account (UDA) of companies which is transferred by them to the Fund under
section 124(5);
(d) Amount in the General Revenue Account of the Central Government- The amount in
the General Revenue Account of the Central Government which had been transferred
to that account under section 205A(5) of the Companies Act, 1956 as it stood
immediately before the commencement of the Companies (Amendment) Act, 1999
and remaining unpaid or unclaimed on the commencement of the Act of 2013;
(e) Amount in IEPF- The amount lying in the Investor Education and Protection Fund
under section 205C of the Companies Act, 1956;
(f) Income from Investments- The interest or other income received out of investments
made from the Fund;
(g) Amount received through disgorgement or disposal of Securities- The amount
received under section 38(4) i.e. amount received through disgorgement or disposal of
securities seized from a person who has been convicted for personation for acquisition
of securities as Provided in section 38(3);
(h) Application Money- The application money received by companies for allotment of any
securities and due for refund (only if such amount has remained unclaimed and unpaid
for a period of seven years from the date it became due for payment);
(i) Matured Deposits- Matured deposits with companies other than banking companies
(only if such amount has remained unclaimed and unpaid for a period of seven years
from the date it became due for payment);
(j) Matured Debentures- Matured debentures with companies (only if such amount has
remained unclaimed and unpaid for a period of seven years from the date it became
due for payment);
(k) Interest- Interest accrued on the amounts referred to in clauses (h) to (j);
(l) Amount received from Sale Proceeds- Amount received from sale proceeds of
fractional shares arising out of issuance of bonus shares, merger and amalgamation for
seven or more years;
(m) Redemption Amount- Redemption amount of preference shares remaining unpaid or
unclaimed for seven or more years; and

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(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the Investor Education
and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.
They are as under:
(a) all amounts payable as mentioned in clause (a) to (n) of section 125
(2) of the Act [as stated above];
(b) all shares in accordance with section 124 (6) i.e. all those shares in whose case
dividends have not been claimed or paid for seven consecutive years or more;
(c) all the resultant benefits arising out of shares held by the Authority under clause
(b) above;
(d) all grants, fees and charges received by the Authority under these
rules;
(e) all sums received by the Authority from such other sources as may be decided
upon by the Central Government;
(f) all income earned by the Authority in any year;
(fa) all shares held by the Authority in accordance with proviso of
subsection (9) of section 90 of the Act and all the resultant benefits arising out of
such shares, without any restrictions;
(g) all amounts payable as mentioned in sub-section (3) of section 10B of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, section
10B of the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1980 sub-section (3) of section 38A of the State Bank of India Act, 1955 and
section 40A of the State Bank of India (Subsidiary Bank) Act, 1959; and; and
(h) all other sums of money collected by the Authority as envisaged in the Act.
Further, according to Rule 3 (3), in case of term deposits and debentures of companies, due
unpaid or unclaimed interest shall be transferred to the Fund along with the transfer of the
matured amount of such term deposits and debentures.
2. Utilization of the Fund: According to section 125 (3) the Fund shall be utilized for:
(a) refund of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants
for shares or debentures, shareholders, debenture-holders or depositors who

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have suffered losses due to wrong actions by any person, in accordance with the
orders made by the Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under
sections 37 and 245 by members, debenture-holders or depositors as may be
sanctioned by the Tribunal; and
(e) any other purpose incidental thereto in accordance with the rules framed under
the Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016.

3. Application to the Authority for payment: According to section 125 (4), any person
claiming to be entitled to the amount referred in section 125 (2) may apply to the
Authority constituted under section 125 (5) for the payment of the money claimed.
4. Other Provisions governing the IEPF
(i) Constitution of the Authority for Administration of Fund- In terms of
Notification dated 13.01.2016, the Ministry of Corporate Affairs has notified sub-
section (5), sub-section (6) (except with respect to the manner of administration
of the Fund) and sub-section (7) of section 125 of the Act w.e.f. 13.01.2016. With
this Notification, an Authority is being constituted for the administration and
maintenance of accounts as well as other relevant records of the Fund.
The Secretary, Ministry of Corporate Affairs shall be the ex-officio Chairperson of
the Authority. In addition, there shall be six members (maximum limit seven) and
a Chief Executive Officer who shall be the convenor of the Authority.
(ii) Provision of required Resources by the Central Government for Administration
of the Fund- The Central Government may provide to the Authority such offices,
officers, employees and other resources in accordance with the IEPF Authority
(iii) Authority to work in consultation with CAG of India- The Authority shall
administer the Fund and maintain separate accounts and other relevant records
in relation to the Fund in such form as may be prescribed after consultation with
the Comptroller and AuditorGeneral of India.
(iv) Spending of Money- The Authority shall be competent to spend money out of
the Fund for carrying out the objects specified in section 125 (3) i.e. purposes for
which the fund shall be utilized.

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(v) Audit of the Fund- The accounts of the Fund shall be audited by the Comptroller
and Auditor-General of India at such intervals as may be specified by him. Such
audited accounts together with the audit report thereon shall be forwarded
annually by the Authority to the Central Government.
(vi) Preparation of Annual Report by the Authority- For each financial year, the
Authority shall prepare in the prescribed form and at prescribed time its annual
report giving full account of its activities during the financial year and forward a
copy thereof to the Central Government. In turn, the Central Government shall
cause the annual report and the audit report given by the Comptroller and
AuditorGeneral of India to be laid before each House of Parliament.

126. RIGHT OF DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN

ABEYANCE PENDING REGISTRATION OF TRANSFER OF SHARES

According to Section 126, in case any instrument of transfer of shares has been
delivered by a shareholder for registration and the transfer of such shares has not
been registered by the company, such company shall take the following steps:
(a) Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless
it is authorised by the registered holder of such share in writing to pay such dividend
to the transferee specified in the instrument of transfer; and
(b) Keep in abeyance in relation to such shares any offer of rights shares under section 62
(1) (a) and any issue of fully paid-up bonus shares in pursuance of first proviso to
section 123 (5).

127. PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30

DAYS
Section 127 of the Act contains time limit for distribution of dividends and
punishment for failure to distribute dividend on time. Certain exemptions from
punishments are also provided. These provisions are stated as under:

Time Limit for Distribution of Dividends

Where a company declares dividend, it must be paid or the dividend warrant thereof
must be posted within 30 days from the date of declaration of dividend to the
shareholders entitled to the same. Posting of dividend warrants within 30 days

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absolves the company from any punishment irrespective of whether it is received by

the shareholder concerned within this time or not. The offence is committed only
when the company fails to post dividend warrants to the registered address of the
members within 30 days of declaration. Non-receipt of dividend warrants by the
shareholders within the prescribed time does not attract any punishment.

Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend warrants within
30 days of declaration, following punishments are applicable:
(i) Every director of the company shall be punishable with imprisonment of up to two
years, if he is knowingly a party to the default. And, he shall also be liable to pay
minimum fine of Rs. 1,000 for every day during which such default continues.

(ii) The company shall be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.

Exemption from Punishment

Under the following cases, where the company has failed to pay declared dividend within
30 days of declaration, no offence shall be deemed to have been committed and therefore,
no punishment is attracted:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment
of the dividend and those directions cannot be complied with and the same has
been communicated to him;
IMP (c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholder;
(e) where, for any other reason, the failure to pay the dividend or to post the
warrant within the prescribed period of 30 days was not due to any default on
the part of the company.

Que : Mr. Alok, holding equity shares of face value of Rs. 10 lakhs, has not paid Rs. 80,000
towards call money due on shares. Can the dividend amount payable to him be adjusted
against such dues? Give reasons for your answer.

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Answer: Yes. As per clause (d) of Proviso to Section 127, where the dividend is declared by a
company and there remains calls in arrears or any other sum due from a member, then the
dividend can be lawfully adjusted by the company against any such dues.
Thus, the action of the company adjusting dividend payable to Mr. Alok towards call money
due on shares amounting to Rs. 80,000 is justified and therefore, no punishment is
attracted.
Applicability of Section 127 to Nidhis
In case the dividend payable to a member is Rs. 100 or less, it shall be sufficient
compliance of the provisions of the section 127, if the declaration of the dividend is
announced in the local language in one local newspaper of wide circulation and
announcement of the said declaration is also displayed on the notice board of the
Nidhis for at least 3 months.

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AUDIT AND AUDITORS

Chapter X Consists of sections 139 to 148 as well as the Companies (Audit and
Auditors) Rules, 2014.

APPOINTMENT OF AUDITORS [SECTION 139]

Who can be appointed as Auditor and when?
Every company shall appoint an individual or a firm (“firm” shall include a limited liability
partnership) as an auditor of the company at the first Annual General Meeting (AGM).

Tenor of appointment as Auditor

The auditor shall hold office from the of 1 conclusion of 1stAGM (or the AGM in which
he is appointed) till the conclusion of its 6th AGM (and thereafter till the conclusion of
till every sixth AGM).

Example : Rashail Tech Labs Private Limited was incorporated during the financial year
2019-20. First AGM of the company held on 30.09.2020. The company appointed M/s.
Rams & Associates, Chartered Accountant firm for the period of 5 Years as a subsequent
statutory auditor.
Manner and procedure of selection and appointment of auditors
Categories of Competent Responsibility of the competent authority
Companies authority
A company which is Audit The competent authority shall take into
required to Committee* consideration the qualifications and
constitute an Audit experience of the individual or the firm
Committee under proposed to be considered for appointment
section 177 as auditor and such qualifications and
experience are commensurate with the size
and requirements of the company.

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A Company which is Board of It shall have regard to any order or pending

not required to Directors proceeding relating to professional matters
constitute an Audit of conduct against the proposed auditor
Committee under before the Institute of Chartered Accountants
section 177 of India (ICAI) or any competent authority or
any Court.
It may call for such other information from
the proposed auditor as it may deem fit.

Where competent authority is audit committee, the committee shall recommend the
name of an individual or a firm as auditor to the Board for consideration; the Board shall
consider and recommend an individual or a firm as auditor to the members in the AGM for
appointment.
If the Board agrees with the recommendation of the Audit Committee - It shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting.
If the Board disagrees with the recommendation of the Audit Committee - It shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
Example : Audit Committee recommended KPM & Associates, Chartered Accountants firm
for appointment as statutory auditor to the board of Surya Solar Limited. However, board
of the company disagreed with the recommendation of the audit committee. In such
condition, board shall refer back the recommendation to the committee for
reconsideration citing reasons for such disagreement.
If the Audit Committee, after considering the reasons given by the Board, decides not
to reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for
consideration of the members in the AGM; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration
by members in the AGM.

Companies that require to constitute an audit committee

Section 177 of the Act, provides Audit Committee shall be constituted by Board of
directors in case of;

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i. Every listed public companies and

ii. Those public companies which having:
a. Paid up capital of ten crore rupees or more; or
b. Turnover of one hundred crore rupees or more; or
c. Aggregate, outstanding loans or borrowings or debentures or deposits
exceeding fifty crore rupees or more.

It is also worth noting that where a company ceases to fulfil any of three
conditions laid down above for three consecutive years, it shall not be required
to comply with the provisions pertaining to audit committee until such time as it
meets any of such conditions.

Consent of auditors for appointment, certificate from such auditor and

notice to Registrar

Written consent
Before the appointment is made, the written consent of the auditor to such appointment
shall be obtained.
Certificate
A certificate shall be also obtained from the auditor stating that;
a. The individual or the firm (as the case may be to be, appointed as auditor) is eligible
for appointment and is not disqualified for appointment under the Act, the
Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
b. The proposed appointment is as per the term provided under the Act;
c. The proposed appointment is within the limits laid down by or under the authority
of the Act;
d. The list of proceedings against the auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.

The certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141 [i.e. eligibility, qualification and disqualification of Auditor which will be
discussed later] of this Act.

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Notice to Registrar
The company shall inform the concerned auditor of his or its appointment, and also file a
notice in the Form ADT-1 of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed.

Intimation to NFRA
every existing body corporate other than a company governed by NFRA rules, shall inform
the National Financial Reporting Authority (NFRA) within 30 days of the commencement of
the NFRA rules, in Form NFRA-1, the particulars of the auditor as on the date of
commencement of the NFRA rules.
every body corporate, other than a company as defined in clause (20) of section 2 of the
Act, formed in India and governed under NFRA Rules shall, within 15 days of appointment
of an auditor under sub-section (1) of section 139, inform the NFRA in Form NFRA-1,

TERM OF AUDITOR [SUB-SECTION 2]

Maximum terms and length thereof in case of individual and firm
Section 139(2) provides that:
i. Listed companies and
ii. All companies (excluding one person companies & small companies), which are
a. Unlisted public companies and having paid up share capital of rupees ten crore
or more;
b. Private limited companies and having paid up share capital of rupees fifty crore
or more;
c. Having public borrowings from financial institutions, banks or public deposits of
rupees fifty crore or more.
Shall not appoint or re-appoint
i. An individual as auditor for more than one term of five consecutive years;

ii. An audit firm as auditor for more than two terms of five consecutive year

Noting contained in sub-section 2, shall prejudice the right of the;

a. Company to remove an auditor or
b. Auditor to resign from such office of the company.

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Example : XYZ Ltd. which is a listed company appoints individual Mr. Raghav as an auditor
in its AGM dated 29th September, 2022. Mr. Raghav will hold office of Auditor from the
conclusion of this meeting upto conclusion of sixth AGM i.e. AGM to be held in the year
2027. Now as per sub-section (2), Mr. Raghav shall not be reappointed as Auditor in XYZ
Ltd at 6th AGM (i.e. 2027).
Example : XYZ Ltd. which is a listed company appoints M/s Raghav & Associates as an audit
firm in its AGM dated 29th September, 2016. M/s Raghav & Associates will hold office
from the conclusion of this meeting upto conclusion of sixth AGM to be held in the year
2021. Now as per sub-section (2), M/s Raghav & Associates can be appointed or re-
appointed as auditor for one more term of five years i.e. upto year 2026. It shall not be re-
appointed as Audit firm in XYZ Ltd at 11th AGM (i.e. 2026).
Cooling Period (to ensure re-instatement of independence)
An individual auditor who has completed his term (i.e. one term of five consecutive years)
shall not be eligible for re-appointment as auditor in the same company for five years
from the completion of his term;
An audit firm which has completed its terms (i.e. two terms of five consecutive years) shall
not be eligible for re-appointment as auditor in the same company for five years from the
completion of second term.

Example : XYZ Ltd. which is a listed company appoints individual Mr. Raghav as an auditor
in its AGM dated 29th September, 2016. Mr. Raghav will hold office of Auditor from the
conclusion of this meeting upto conclusion of sixth AGM i.e. AGM to be held in the year
2021. Now as per sub-section (2), Mr. Raghav shall not be reappointed as Auditor in XYZ
Ltd. for further term of five years i.e. he cannot be appointed as Auditor in XYZ Ltd. upto
year 2026.
Example : XYZ Ltd. which is a listed company appoints M/s Raghav & Associates as an audit
firm in its AGM dated 29th September, 2016. M/s Raghav & Associates will hold office
from the conclusion of this meeting upto conclusion of sixth AGM to be held in the year
2021. Now as per sub-section (2), M/s Raghav & Associates can be appointed or re-
appointed as auditor for one more term of five years i.e. upto year 2026. It shall not be re-
appointed as Audit firm in XYZ Ltd. for further term of five years after year 2026 to year
2031.

Note: On the date of appointment, an audit firm shall not have any partner or partners
who are/were also the partner/s to the other audit firm, whose tenure has been expired in
a company immediately preceding the financial year.

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It means, the audit firm with common partner/s shall not be appointed as succeeding
auditor of same company after two terms of five consecutive years.

Example : M/s Krishna & Associates is an audit firm having 2 partners namely Mr. Krishna
and Mr. Shyam. Mr. Shyam is also a partner of another audit firm named M/s Kukreja &
Associates. M/s Krishna & Associates was appointed as the auditors in the company
Golden Smith Ltd. for two consecutive periods of 5 years i.e. from year 2016 to year 2026.
Now, if Golden Smith Ltd. wants to appoint M/s Kukreja & Associates as its audit firm, it
cannot do so because Mr. Shyam is the common partner between both the Audit firms.
This prohibition is only for 5 years i.e. upto year 2031. After cooling period of 5 years,
Golden Smith Ltd. may appoint M/s Kukreja & Associates or M/s. Krishna & Associates as
its auditors.
Transitional period
Every company, existing on or before the commencement of this Act which is required to
comply with the provisions as mentioned in above mentioned points (a) to (d) (i.e.
provisions of this sub-section), shall comply with those provisions within a period which
shall not be later than the date of the first AGM of the company held, within the period
specified under sub-section (1) of section 96, after three years from the date of
commencement of this Act.
ROTATION OF AUDITOR [SUB-SECTION 3 ]
.

Power to Members [Sub-section 3]

Members of a company may resolve to provide that;
a. In the audit firm appointed by them, the auditing partner and his team shall be
rotated at such intervals as may be resolved by members; or
b. The audit shall be conducted by more than one auditor.
Manner of rotation of auditors by the companies on expiry of their term
[Subsection 4 read with Rule 6 (2) and (3)]
The Central Government may, by rules, prescribe the manner in which the companies shall
rotate their auditors. The manner of rotation of auditors by the companies on expiry of
their term as provided under Rule 6 of the Companies (Audit and Auditors) Rules, 2014, as
stated below;
a. Where a company is required to constitute an Audit Committee
i. Such Audit Committee shall recommend to the Board, the name of an
individual auditor or of an audit firm who may replace the incumbent
auditor on expiry of the term of such incumbent

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ii. The Board shall consider the recommendation of such committee, and make
its recommendation for appointment of the next auditor by the members in
annual general meeting.
b. In other cases, the Board shall itself consider the matter of rotation of auditors and
make its recommendation for appointment of the next auditor by the members in
annual general meeting.

In case where Audit committee is not required to be constituted under section 177, but
constituted by the company voluntarily, then such audit committee shall recommend to
the Board, the name of an individual auditor or of an audit firm who may replace the
incumbent auditor on expiry of the term of such incumbent; but in such cases board may
or may not consider the recommendation of such committee.
Manner of rotation in case of auditors appointed prior to commencement of
this Act and continuing after such commencement [Rule 6(3)]
For the purpose of the rotation of auditors in case of an auditor (whether an individual or
audit firm), the period for which the individual or the firm has held office as auditor prior
to the commencement of the Act shall be taken into account for calculating the period of
five consecutive years or ten consecutive years, as the case may be.
Example : Dass & Dass Co, a Chartered Accountants firm was appointed as auditor of
Modern Furniture since 28th September 2012. The firm can continue to assume the office
of auditor till AGM conducted for financial year 2021-22.
Illustration explaining rotation in case of individual auditor
Number of consecutive years for Maximum number of Aggregate period
which an individual auditor has consecutive years for which which the auditor
been functioning as auditor in he may be appointed in the would complete in
the same company [till the first same company (including the same company
AGM held after the transitional period) in view of column I
commencement of provisions of and II
section 139(2)]
I II III
5 years (or more than 5 years) 3 years 8 years or more
4 years 3 years 7 years
3 years 3 years 6 years
2 years 3 years 5 years

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1 year 4 years 5 years

Here,
a. Individual auditor shall include other individuals or firms whose name or trademark
or brand is used by such individual, if any.
b. Consecutive years shall mean all the preceding financial years for which the
individual auditor has been the auditor until there has been a break by five years or
more.
Illustration explaining rotation in case of audit firm
Number of consecutive years for Maximum number of Aggregate period
which an audit firm has been consecutive years for which which the firm
functioning as auditor in the the firm may be appointed in would complete in
same company [till the first the same company the same company
AGM held after the (including transitional in view of column I
and
commencement of provisions of period)
II
section 139(2)]
I II III

10 years (or more than 10 years) 3 years 13 years or more

9 years 3 years 12 years

8 years 3 years 11 years

7 years 3 years 10 years

6 years 4 years 10 years

5 years 5 years 10 years

4 years 6 years 10 years

3 years 7 years 10 years

2 years 8 years 10 years

1 year 9 years 10 years

Here,

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a. Audit Firm shall include other firms whose name or trade mark or brand is used by
the firm or any of its partners.
b. Consecutive years shall mean all the preceding financial years for which the firm has
been the auditor until there has been a break by five years or more.
Manner of rotation in case of same network and common partner [Rule 6(3)]
The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit firms.
The term same network includes the firms operating or functioning, hitherto or in future,
under the same brand name, trade name or common control.
For the purpose of rotation of auditors, a break (cooling period) in the term for a
continuous period of five years shall be considered as fulfilling the requirement of
rotation. But if a partner (common partner), who is in charge of an audit firm and also
certifies the financial statements of the company, retires from the said firm and joins
another firm of chartered accountants, such other firm shall also be ineligible to be
appointed for a period of five years i.e. cooling period.
Manner of rotation in case of joint auditors [Rule 6(4)]
Where a company has appointed two or more individuals or firms or a combination
thereof as joint auditors, the company may follow the rotation of auditors in such a
manner that both or all of the joint auditors, as the case may be, do not complete their
term in the same year.

Question 1
Modern Furniture Limited (MFL), despite not mandated by Section 177 of the Act, read with
Companies (Meetings of Board and its Powers) Rules, 2014 to constitute audit committee;
on their own on voluntary basis constitute such audit committee. Such committee
recommend to the Board, the name of an individual auditor or of an audit firm who may
replace the incumbent auditor on expiry of the term of such incumbent; but board didn’t
consider the recommendation of such committee. Examine the legal validity of act of audit
committee and board of MFL.
Answer – Rule 6(1) read in conjunction with rule 6(2) of the Companies (Audit & Auditors)
Rules, 2014 provides that in case where Audit committee not required to be constituted
under section 177, but constituted by company, then also such audit committee shall
recommend to the Board, the name of an individual auditor or of an audit firm who may
replace the incumbent auditor on expiry of the term of such incumbent; but in such cases
board may or may not consider the recommendation of said audit committee.
Hence, act of audit committee and board at MFL is legally valid.

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FIRST AUDITORS [SUB-SECTION 6]

The first auditor of a company, other than a Government Company, shall be;
a. Appointed by the Board of directors
b. Within 30 days of the date of registration of the company and
c. The auditor so appointed shall hold office until the conclusion of the first AGM.
Question 2 Unicorn Steel Private Limited is incorporated as on 02.06.2022,
board of directors of the company held board meeting as on 15.06.2022 to
appoint Jain Ajmera & Associates as a first auditor of the company for a term of
5 years. As per section 139(6) of the Companies Act, 2013, the board shall
appoint first director within 30 days from the date of registration of the company.
Evaluate the legal validity;
Options

a. Valid
b. Invalid
c. Valid after approval of shareholder in General Meeting
d. Valid only after approval of Central Government
Reason – As per section 139(6), the first auditor so appoint by Board of Director shall hold
office until the conclusion of the first AGM.
If the Board fails to exercise its powers i.e. appointment of first auditor, it shall
a. Inform the members of the company and
b. The company may appoint the first auditor within 90 days at an extra ordinary
general meeting (EGM) and
c. Such auditor shall hold office till the conclusion of the first AGM.
Question 3 Managing Director of PQR Limited wanted to appoint Mr. Ganpati, a
practicing Chartered Accountant, as first auditor of company. He himself without
consulting the board, appointed Shri Ganpati as auditor. Evaluate legal validity
Answer - Section 139(6) of the Companies Act, 2013 provides that “the first auditor or
auditors of a company shall be appointed by the Board of directors within 30 days from
the date of registration of the company”. Hence in the instant case, the appointment of
Mr. Ganpati by the Managing Director himself is invalid due to violation of Section 139(6)
of the Companies Act, 2013.

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AUDITOR OF GOVERNMENT COMPANY [SUB-SECTION 5 & 7]

First Auditor [Sub-section 7]

The first auditor is to be appointed by Comptroller and Auditor General of India (CAG)
within 60 days from the date of registration of the company, who shall hold office till the
conclusion of the first annual general meeting; in case of:
i. A Government company or
ii. Any other company owned or controlled, directly or indirectly, 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.
If Comptroller and Auditor General of India fails in this respect, the Board is to appoint the
IMP auditor within next 30 days
Further if the Board also fails to do so, it has to inform the members of the company who
have to make the appointment within 60 days at an extraordinary general meeting (EGM).
Mind it, even appointed by Board or by embers at EGM, the first auditor shall hold office
till the conclusion of the first annual general meeting
Subsequent Auditor [Sub-section 5]

In respect of financial year, the Comptroller and Auditor General of India shall appoint a
duly qualified auditor within 180 days from the commencement of the financial year,
who shall hold office till conclusion of annual general meeting; in case of:
a. A Government company or
b. Any other company owned or controlled, directly or indirectly, 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.

FILLING UP CASUAL VACANCY [SUB-SECTION 8]

Other than company whose accounts are subject to audit by an auditor

appointed by the CAG
The Board may fill any casual vacancy in the office of an auditor within 30 days. Any
auditor appointed in a casual vacancy shall hold office until the conclusion of the next
annual general meeting.

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Where such vacancy is caused by the resignation of an auditor, such appointment shall
also be approved by the company at a general meeting convened within three months of
the recommendation of the Board
Company whose accounts are subject to audit by an auditor appointed by the CAG
Casual vacancy of an auditor shall be filled by the Comptroller and Auditor General of
India within 30 days.
Further, in case the CAG does not fill the vacancy within the said period, the Board of
Directors shall fill the vacancy within next 30 days.
Example : Prakash Carriers Limited appointed Mr. Raman as its auditor in the Annual
General Meeting held on 30th September, 2022. Initially, he accepted the appointment.
But he resigned from his office on 31st October, 2022 for personal reasons. The Board of
directors seeks advice for filling up the vacancy by appointment of Mr. Albert as auditor.
In the present case, as the auditor has resigned, the casual vacancy so created can be filled
up by the Board appointing Mr. Albert. However, the appointment of Mr. Albert must be
approved by the company by passing of an ordinary resolution at a general meeting of the
company which must be convened by the Board within 3 months of the recommendation
of the Board. Mr. Albert will be entitled to hold office till the conclusion of the next Annual
General Meeting.

RE-APPOINTMENT OF RETIRING AUDITOR [SUB-SECTION 9 AND 10]

As per sub-section 9, a retiring auditor may be re-appointed at an AGM if;
a. He is not disqualified for re-appointment;
b. He has not given a notice in writing to the company of his unwillingness to be re-
appointed; and
c. A special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
Further as per sub-section 10, where at any AGM, no auditor is appointed or reappointed,
the existing auditor shall continue to be the auditor of the company.
Even in case of continuation of auditor due to deeming provision of sub-section 10, the
conditions specified under sub-section 9 shall be checked.

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AUDIT COMMITTEE‘S RECOMMENDATION [SUB-SECTION 11]

Sub-section 11 prescribes the confirming provision, that all appointments, including the
filling of a casual vacancy of an auditor under this section shall be made after taking into
account the recommendations of such committee.

REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE

[SECTION 140]
Section 140 of the Companies Act, 2013 provides for removal, resignation of auditor and
giving of special notice. According to this section:
REMOVAL OF AUDITOR BEFORE HIS TERM [SUB-SECTION 1]
Manner and Procedure
The auditor appointed under section 139 may be removed from his office before the
expiry of his term only by—
a. A special resolution of the company and
b. After obtaining the previous approval of the Central Government (powers are
delegated to Regional Director) by making an application in Form ADT2 that shall be
accompanied with the prescribed fees as provided for this purpose under the
Companies (Registration Offices and Fees) Rules, 2014.
The application shall be made to the Central Government within 30 days of the resolution
passed by the Board.
The Company shall hold the general meeting within 60 days of receipt of approval of the
Central Government for passing the special resolution.

Example : Mr. Suresh, a Chartered Accountant, was appointed by the Board of Directors
of AB Limited as the First Auditor. The company in General Meeting removed Mr. Suresh
without seeking the approval of the Central Government and appointed Mr. Gupta as an
auditor in his place. The first auditor appointed by the Board of Directors can be removed
in accordance with the provision of Section 140(1) of the Companies Act, 2013. Hence, the
removal of the first auditor in this case is invalid. The company contravened the provision
of the Act.
In case of a Specified IFSC public company and Specified IFSC private company, where,
within a period of 60 days from the date of submission of the application to the Central
Government under this sub-section, no decision is communicated by the Central
Government to the company, it would be deemed that the Central Government has

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approved the application and the company shall appoint new auditor at a general meeting
convened within three months from the date of expiry of sixty days period.

Giving opportunity of being heard (Audi Alteram Partem)

Before taking any action for removal of auditor before the expiry of his term, the auditor
concerned shall be given a reasonable opportunity of being heard.
The Latin maxim, ‘Audi Alteram Partem’ is the principle of natural justice where every
person gets a chance of being heard to respond to the charge, evidence or action against
them.
Question 4 Special Resolution to remove auditor at general meeting shall be
passed within ______________, form the approval from central government.
a. 30 days
b. 1 month
c. 60 days
d. 3 months
Reason – Rule 7(3) of the Companies (Audit & Auditors) Rules, 2014 that states the
company shall hold the general meeting within sixty days of receipt of approval of the
Central Government for passing the special resolution.
steps for removal of auditor

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RESIGNATION BY AUDITOR [SUB-SECTION 2 & 3]

File a statement
If the Auditor has resigned from the company, he shall file a statement in the form ADT-3
with the company and the Registrar within a period of 30 days from the date of such
resignation.
The auditor shall indicate the reasons and other facts as may be relevant with regard to his
resignation, in the statement.
Statement to CAG in case of Government Company [Sub-section 2]
The auditor shall file such statement with the Comptroller and Auditor-General of India
(CAG) along with the company and the Registrar indicating the reasons and other facts as
may be relevant with regard to his resignation, in case if he is auditor of:
i. A Government company or
ii. Any other company owned or controlled, directly or indirectly, 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.
Penalty for Contravention [Sub-section 3]
If the auditor does not comply with aforesaid provision of filling statement then;
a. He or it shall be liable to a Penalty of Rs. 50,000 or an amount equal to the
remuneration of the auditor, whichever is less,
and
b. In case of continuing failure, with a further Penalty of Rs. 500 for each day after the
first during which such failure continues, subject to a maximum of Rs. 2 lakh.

APPOINTING AUDITOR OTHER THAN THE RETIRING AUDITOR

[SUBSECTION 4]
Special notice for resolution
If the retiring auditor has not completed a consecutive tenure of 5 years (or 10 years in
case of firm, as the case may be), special notice shall be required for a resolution at an
annual general meeting appointing as auditor a person other than a retiring auditor, or
providing expressly that a retiring auditor shall not be reappointed.
Copy of special notice to retiring auditor
On receipt of notice of such a resolution, the company shall forthwith send a copy thereof
to the retiring auditor.

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Representation of auditor
Where notice is given of such a resolution and the retiring auditor makes with respect
thereto representation in writing to the company (not exceeding a reasonable length) and
requests its notification to members of the company, the company shall, unless the
representation is received by it too late for it to do so,
a. In any notice of the resolution given to members of the company, state the fact of
the representation having been made; and
b. Send a copy of the representation to every member of the company to
whom notice of the meeting is sent, whether before or after the receipt of the
representation by the company.
If a copy of the representation is not sent to members If a copy
of representation is not sent to member as aforesaid,
a. Either because it was received too late or of the company’s default, the auditor may
(without prejudice to his right to be heard orally) require that the representation
shall be read out at the meeting.
b. A copy of such representation shall be filed with the Registrar.
Second proviso to section 140(4) read with Rule 78 of the National Company Law
Tribunal Rules, 2016, provides, if the Tribunal i.e. NCLT is satisfied;
a. On an application in Form No. NCLT. 1 may be filed by the director on behalf of the
company or the aggrieved auditor to the Tribunal
b. That the rights conferred by the provisions of section 140 are being abused by the
auditor,
c. Then, the copy of the representation need not be sent and the representation need
not be read out at the meeting.

AUDITOR ACTS IN A FRAUDULENT MANNER OR ABETTED OR

COLLUDED IN ANY FRAUD [SUB-SECTION 5]
Tribunal may order the company to change its auditor/s.
Without prejudice to any action under the provisions of this Act or any other law for the
time being in force, the Tribunal (i.e. NCLT) either on
a. Its own (Suo-moto); or
b. An application (in Form No. NCLT 9) made to it by the Central Government; or
c. An application (in Form No. NCLT 9) made to it by any person concerned,

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If it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors.
Rule 78(3) of the National Company Law Tribunal Rules, 2016 provides exactly similar
provision to what is stated as first proviso to Sub-section 5 of Section 140, if the
application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall within fifteen days of receipt of such application
make an order that the auditor shall not function as an auditor and the Central
Government may appoint another auditor in his place.
Ineligibility of auditor to be appointed and criminal liability
An auditor, whether individual or firm, against whom final order has been passed by the
Tribunal under section 140, shall;
a. Not be eligible to be appointed as an auditor of any company for a period of 5 years
from the date of passing of the order and
b. Also be liable for action under section 447 of the Companies Act 2013.
In case of a firm, the liability shall be of the firm and that of every partner or partners who
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its director or officers.
The word “auditor” also includes a firm of auditors.

Question 5 FLP Ltd, engaged in the business of real estate and energy, defaulted
on its borrowings which amounted to thousands of crore. During the year ended
31st March 2023, a fraud was uncovered in respect of various transactions of the
company and it was observed by the Central Government that the auditors of the
company were involved in such fraud. Please suggest what can be the course of
action in this case.
Answer - The Central Government may apply to the Tribunal in respect of such matter
highlighting that the auditors miserably failed to fulfill their duties as auditors of the
company. If the Tribunal is satisfied that the auditors were involved in the fraud with the
company, the Tribunal may direct the company to change its auditors and those auditors
shall not be eligible to be appointed as auditor of any company for 5 years and also liable
for action under section 447 of the Companies Act 2013.

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Summary of Sub-section 5

suo motu
If tribunal is satisfied, within
15 days of receipt of
on application application, it shall order that
NCLT by CG he shall not function as
Auditor and CG may appoint
on application another auditor
by any person
Satisfied that concerned
Auditor has
acted in
fraudulent
manner

The removed auditor shall not be eligible to be

Direct the company to
appointed as auditor of any company for 5 years
change its auditors
and liable for action u/s 447

ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS

[SECTION 141]
Section 141 of the Companies Act, 2013 provides for eligibility, qualifications and
disqualifications of auditors.
QUALIFICATION OF AN AUDITOR [SUB-SECTION 1 AND 2]
Auditor shall be CA in Practice [Sub-section 1]
A person shall be eligible to be appointed as an auditor of a company only if he is a
chartered accountant as defined in the Chartered Accountants Act, 1949 who holds a valid
certificate of practice under that Act.
Since section 139 allows a firm also to be appointed as an auditor, hence proviso to section
141(1) prescribe clearly that only those firms wherein majority of partners practicing in
India, are qualified for appointment by its firm name.
Who shall sign if firm appointed as Auditor [Sub-section 2]
Where a firm including a Limited Liability Partnership is appointed as an auditor of a
company, only the partners who are Chartered Accountants shall be authorized to act and
sign on behalf of the firm.

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DISQUALIFICATIONS OF AUDITORS [SUB-SECTION 3]

Following persons shall not be qualified for appointment as auditor of a company
a. A body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
b. An officer or employee of the company;
c. A person who is a partner, or who is in the employment, of an officer or employee of
the company;

Question Mr. Anil, a Chartered accountant, is a partner of a firm and has

been appointed as an auditor of Laxman Ltd. in the Annual General Meeting
of the company held in September 2022 in which he accepted the
assignment. Subsequently, in January 2023, he offered Bharat, another
Chartered Accountant, who is the Manager Finance of Laxman Ltd., to join
the firm of Anil as a partner.
Answer Section 141(3)(c) of the Companies Act, 2013 prescribes that any
person who is a partner or in employment of an officer or employee of the
company will be disqualified to act as an auditor of a company. Sub-section
(4) of Section 141 provides that an auditor who becomes subject, after his
appointment, to any of the disqualifications specified in sub-sections (3) of
Section 141, shall be deemed to have vacated his office as an auditor.
In the present case, Anil is auditor of M/s Laxman Limited and any
employee of Laxman Limited cannot become the Partner of the firm where
Anil is a Partner. In case that happens, he/the firm shall be deemed to have
vacated office of the auditor of M/s Laxman Limited.
d. A person who himself or his partner is holding any security of or interest in the
company or its subsidiary, or of its holding or associate company or a subsidiary of
such holding company (i.e. fellow subsidiary) or his relative or partner
Question ―Mr. Ashish‖, a practicing Chartered Accountant, is holding
securities of ―XYZ Ltd.‖ having face value of Rs. 900/-. Whether Mr. Ashish
is qualified for appointment as an Auditor of ―XYZ Ltd.‖?
Answer
As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as an auditor if
he, or his partner is holding any security or interest in the company or its subsidiary,
or of its holding or associate company or a subsidiary of such holding company. In

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the present case, Mr. Ashish is holding security of Rs. 900 in XYZ Ltd, therefore he is
not eligible for appointment as an Auditor of “XYZ Ltd”.
Note – In earlier act i.e. Companies Act 1956 the holding securities of par value upto
the limit of Rs. 1000 by auditor was not the disqualification criteria. Under current
Act i.e. Companies Act 2013, not a single rupee of holding by auditor is allowed.
e. A person whose relative (defined u/s 2(77) is holding any security of or interest in
the company or its subsidiary, or of its holding or associate company or a subsidiary
of such holding company (i.e. fellow subsidiary) of face value exceeding Rs. 1,00,000.
Question
“Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr.
P”, is holding securities of “ABC Ltd.” having face value of
Rs. 90,000/-. Whether “Mr. P” is qualified for being appointed as an auditor of “ABC
Ltd.”?
Answer
As per section 141 (3)(d)(i), an auditor is disqualified to be appointed as an auditor if
he, or his relative or partner holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of such holding
company. Further as per proviso to this Section, the relative of the auditor may hold
the securities or interest in the company of face value not exceeding of Rs. 1,00,000.
In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of Rs.
90,000 face value in ABC Ltd., which is as per requirement of proviso to section
141(3)(d)(i). Therefore, Mr. P will not be disqualified to be appointed as an auditor of
ABC Ltd.
Though rule 10(1) says, a relative of an auditor may hold securities in the company of
face value not exceeding rupees one lakh but here rather than a literal
interpretation, reasonable construction is required. And holding of all the relatives
IMP together shall be checked against the threshold.
Further, even if relative of one of the partners of any firm hold securities or interests
exceeding the threshold then, not only such partner even firm shall not be eligible to
appointed as auditor.
The threshold condition specified above shall, wherever relevant, be also applicable
in the case of a company not having share capital or other securities.

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If the relative acquires any security or interest above the prescribed threshold
i.e. Rs. 1,00,000, the corrective action to maintain the limits as specified above
shall be taken by the auditor within 60 days of such acquisition or interest.

Question ―BC & Co.‖ is an audit firm having partners ―Mr. B‖ and ―Mr. C‖
and ―Mr. A‖, relative of ―Mr. C‖, is holding securities of ―MWF Ltd.‖ having
face value of Rs. 1,10,000. Whether ―BC & Co.‖ is qualified for appointment
as auditor of ―MWF Ltd.‖?
Answer As per section 141(3)(d)(i) an auditor is disqualified to be
appointed as an auditor if he, or his relative or partner holding any security
of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. Further as per proviso to
this Section, the relative of the auditor may hold the securities or interest in
the company of face value not exceeding of Rs. 1,00,000. In the instant
case, BC & Co, will be disqualified for appointment as an auditor of MWF
Ltd as the relative of Mr. C i.e. partner of BC & Co., is holding the securities
in MWF Ltd which is exceeding the limit mentioned in proviso to section
141(3)(d)(i).
f. A person who himself, or whose partner or relative is indebted to the company, or its
subsidiary, or its holding or associate company or a subsidiary of such holding
company, in excess of Rs. 5 Lakh
g. A person who or whose relative or partner has given a guarantee or provided any
security in connection with the indebtedness of any third person to the company, or
its subsidiary, or its holding or associate company or a subsidiary of such holding
company, in excess of one lakh rupees
h. A person or a firm who, whether directly or indirectly, has business relationship with
the company, or its subsidiary, or its holding or associate company or subsidiary of
such holding company or associate company.
The term ―business relationship‖ shall be construed as any transaction
entered into for a commercial purpose, but except–
 Commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the
Chartered Accountants Act, 1949 and the rules or the regulations made under
IMP those Acts;
 Commercial transactions which are in the ordinary course of business of the
company at arm’s length price like sale of products or services to the auditor as

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customer by the companies engaged in the business of telecommunications,

airlines, hospitals, hotels and such other similar businesses.
i. A person whose relative is a director or is in the employment of the company as a
director (as defined u/s 2(34) or key managerial personnel (as defined u/s 2(51);
j. A person who is in full time employment elsewhere
k. A person or a partner of a firm holding appointment as its auditor, if such persons or
partner is at the date of such appointment or reappointment holding appointment as
auditor of more than 20 companies.

While calculating the ceiling limit of 20, the one person companies, small companies
and private companies having paid-up share capital less than 100 crore rupees shall
be excluded.
The exceptions provided above shall be applicable only to those Private Companies
which has not committed a default in filing its financial statements under section 137
of the said act or annual return under section 92 of the said act with the registrar
Before appointment is given to any auditor, the company must obtain a certificate
from him to the effect that the appointment, if made, will not result in an excess
holding of company audit by the auditor concerned over the limit laid down in
section141(3)(g) of the Companies Act, 2013.

Question
“ABC & Co.” is an audit firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered
Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as auditors in 4,
6 and 10 companies respectively.
i. Provide the maximum number of audits remaining in the name of “ABC & Co.”
ii. Provide the maximum number of audits remaining in the name of individual
partner i.e. Mr. A, Mr. B and Mr. C.
Answer
In the instant case, Mr. A is holding appointment in 4 companies, Mr. B is having
appointment in 6 companies and Mr. C is having appointment in 10 companies. In
aggregate all three partners are having 20 audits.
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment elsewhere or a person or
a partner of a firm holding appointment as its auditor, if such person or partner is at
the date of such appointment or reappointment holding appointment as auditor of

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more than twenty companies other than one person companies, dormant
companies, small companies and private companies having paid-up share capital less
than Rs. 100 crore.
As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of
an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 companies’
audit. Sometimes, a Chartered Accountant may be a partner in a number of auditing
firms. In such a case, all the firms in which he is partner or proprietor will be together
entitled to 20 company audits only on his account.
Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:
Total Number of audits for which the firm would be eligible = 20 X 3 = 60
Number of audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of audits available to the firm = 40
With reference to above provisions, an auditor can hold more appointment as
auditor (i.e. ceiling limit as per section 141(3)(g) - already holding appointments as
an auditor). Hence
i. Mr. A can hold: 20 – 4 = 16 more audits.

iii. Mr. B can hold 20 - 6 = 14 more audits and

iii. Mr. C can hold 20-10 = 10 more audits.

Note - It has been assumed that the companies given in the question are not one
person companies, dormant companies, small companies and private companies
having paid-up share capital less than Rs. 100 crore.

l. a person who has been convicted by a court of an offence involving fraud and a
period of 10 years has not elapsed from the date of such conviction;
m. A person who, directly or indirectly, renders any service referred to in section 144 to
the company or its holding company or its subsidiary company.

VACATION OF OFFICE BY AN AUDITOR [SUB-SECTION 4]

If a person appointed as an auditor of a company incurs any of the disqualifications

specified in Section 141(3) after his appointment, he shall vacate his office as Auditor.
Such vacation shall be deemed to be a casual vacancy in the office of the auditor.

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REMUNERATION OF AUDITORS [SECTION 142]

Section 142 of the Companies Act, 2013 provides for remuneration of auditors.
WHO WILL FIX THE REMUNERATION?
Subsequent auditors
The remuneration of auditors has to be fixed by the company in general meeting or in
such manner as the general meeting may determine.
First Auditor
While the remuneration of first auditor shall be fixed by the board, which appointed him.
Components
a. The remuneration so fixed is, in addition to the fee payable to an auditor to,
Includes
b. The expenses, if any, incurred by him in connection with the audit of the company
(i.e. out of pocket expense) and
c. Any facility extended to him.
Exclusion
It is not to include any remuneration paid to him for any other service rendered by him at
the request of the company.
Example : SHRD Private Ltd is engaged in the business of software and consultancy. The
company has an annual turnover of Rs. 2,000 crore but its profit margins are not very
good as compared to the industry standards. For the financial year ended 31st March 2019,
the company proposed appointment of its statutory auditors at its Board meeting,
however, the remuneration was not finalized. The statutory auditors completed the
engagement formalities including the engagement letter between the company and the
auditors and it was decided that the engagement letter be signed without fee i.e. with the
clause that the fee to be mutually decided. In this situation, engagement letter with such
arrangement is valid.

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POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS

[SECTION 143]
POWERS OF AUDITORS [SUB-SECTION 1]
Access to books of account and vouchers
Every auditor of a company shall have a right of access at all times to the books of
accounts and vouchers of the company, whether kept at the registered office of the
company or at any other place.
Entitled to have necessary information and Explanation
He shall be entitled to require from the officers of the company such information and
Explanations as the auditor may consider necessary for the performance of his duties as
auditor.
Access to record of all its subsidiaries
The auditor of a company which is a holding company shall also have the right of access to
the records of all its subsidiaries and associate companies in so far as it relates to the
consolidation of its financial statements with that of its subsidiaries and associate
companies.
DUTIES OF AUDITORS
Matters of inquiry [Sub-section 1]
The auditor shall inquire into the following matters, namely
a. Whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are
prejudicial to the interests of the company or its members;
b. Whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company;
c. Where the company not being an investment company or a banking company,
whether so much of the assets of the company as consist of shares, debentures and
other securities have been sold at a price less than that at which they were
purchased by the company;
d. Whether loans and advances made by the company have been shown as
deposits;
e. Whether personal expenses have been charged to revenue account;

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f. Where it is stated in the books and documents of the company that any shares have
been allotted for cash, whether cash has actually been received in respect of such
allotment, and if no cash has actually been so received, whether the position as
stated in the
g. account books and the balance sheet is correct, regular and not misleading.

Report to members [Sub-section 2 and 3]

The auditor shall make a report to the members of the company on the following;
a. On the accounts examined by him; and
b. On every financial statements which are required by or under this Act to be laid
before the company in general meeting; and

The auditor while making the report shall take into account the provisions of the Act, the
accounting and auditing standards and matters which are required to be included in the
audit report under the provisions of this Act or any rules made thereunder or under any
order made under section 143(11).
The auditor shall express his opinion on the accounts and financial statements examined
by him. He shall express an opinion, according to him and to the best of his information
and knowledge, whether the said accounts/financial statements give a true and fair view
of the state of the company’s affairs as at the end of its financial year and profit or loss
and cash flow for the year and such other matters as may be prescribed.

Further, sub-section 3 requires, the auditors’ report shall also state:

a. Whether he has sought and obtained all the information and Explanations which to
the best of his knowledge and belief were necessary for the purpose of his audit and
if not, the details thereof and the effect of such information on the financial
statements;
b. Whether, in his opinion, proper books of account as required by law have been kept
by the company so far as appears from his examination of those books and proper
returns adequate for the purposes of his audit have been received from branches not
visited by him;
c. Whether the report on the accounts of any branch office of the company audited
under sub-section (8) by a person other than the company’s auditor has been sent to
him under the proviso to that sub-section and the manner in which he has dealt with
it in preparing his report;

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d. Whether the company’s balance sheet and profit and loss account dealt with in the
report are in agreement with the books of account and returns;
e. Whether, in his opinion, the financial statements comply with the accounting
standards;
f. The observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
g. Whether any director is disqualified from being appointed as a director under sub
section (2) of section 164;
h. Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
i. Whether the company has adequate internal financial controls with reference to
financial statements in place and the operating effectiveness of such controls;
j. Such other matters as may be prescribed.
In context of clause j stated above, Rule 11 of the Companies (Audit & Auditors)
Rules,2014 i.e. Other Matters to be Included in Auditors Report requires the
auditor’s report shall also include their views and comments on the following
matters, namely:
(i) Whether the company has disclosed the impact, if any, of pending litigations on
its financial position in its financial statement;
(ii) Whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts;
(iii) Whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.
(iv) Whether the management has represented that, to the best of it’s knowledge
and belief, other than as disclosed in the notes to the accounts, no funds have
been;
1. Advanced or loaned or invested (either from borrowed funds or share
premium or any other sources or kind of funds) by the company to or in
any other person(s) or entity(ies), including foreign entities
(“Intermediaries”), with the understanding, whether recorded in writing
or otherwise, that the Intermediary

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shall, whether, directly or indirectly lend or invest in other persons or

entities identified in any manner whatsoever by or on behalf of the
company (“Ultimate Beneficiaries”) or provide any guarantee, security or
the like on behalf of the Ultimate Beneficiaries;
2. Received by the company from any person(s) or entity(ies), including
foreign entities (“Funding Parties”), with the understanding, whether
recorded in writing or otherwise, that the company shall, whether,
directly or indirectly, lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the Funding Party (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of
the Ultimate Beneficiaries; and
3. Based on such audit procedures that the auditor has considered
reasonable and appropriate in the circumstances, nothing has come to
their notice that has caused them to believe that the representations
under sub-clause (i) [i.e. pt 1] and (ii) [i.e. pt 2] contain any material mis-
statement.
(v) Whether the dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
(vi) Whether the company, in respect of financial years commencing on or after the
1st April, 2022, has used such accounting software for maintaining its books of
account which has a feature of recording audit trail (edit log) facility and the
same has been operated throughout the year for all transactions recorded in
the software and the audit trail feature has not been tampered with and the
audit trail has been preserved by the company as per the statutory
requirements for record retention.

As per sub-section 4 to section 143, where any of the matters is answered in the negative
or with a qualification, the auditor’s report shall state the reason for the same.

Clause (i) of Sub-Section (3) of Section 143 (i.e. Whether the company has adequate
internal financial controls with reference to financial statements in place and the
operating effectiveness of such controls) shall not apply to a private company,
i. which is a one person company or a small company; or
ii. Which has turnover less than rupees fifty crore as per latest audited financial
statement and which has aggregate borrowings from banks or financial institutions

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or anybody corporate at any point of time during the financial year less than rupees
25 crore.
The aforesaid exceptions, modifications and adaptations shall be applicable to a Private
company which has not committed a default in filing of its financial statements under
section 137 or annual return under section 92 of the said Act with the Registrar.

Question
MNO Ltd. is a listed company engaged in the business of trading of various products. The
company also plans to start manufacturing of certain products which are currently traded.
During the course of its audit, the auditors completed all the procedures related to audit of
financial statements. However, the auditor got stuck on one procedure because of which
audit has not got concluded.
Auditors are waiting for certain additional information – Directors report and Management
Discussion and Analysis (MD&A) for their review. However, the management is not ready
with this information and wants the auditors to complete their work without review of this
information. Please advise as per the legal requirements.
Answer
In the given case, the requirement of the auditors regarding additional information i.e.
Directors report and MD&A without which they have not been able to conclude the audit
doesn’t look valid. The auditor is required to audit the financial statements and express an
opinion on the same. The auditor does not audit these additional information.

Hence the auditor should conclude the work without delaying because of this additional
information.
Compliance with auditing standards [Sub-section 9 and 10]
Every auditor shall comply with the auditing standards.
The Central Government may prescribe the standards of auditing or any addendum
thereto, as recommended by the ICAI, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority (NFRA).
It is further provided that until any auditing standards are notified, any standard or
standards of auditing specified by the ICAI shall be deemed to be the auditing standards.

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Additional matters to be reported in case of specified companies [Sub-

section 11]
In respect of such class or description of companies, as may be specified in the general or
special order by the Central Government, may in consultation with the NFRA direct, the
auditor’s report shall also include a statement on such matters as may be specified
therein.

CARO 2020 issued by MCA should be complied by the statutory auditor of every company,
on which it applies.

REPORTING OF FRAUDS BY AUDITORS [SUB-SECTION 12, 13 AND 15 ]

Fraud involving amount of one crore or more [Sub-section 12 ]

Notwithstanding anything contained in this section, if an auditor of a company, in the
course of the performance of his duties as auditor,
a. Has reason to believe that an offence involving fraud
b. Which involves or is expected to involve individually an amount of rupees one crore
or above
c. Is being or has been committed against the company by officers or employees of the
IMP
company,
d. He shall immediately report the matter to the Central Government within such time
and in such manner as may be prescribed.
In this regards Rule 13(2) the auditor shall report the matter to the Central Government in
following manner
a. The auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than 2 days of his knowledge of the fraud,
seeking their reply or observations within 45 days;
b. On receipt of such reply or observations, the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his comments
(on such reply or observations of the Board or the Audit Committee) to the Central
Government within 15 days from the date of receipt of such reply or observations;
c. In case the auditor fails to get any reply or observations from the Board or the
Audit Committee within the stipulated period of 45 days, he shall forward his report
to the Central Government along with a note containing the details of his report that
was earlier forwarded to the Board or the Audit
Committee for which he has not received any reply or observations;

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d. The report shall be sent to the Secretary, Ministry of Corporate Affairs (MCA) in a
sealed cover by Registered Post with Acknowledgement Due or by Speed Post
followed by an e-mail in confirmation of the same;
e. The report shall be on the letter-head of the auditor containing postal address, e-
mail address and contact telephone number or mobile number and be signed by the
auditor with his seal and shall indicate his Membership
Number; and
f. The report shall be in the form of a statement as specified in Form ADT-4.
Fraud involving amount less than one crore
Report to Audit Committee or Board [First Proviso to Sub-section 12]
In case of a fraud involving lesser than an amount of rupees one crore, the auditor shall
report the matter to the audit committee (if constituted under section 177) or to the
Board (in other cases) immediately but not later than two days of his knowledge of the
fraud and he shall report the matter specifying the following;
a. Nature of Fraud with description;
b. Approximate amount involved; and
c. Parties involved.
Disclosure in Board’s Report [Second Proviso to Sub-section 12 ]
The audit committee or the Board shall disclose the following details about such frauds
(reported to them, but not to the Central Government i.e. when amount involved is less
than Rs. 1 crore), in the Board's report;
a. Nature of fraud with description;
b. Approximate amount involved;
c. Parties involved, if remedial action not taken; and
d. Remedial actions taken.
Exception of bonafide faith [Sub-section13]
No duty to which an auditor of a company may be subject to shall be regarded as having
been contravened by reason of his reporting the matter referred to in subsection (12) if it
is done in good faith.
Penalty for non-compliance of section 143(12) [Sub-section 15]
If any auditor, cost accountant, or company secretary in practice does not comply with the
provisions of sub-section (12), he shall

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a. Be liable to a Penalty of five lakh rupees in case of a listed company; and

b. Be liable to a Penalty of one lakh rupees in case of any other company.
Quantum of Penalty
Liable In case of Quantum

auditor, cost accountant, or listed company five lakh rupees

company secretary in practice does
any other company one lakh rupees
not comply with the provisions of
section 143(12)
Question
NSH Ltd is engaged in the business of retail and is listed on National stock exchange. The
company recently acquired a business undertaking to expand its business. During the year,
certain transactions amounting to thousands of rupees were carried out by the employees/
directors of the company which the management found suspicious and appointed a
forensic consultant to carry out their review. Pursuant to this review process, certain
suspicious transactions were identified by the management and the management reported
these transactions to the appropriate authorities. During the course of statutory audit,
such transactions were also made known to the statutory auditors. How should the auditor
deal with such matter?
Answer
As per Section 143(12) of the Companies Act, 2013, the auditor is required to report to the
Audit Committee or to the Board of Directors and, where applicable, to the Central
Government an offence of fraud in the company by its officers or employees only if he is
the first person to identify/note such instance in the course of performance of his duties
as an auditor. In this case, the suspicious transactions have been identified by the
management first and information about the same has been given by the management to
the auditor. Accordingly, the auditor should report about this matter to the Audit
Committee/ Board of Directors but the auditor would not be required to report the same
to Central Government.

AUDIT OF GOVERNMENT COMPANIES [SUB-SECTION 5, 6 & 7]

Powers vested with CAG [Sub-section 5]
Sub-section 5 provides, in the case of a Government company or any other company
owned or controlled, directly or indirectly, 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;

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a. CAG shall appoint the auditor under section 139(5) or 139(7) and
b. Direct such auditor the manner in which the accounts of the Government company
are required to be audited and
c. Thereupon the auditor so appointed shall submit a copy of the audit report to the
CAG.
The audit report among other things, shall include the following
a. The directions, if any, issued by the CAG;
b. The action taken thereon; and
c. Its impact on the accounts and financial statement of the company.
Comment by CAG and Supplementary Audit [Sub-section 6]
Sub-section 6 provides that, the CAG shall within 60 days from the date of receipt of the
audit report have a right to;
a. Conduct a supplementary audit of the financial statement of the company by such
person or persons as he may authorize in this behalf; and for the purposes of such
audit, require information or additional information to be furnished to any person or
persons, so authorized, on such matters, by such person or persons, and in such
form, as the CAG may direct; and
b. Comment upon or supplement such audit report.
Any comments given by the CAG upon, or supplement to, the audit report shall be sent by
the company to every person entitled to copies of audited financial statements under
section 136(1) and also be placed before the AGM of the company at the same time and in
the same manner as the audit report.
Test Audit [Sub-section 7]
For Government Company or Company controlled by State Government or Central
Government, the CAG may, if he considers necessary, by an order, cause test audit to be
conducted of the accounts of such company, without prejudice to the provisions related to
Audit and Auditors. The provisions of section 19A of the Comptroller and Auditor-
General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of
such test audit.

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AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY

[SUBSECTION 8]
Branch office in India
Where a company has a branch office, the accounts of that office shall be audited either
by:
a. The company’s auditor appointed under section 139, or
b. By any other person qualified for appointment as an auditor of the company under
section 139.
Branch office outside India
If the branch office is situated in a country outside India, the accounts of the branch office
shall be audited either by:
a. The company’s auditor or
b. By an accountant or
c. By any other person duly qualified to act as an auditor of the accounts of the branch
office in accordance with the laws of that country.
Duties and powers of the company‘s auditor with reference to the audit of
the branch and the branch auditor
The duties and powers of the company’s auditor with reference to the audit of the branch
and the branch auditor, if any, shall be as contained in sub-sections (1) to
(4) of section 143.
The branch auditor shall submit his report to the company’s auditor.
The provisions regarding reporting of fraud by the auditor shall also extend to such branch
auditor to the extent it relates to the concerned branch.
APPLICATION OF PROVISIONS OF SECTION 143 TO COST
ACCOUNTANTS AND COMPANY SECRETARY [SUB-SECTION 14]
The provisions of this section shall mutatis mutandis apply to:
a. The cost accountant conducting cost audit under section 148; or
b. The company secretary in practice conducting secretarial audit under section 204.

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AUDITOR NOT TO RENDER CERTAIN SERVICES [SECTION 144]

An auditor appointed under this Act shall provide to the company only such other services
as are approved by the Board of Directors or the audit committee, as the case may be.
But such services shall not include any of the following services (whether such services are
rendered directly or indirectly to the company or its holding company or subsidiary
company), namely
a. Accounting and book keeping services;
b. Internal audit;
c. Design and implementation of any financial information system;
d. Actuarial services;
e. Investment advisory services;
f. Investment banking services;
g. Rendering of outsourced financial services;
h. Management services; and
i. Any other kind of services as may be prescribed
Snapshot of prohibited services

Accounting and book Investment advisory Investment banking

keeping services services services

Internal audit Actuarial services Management services

Design and
Rendering of Any other kind of
implementation of any
outsourced financial services as may be
financial information
services prescribed
system

The term “directly or indirectly” shall include rendering of services by the auditor

 In case of auditor being an individual, either himself or through his relative or any
other person connected or associated with such individual or through any other
entity, whatsoever, in which such individual has significant influence or control, or
whose name or trademark or brand is used by such individual;

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 In case of auditor being a firm, either itself or through any of its partners or through
its parent, subsidiary or associate entity or through any other entity, whatsoever, in
which the firm or any partner of the firm has significant influence or control, or
whose name or trademark or brand is used by the firm or any of its partners.

Example : MNP Ltd is a medium-sized company engaged in the business of

pharmaceuticals. For the year ended 31st March 2018, the company is looking for
appointment of GST (Goods and Services Tax) auditor. The company wants to appoint
somebody for this work who is familiar with the business of the company i.e. who would
have worked with the company in the past so that lesser efforts are required to get the
GST audit completed. The company has options of statutory auditors that can be
appointed for this work for betterment of company.

AUDITORS TO SIGN AUDIT REPORTS, ETC. [SECTION 145]

Section 145 of the Companies Act, 2013 provides for auditors to sign audit reports, etc.
The person appointed as an auditor of the company shall sign the auditor’s report or sign
or certify any other document of the company in accordance with the provisions of sub-
section (2) of section 141 (i.e. in case of firm including LLP is appointed as an auditor of a
company, only the partner who are Chartered Accountants shall be authorized to act and
sign on behalf of the firm).
The qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditor’s
report shall be read before the company in general meeting and shall be open to
inspection by any member of the company.

Question Whether entire audit report need to read before the company in general
meeting?
Answer No, as per section 145 of the Companies Act 2013, qualifications, observations or
comments on financial transactions or matters, which have any adverse effect on the
functioning of the company mentioned in the auditor’s report shall be read before the
company in general meeting and shall be open to inspection by any member of the
company.

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AUDITORS TO ATTEND GENERAL MEETING [SECTION 146]

Section 146 of the Companies Act, 2013 provides for auditors to attend general meeting.
All notices of, and other communications relating to, any general meeting shall be
forwarded to the auditor of the company.
The auditor shall, unless otherwise exempted by the company, attend either by himself
or through his authorized representative, who shall also be qualified to be an auditor, any
general meeting.
The auditor shall have right to be heard at such meeting on any part of the business which
concerns him as the auditor.
Example
Modern Furniture Limited (MFL) convened its general meeting on 21 st March 2023, the
notice of same was not served at auditor. Since company is obligated under section 146 to
forward a notice of general meeting to auditor as well, hence nonserving of notice to
auditor by MFL is in Contravention to section 146 and liable for Penalty under section 147.
Question
Regarding the general meeting for which notice is served on auditor;
i. Whether auditor is mandatorily required to be attend the said general meeting?

ii. If yes, whether he is required to attend the meeting personally?

Answer
Answer to first part is yes, while no in case of second, because as per section 146 of the
Companies Act 2013, the auditor shall, unless otherwise exempted by the company,
attend either by himself or through his authorized representative, who shall also be
qualified to be an auditor, any general meeting.

PUNISHMENT FOR CONTRAVENTION [SECTION 147]

Section 147 of the Companies Act, 2013 provides for punishment for Contravention.
CONTRAVENTION BY COMPANY [SUB-SECTION 1]
Penalty on company
If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company
shall be punishable with fine which shall not be less than 25,000 rupees but which may
extend to five lakh rupees.

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Penalty on officer/s who is/are in default

If any of the provisions of sections 139 to 146 (both inclusive) is contravened, every officer
of the company who is in default shall be punishable with fine which shall not be less than
10,000 rupees but which may extend to one lakh rupees.

CONTRAVENTION BY AUDITOR [SUB-SECTION 2 AND 3]

IMP
Penalty on auditor [Sub-section 2]
If an auditor of a company contravenes any of the provisions of section 139, section 144 or
section 145, the auditor shall be punishable with fine which shall not be less than 25,000
rupees but which may extend to five lakh rupees or four times the remuneration of the
auditor, whichever is less.

Penalty for knowing/willful Contravention [Proviso to Sub-section 2]

If an auditor has contravened any of the provisions of section 139, section 144 or section
145, knowingly or willfully with the intention to deceive the company or its shareholders
or creditors or tax authorities, he shall be punishable with the imprisonment for a term
which may extend to 1 year and with the fine which shall not be less than 50,000 rupees
but which may extend to twenty-five lakh rupees or eight times the remuneration of the
auditor, whichever is less.
Refund of remuneration and payment of damages [Sub-section 3]
Where an auditor has been convicted under sub-section 2, he shall be liable to;
a. Refund the remuneration received by him to the company; and
b. Pay for damages to the company, statutory bodies or authorities or to members or
creditors of the company for loss arising out of incorrect or misleading statements of
particulars made in his audit report.

Note:
For operation of sub-section 3, the sub-section 4 empowers the Central Government, to
specify any statutory body or authority or an officer for ensuring prompt payment of
damages to the company or the persons, by notification.
Such body, authority or officer shall after payment of damages to such company or
persons file a report with the Central Government in respect of making such damages in
such manner as may be specified in the said notification.

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CONTRAVENTION BY AUDIT FIRM [SUB-SECTION 5]

Where, in case of audit of a company being conducted by an audit firm,
It is proved that the partner or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the
company or its directors or officers, the liability,
Whether civil or criminal as provided in the Companies Act, 2013, or in any other law for
the time being in force,
For such act shall be of the partner or partners concerned of the audit firm and of the firm
jointly and severally.

CENTRAL GOVERNMENT TO SPECIFY AUDIT OF ITEMS OF COST IN

RESPECT OF CERTAIN COMPANIES [SECTION 148]
COST RECORDS [SUB-SECTION 1]
Who shall prepare cost records? [Rule 3]
Notwithstanding anything contained in the provisions related to audit and auditor
(Chapter X), the Central Government may, by order, in respect of such class of companies
engaged in the production of such goods or providing such services as may be prescribed,
direct that particulars relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account kept under
section 128 by that class of companies.
The Central Government shall, before issuing such order in respect of any class of
companies regulated under a special Act, consult the regulatory body constituted or
established under such special Act.
For the purposes of sub-section (1) of section 148 of the Act, rule 3 of the Companies (Cost
Records and Audit) Rules, 2014 provides, the class of companies (including foreign
companies defined in clause (42) of section 2 of the Act) engaged in the production of the
goods or providing services, specified in the Table A (6 Regulated Sectors) and/or Table B
(33 Non-Regulated Sector), having an overall turnover from all its products and services of
rupees thirty five crore or more during the immediately preceding financial year, shall
include cost records for such products or services in their books of account

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Nothing contained in Rule 3 shall apply to a company which is classified as a micro

enterprise or a small enterprise including as per the turnover criteria under sub-section
(9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.
Form and manner of Cost Records [Rule 5]
Every company covered by rule 3 explained above under these rules including all units and
branches thereof, shall, in respect of each of its financial year maintain cost records in
form CRA-1.
The cost records shall be maintained on regular basis in such manner as to facilitate
calculation of per unit cost of production or cost of operations, cost of sales and margin
for each of its products and activities for every financial year on monthly or quarterly or
half-yearly or annual basis.
The cost records shall be maintained in such manner so as to enable the company to
exercise, as far as possible, control over the various operations and costs to achieve
optimum economies in utilisation of resources and these records shall also provide
necessary data which is required to be furnished under these rules.
COST AUDIT [SUB-SECTION 2 TO 7]

If the Central Government is of the opinion, that it is necessary to do so, it may, by order,
direct that the audit of cost records of class of companies, which are covered aforesaid
(under sub-section 1 i.e. required to prepare cost records) and which have a net worth of
such amount as may be prescribed or a turnover of such amount as may be prescribed,
shall be conducted in the manner specified in the order.
As per sub-section 4, an audit conducted under this section (cost audit u/s 148) shall be in
addition to the audit conducted under section 143.
The cost statements, including other statements to be annexed to the cost audit report,
shall be approved by the Board of Directors before they are signed on behalf of the Board
by any of the director authorised by the Board, for submission to the cost auditor to report
thereon.
Sub-rule 1 to rule 4 provides every company specified in the item (A) of rule 3 shall be
required to get its cost records audited in accordance with these rules if the overall
annual turnover of the company from all its products and services during the immediately
preceding financial year is rupees fifty crore or more and the aggregate turnover of the
individual product or products or service or services for which cost records are required to
be maintained under rule 3 is rupees twenty five crore or more.

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Whereas sub rule 2 provides every company specified in item (B) of rule 3 shall get its cost
records audited in accordance with these rules if the overall annual turnover of the
company from all its products and services during the immediately preceding financial
year is rupees one hundred crore or more and the aggregate turnover of the individual
product or products or service or services for which cost records are required to be
maintained under rule 3 is rupees thirty five crore or more.
Further sub-rule 3 to rule 4 provides exception from cost audits. The requirement for cost
audit shall not apply to a company which is covered in rule 3, and
a. Whose revenue from exports, in foreign exchange, exceeds seventy five percent of
its total revenue; or
b. Which is operating from a special economic zone.
c. Which is engaged in generation of electricity for captive consumption through
Captive Generating PIant. For this purpose, the term “Captive Generating Plant” shall
have the same meaning as assigned in rule 3 of the Electricity Rules, 2005.

COST AUDITOR [SUB-SECTION 3 AND 5]

Who can be appointed as cost auditor? [Sub-Section 3]
Only a Cost Accountant, as defined under section 2(28) of the Companies Act, 2013, can be
appointed as a cost auditor.
First Proviso to sub-section 3 provides that person appointed under section 139 as an
auditor of the company (i.e. company auditor) shall not be appointed for conducting the
audit of cost records.
Question
Can a professional LLP which have CAs and CMAs as its partners, appointed as Cost
Auditor u/s 148 as well as Statutory Independent Auditor u/s 139
Answer
No, because as per proviso to section 148(3), no person (or firm including LLP) appointed
under section 139 as an auditor of the company shall be appointed for conducting the
audit of cost records or vice-versa.
Qualifications, disqualifications, rights, duties and obligations of cost
Auditor [Sub-section 5]
The qualifications, disqualifications, rights, duties and obligations applicable to auditors
(i.e. applicable to company auditor) shall, so far as may be applicable, apply to a cost

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auditor appointed under section 148 and it shall be the duty of the company to give all
assistance and facilities to the cost auditor appointed under this section for auditing the
cost records of the company.
The provisions of sub-section (12) of section 143 of the Act and the relevant rules made
thereunder shall apply mutatis mutandis to a cost auditor during performance of his
functions under section 148 of the Act and rule notified thereunder.
Who shall appoint cost auditor? [Sub-section 3 read with Rule 14 of the
Companies (Audit and Auditors) Rules, 2014]
Rule 14 of the Companies (Audit and Auditors) Rules, 2014 provides that in the case of
companies which are required to constitute an audit committee
a. The Board shall appoint an individual, who is a cost accountant, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the
Audit committee, which shall also recommend remuneration for such cost auditor;
b. The remuneration recommended by the Audit Committee under (A) shall be
considered and approved by the Board of Directors and ratified subsequently by the
shareholders.
Whereas in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant or a firm of cost
accountants in practice as cost auditor and the remuneration of such cost auditor shall be
ratified by shareholders subsequently.
Manner and Procedure – Appointment, Removal and Resignation [Rule 6 of
Companies (Cost Records and Audit) Rules, 2014]
Time Limit for appointment
Cost Auditor shall within one hundred and eighty days of the commencement of every
financial year, appoint a cost auditor.
Written Consent and Certificate
Before such appointment is made, the written consent of the cost auditor to such
appointment, and a certificate following shall be obtained from him or it.
a. The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Cost and Works
Accountants Act, 1959 and the rules or regulations made thereunder;
b. The individual or the firm, as the case may be, satisfies the criteria provided in
section 141 of the Act, so far as may be applicable;

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c. The proposed appointment is within the limits laid down by or under the authority of
the Act; and
d. The list of proceedings against the cost auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in
the certificate, is true and correct.
Notice of appointment
Every company shall inform the cost auditor concerned of his or its appointment as such
and file a notice of such appointment with the Central Government within a period of
thirty days of the Board meeting in which such appointment is made or within a period of
one hundred and eighty days of the commencement of the financial year, whichever is
earlier, through electronic mode, in form CRA-2, along with the fee as specified in
Companies (Registration Offices and Fees) Rules, 2014.
Tenure of appointment as cost auditor
Every cost auditor appointed as such shall continue in such capacity till the expiry of one
hundred and eighty days from the closure of the financial year or till he submits the cost
audit report, for the financial year for which he has been appointed.
Removal of cost Auditor
The cost auditor appointed under these rules may be removed from his office before the
expiry of his term, through a board resolution after giving a reasonable opportunity of
being heard to the Cost Auditor and recording the reasons for such removal in writing.

Form CRA-2 to be filed with the Central Government for intimating appointment of
another cost auditor shall enclose the relevant Board Resolution to the effect
Nothing shall prejudice the right of the cost auditor to resign from such office of the
company.
Filling of casual vacancy in the office of a cost auditor
Any casual vacancy in the office of a cost auditor, whether due to resignation, death or
removal, shall be filled by the Board of Directors within thirty days of occurrence of such
vacancy and the company shall inform the Central Government in form CRA-2 within thirty
days of such appointment of cost auditor
Cost auditor to comply with cost auditing standards [Second Proviso to
Subsection 3]
The auditor conducting the cost audit shall comply with the cost auditing standards.

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Here, the expression “cost auditing standards” mean such standards as are issued by the
Institute of Cost Accountants of India (erstwhile ICWAI), constituted under the Cost and
Works Accountants Act, 1959, with the approval of the Central Government.
COST AUDIT REPORT Form and timing to submit cost audit report
The report on the audit of cost records shall be submitted by the cost accountant to the
Board of Directors of the company.
Every cost auditor, who conducts an audit of the cost records of a company, shall submit
the cost audit report along with his or its reservations or qualifications or observations or
suggestions, if any, in form CRA-3.
Every cost auditor shall forward his duly signed report within a period of one hundred and
eighty days from the closure of the financial year to which the report relates and the
Board of Directors shall consider and examine such report, particularly any reservation or
qualification contained therein.
The Companies which have got extension of time of holding Annual General Meeting
under section 96 (1) of the Companies Act, 2013, may file form CRA-4 within resultant
extended period of filing financial statements under section 137 of the Companies Act,
2013.
Filing of cost audit report with Central Government [Sub-section 6 and 7
(Filing of Documents & forms in Extensible Business Reporting Language) ]

A company shall
a. Within 30 days from the date of receipt of a copy of the cost audit report
b. Furnish the Central Government with such report
c. Along with full information and Explanation on every reservation or qualification
contained therein.
Rule 4 of the Companies (Filing of Documents and forms in Extensible Business Reporting
Language) Rules, 2015, provides a company which is required to furnish cost audit report
and other documents to the Central Government under sub- section 6 of the section 148
of the Act and rules made thereunder, shall file such report and other documents using
the XBRL taxonomy given in Annexure III for the financial year commencing on or after 1
April 2014 in e-form CRA-4 specified under the Companies (Cost Records and Audit) Rules,
2014.
If, after considering the cost audit report and the information and Explanation furnished
by the company, the Central Government is of the opinion that any further information or

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Explanation is necessary, it may call for such further information and Explanation and the
company shall furnish the same within such time as may be specified by that Government.
Summary of different form pertaining to cost records and cost audits
Form Purpose

CRA-1 The manner in which cost records to be maintained

CRA-2 For intimation of appointment of cost auditor by company to the

Central Government

CRA-3 Cost Audit Report

CRA-4 Filling of the cost audit report with the Central Government

CONTRAVENTION AND PUNISHMENT THEREOF [SUB-SECTION 8]

If any default is made in complying with the provisions of section 148;
a. The company and every officer of the company who is in default shall be punishable
in the manner as provided in section 147(1);
b. The cost auditor of the company who is in default shall be punishable in the manner
as provided in sub-sections (2) to (4) of section 147.
Note: The provision of the section 147 explained in details under heading 10, earlier in this
chapter.

NFRA [NATIONAL FINANCIAL REPORTING AUTHORITY] AND AUDITOR

MONITORING AND ENFORCING COMPLIANCE WITH AUDITING
STANDARDS
Rule 8 of The National Financial Reporting Authority Rules, 2018 empowers NFRA
for the purpose of monitoring and enforcing compliance with auditing standards under the
Act by a company or a body corporate governed under rule 3.

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NFRA may;
a. Review working papers (including audit plan and other audit documents) and
communications related to the audit;
b. Evaluate the sufficiency of the quality control system of the auditor and the manner
of documentation of the system by the auditor; and
c. Perform such other testing of the audit, supervisory, and quality control procedures
of the auditor as may be considered necessary or appropriate.
Rule 8 further provides that:
NFRA may require:
1. Require an auditor to report on its governance practices and internal processes
designed to promote audit quality, protect its reputation and reduce risks including
risk of failure of the auditor and may take such action on the report as may be
necessary.
2. Seek additional information or may require the personal presence of the auditor for
seeking additional information or Explanation in connection with the conduct of an
audit.
3. Send a separate report containing proprietary or confidential information to the
Central Government for its information.
4. Where the NFRA finds or has reason to believe that any law or professional or other
standard has or may have been violated by an auditor, it may decide on the further
course of investigation or enforcement action through its concerned Division.
NFRA shall;
1. Perform its monitoring and enforcement activities through its officers or experts
with sufficient experience in audit of the relevant industry.
2. Publish its findings relating to non-compliances on its website and in such other
manner as it considers fit, unless it has reasons not to do so in the public interest
and it records the reasons in writing.
NFRA shall not
Publish proprietary or confidential information, unless it has reasons to do so in the
public interest and it records the reasons in writing.

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OVERSEEING THE QUALITY OF SERVICES AND SUGGESTING MEASURES FOR IMPROVEMENT

Further Rule 9 of The National Financial Reporting Authority Rules, 2018 empowers NFRA
for overseeing the quality of services and suggesting measures for improvement
a. On the basis of its review, the NFRA may direct an auditor to take measures for
improvement of audit quality including changes in their audit processes, quality
control, and audit reports and specify a detailed plan with time-limits.
b. It shall be the duty of the auditor to make the required improvements and send a
report to the NFRA explaining how it has complied with the directions made by the
NFRA.
c. The NFRA shall monitor the improvements made by the auditor and take such action
as it deems fit depending on the progress made by the auditor.
d. The NFRA may refer cases with regard to overseeing the quality of service of auditors
of companies or bodies corporate referred to in rule 3 to the Quality Review Board
constituted under the Chartered Accountants Act, 1949 or call for any report or
information in respect of such auditors or companies or bodies corporate from such
Board as it may deem appropriate.
e. The NFRA may take the assistance of experts for its oversight and monitoring
activities.
FILLING OF RETURN WITH NFRA on or before 30th November every year in
Form NFRA-2

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COMPANIES INCORPORATED OUTSIDE INDIA

Foreign Company [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.

“electronic mode” means carrying out electronically based, whether

main server is installed in India or not, including, but not limited to –

a) business to business and business to

consumer transactions, data interchange and other
digital supply transactions;
b) offering to accept deposits or inviting deposits or accepting
deposits or subscriptions in securities, in India or from
citizens of India;
c) financial settlements, web based marketing, advisory and
transactional services, database services and products, supply
chain management;
d) online services such as telemarketing, telecommuting,
telemedicine, education and information research; and
e) all related data communication services, whether conducted
by e-mail, mobile devices, social media, cloud computing,
document management, voice or data transmission or
otherwise.
Explanation- For the purposes of this clause, electronic based offering of
securities, subscription thereof or listing of securities in the International
Financial Services Centres set up under section 18 of the Special Economic
Zones Act, 2005 shall not be construed as „electronic mode‟ for the purpose
of clause (42) of section 2 of the Act.

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Facts: Union Minister of State for Corporate Affairs Shri Rao Inderjit Singh in a
written reply to a question in Rajya Sabha stated that 320 foreign companies
were registered in India between 2018 and 2021.

APPLICATION OF ACT TO FOREIGNCOMPANIES [SECTION 379]

 Sections 380 to 386 (both inclusive) and sections 392 and 393 shall apply to all
foreign companies.
 It implies that all companies which falls within the definition of foreign company as
per section 2(42), shall comply with the provisions of this Chapter.
Where not less than 50% of the paid-up share capital, whether equity or preference
or partly equity and partly preference, of a foreign company incorporated outside India
is held by:
 one or more citizens of India; or
 by one or more companies or bodies corporate incorporated in India; or
 by one or more citizens of India and one or more companies or bodies corporate
incorporated in India,

whether singly or in the aggregate, such foreign company shall also comply with
the provisions of Chapter XXII and such other provisions of this Act as may be
prescribed with regard to the business carried on by it in India as if it were a company
incorporated in India. [Section 379(2)]

DOCUMENTS, ETC., TO BE DELIVERED TO REGISTRAR BY FOREIGN COMPANIES [ 380]

According to section 380 (1) of the Companies Act, 2013,
Every foreign company shall, within 30 days of the establishment of its place of business
in India, deliver to the Registrar 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.
If the instrument is not in the English language, a certified translation
thereof in the English language;

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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;
The foreign company shall contain the following particulars, for each of the persons
included in such list, namely:
1) personal name and surname in full;
2) any former name or names and surname or surnames in full;
3) father’s name or mother’s name or spouse’s name;
4) date of birth;
5) residential address;
6) nationality;
7) if the present nationality is not the nationality of origin, his nationality of origin;
8) passport Number, date of issue and country of issue; (if a person holds more than one
passport then details of all passports to be given)
9) income-tax permanent account number (PAN), if applicable;
10) occupation, if any;
11) whether directorship in any other Indian company, (Director Identification Number (DIN),
Name and Corporate Identity Number (CIN) of the company in case of holding
directorship);
12) other directorship or directorships held by him;
13) Membership Number (for Secretary only); and
14) e-mail ID.

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;

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

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companies and management in India or abroad; and

h) any other information as may be prescribed.

Form, procedure and time for making application and submission of

prescribed documents:
According to the Companies (Registration of Foreign Companies) Rules, 2014,

 The above information shall be filed with the Registrar within 30 days of the
establishment of its place of business in India, in Form FC-1 along with prescribed
fees and documents required tobe furnished as provided in section 380(1).

 The application shall also be supported with an attested copy of approval from the
Reserve Bank of India under the Foreign Exchange Management Act or Regulations,
and also from other regulators, if any,

 approval is required by such foreign company to establish a place of business in India

or a declaration from the authorised representative of such foreign company that
no such approval is required.

Office where documents to be delivered and fee for registration of

documents:
1) According to the Companies (Registration of Foreign Companies) Rules, 2014, any
document which any foreign company is required to deliver to the Registrar shall be
delivered to the Registrar having jurisdiction over New Delhi.
2) It shall be accompanied with the prescribed fees.
3) If any foreign company ceases to have a place of business in India, it shall
forthwith give notice of the fact to the Registrar, and from the date on which
such notice is so given, the obligation of the company to deliver any document to
the Registrar shall cease, provided it hasno other place of business in India.

 Under section 380(2)

 every foreign company existing at the commencementof the Companies Act 2013,
 which has not delivered to the Registrar the documents and particulars specified in
section 592(1) of the Companies Act, 1956,

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 it shall continue to be subject to the obligation to deliver those documents and

particulars in accordance with the Companies Act, 1956.

Form, procedure and time within which alteration in documents

shall be intimated to Registrar:
 Section 380(3) provides that where any alteration is made or occurs in the
documents delivered to the Registrar under section 380,
 the foreign company shall,
 within 30 days of such alteration,
 deliver to the Registrar for registration,
 a return containing the particulars of the alteration in the prescribed form.
 The Companies (Registration of Foreign Companies) Rules, 2014, has prescribed
that the return containing the particulars of the alteration shall be filed in form FC-2
along with prescribed fees.

Illustration 1: Heart lost Pte. Ltd., incorporated in Singapore. The Company sells its goods
through electronic mode on the e-commerce platforms in India, however, it does not have
any branch or office in India. Is the Company required to submit the documents as required
under Section 380 of the Companies Act, 2013.

Answer: Yes, as per 2(42) of Companies Act, 2013, 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 shall be
considered as a foreign company.
Accordingly, as Heart lost Pte. Ltd., is conducting its business through
electronic mode, it is considered a foreign company as per Companies Act, 2013
and is required to submit the documents mentioned under Section 380 of the
Companies Act, 2013.

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ACCOUNTS OF FOREIGN COMPANY [SECTION 381]

According to this section:
1. Every foreign company shall, in every calendar year,—
 make out a balance sheet and profit and loss account in such form,
containing such particulars and including or having attached or annexed
thereto such documents as may be prescribed, and
 deliver a copy of those documents to the Registrar.
According to the Companies (Registration of Foreign Companies) Rules, 2014,
every foreign company shall prepare financial statement of its Indian business
operations in accordance with Schedule III or as near thereto as possible for each
financial year including:
1) documents that are required to be annexed should be in accordance with
Chapter IX i.e. Accounts of Companies.
2) The documents relating to copies of latest consolidated financial statements of
the parent foreign company, as submitted by it to the prescribed authority in
the country of its incorporation under the applicable laws there.

Note: “financial year” in relation to any company or body corporate, means

 the period ending on the 31st day of March every year, and
 where it has been incorporated on or after the 1st day of January of a
year, the period ending on the 31st day of March of the following year,
 in respect whereof financial statement of the company or body
corporate is made up:

Provided that
 where a company or body corporate, which is a holding company or a
subsidiary or associate company of company incorporated outside India
and
 is required to follow a different financial year for consolidation of its
accounts outside India,

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 the Central Government may, on an application made by that company or

body corporate in such form and manner as may be prescribed,
 allow any period as its financial year, whether or not that period is a year.

Provided further that

 any application pending before the Tribunal as on the date of
commencement of the Companies (Amendment) Ordinance, 2018, shall be
disposed of by the Tribunal in accordance with the provisions applicable to
it before such commencement.
It is important to note that a foreign company having its place of business in India may not
necessarily follow a financial year ending on the 31st day of March every year provided it
has obtained the requisite approvals from the Central Government for the same.

Example: Smirnof Limited, is a company incorporated outside India having a place of

business in India. Smirnof Limited is a subsidiary of THOR Limited (Holding company),
registered in Australia and is required to consolidate its accounts with THOR Limited.
Accordingly, if THOR Limited is required to follow financial year other than 31st day of
March every year, Smirnof Limited,can make an application to Central Government to
follow the financial year as per THOR Limited
(ii) The Central Government is empowered to direct that, in the case of any foreign
company or class of foreign companies, the requirements of clause (a) given above
shall not apply, or shall apply subject to such exceptions and modifications as may be
specified in notification in that behalf [Section 381(1)].
(III) If any of the specified documents are not in the English language, a certified translation
thereof in the English language shall be annexed. [Section 381(2)]
(iv) Every foreign company shall send to the Registrar along with the documents
required to be delivered to him, a copy of a list in the prescribed form, of all places of
business established by the company in India as at the date with reference to which the
balance sheet referred to in section 381(1)is made.

According to the Companies (Registration of Foreign Companies) Rules, 2014,

every foreign company shall file with the Registrar, along with the financial
statement, in Form FC-3 with such fee as provided under Companies
(Registration Offices and Fees) Rules, 2014 a list of all the places of business
established by the foreign company in India as on the date of balance sheet.

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According to the Companies (Registration of Foreign Companies) Rules, 2014, if

any foreign company ceases to have a place of business in India, it shall
forthwith give notice of the fact to the Registrar, and as from the date on which
notice is so given, the obligation of the company to deliver any document to the
Registrar shall cease, if it does not have other place of business in India.
According to the Companies (Registration of Foreign Companies) Rules, 2014,
(a) Further, every foreign company shall, along with the financial statement
required to be filed with the Registrar, attach thereto the following
documents; namely:-
(1) Statement of related party transaction
(2) Statement of repatriation of profits
(3) Statement of transfer of funds (including dividends, if any)
The above statements shall include such other particulars as are prescribed in the
Companies (Registration of Foreign Companies) Rules, 2014.
(b) All these documents shall be delivered to the Registrar within a period of
6 months of the close of the financial year of the foreign company to
which the documents relate.
Provided that the Registrar may, for any special reason, and on application made in
writing by the foreign company concerned, extend the said period by a period
not exceeding three months.

Example : Sukesh & Jackie LLC is a foreign company and is required to file
its financial statements within six months of the close of the financial year
with Registrar on an annual basis along with following additional documents
(i) Statement of related party transaction

(ii) Statement of repatriation of profits

(iii) Statement of transfer of funds (including dividends, if any)

However, where the Central Government has exempted or specified different

documents for any foreign company or a class of foreign companies, then
documents as specified shall be submitted.

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Audit of accounts of foreign company:

According to the Companies (Registration of Foreign Companies) Rules, 2014,
 Every foreign company shall get its accounts, pertaining to the Indian business
operations prepared in accordance with section 381(1) and Rules thereunder,
shall be audited by a practicing Chartered Accountant in India or a firm or
limited liability partnershipof practicing chartered accountants.
 The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as
far as applicable, shall apply, mutatis mutandis, to the foreign company.

DISPLAY OF NAME, ETC., OF FOREIGNCOMPANY [SECTION 382]

Every foreign company shall—
 conspicuously exhibit on the outside of every office or place where it carries on
business in India, the name of the company and the country in which it is
incorporated, in letters easily legible in English characters, and also in the characters
of the language or one of the languages in general use in the locality in which the
office or place is situate;
 cause the name of the company and of the country in which the company is
incorporated, to be stated in legible English characters in all business letters, bill-
heads and letter paper, and in all notices, and other official publications of the
company; and
 if the liability of the members of the company is limited, cause notice of that fact—
(i) to be stated in every such prospectus issued and in all business
letters, bill-heads, letter paper, notices, advertisements and other
official publications of the company, in legible English characters;
and
(ii) to be conspicuously exhibited on the outside of every office or place
where it carries on business in India, in legible English characters
and also in legible characters of the language or one of the languages
in general use in the locality in which the office or place is situated.

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SERVICE ON FOREIGN COMPANY [SECTION 383]

 Any process, notice, or other document required to be served on a foreign
company
 shall be deemed to be sufficiently served,
 if addressed to any person whose name and address have been delivered to the
Registrar under section 380 and
 left at, or sent by post to, the address which has been so delivered to the Registrar
or by electronic mode.

DEBENTURES, ANNUAL RETURN,REGISTRATION OF CHARGES, BOOKS OF

ACCOUNT AND THEIR INSPECTION [SECTION 384]

1) The provisions of section 71 (Issue of Debentures) shall apply mutatis mutandis

to a foreign company.
2) The provisions of section 92 (Preparation and filing of Annual return) shall, subject
to such exceptions, modifications and adaptations as may be made therein by rules
made under this Act, apply to a foreign company as they apply to a company
incorporated in India. Further, as per Rule 3 of the Companies (Corporate Social
Responsibility Policy) Rules 2014, a foreign company which fulfils the criteria
specified under Section 135(1) of the Companies Act 2013 is required to comply
with Section 135 of the Companies Act, 2013, subject to such exceptions,
modifications and adaptations as may be made therein by rules made under this
Act, apply toa foreign company as they apply to a company incorporated in India.
According to the Companies (Registration of Foreign Companies) Rules, 2014, every
foreign company shall prepare and file an annual return in Form FC-4 along with
prescribed fees, within a period of 60 days from the last day of its financial year, to
the Registrar containing the particulars as they stood on the close of the financial year.

(3) The provisions of section 128 (Books of account, etc., to be kept by company)
shall apply to a foreign company to the extent of requiring it to keep at its principal
place of business in India, the books of account referred to in that section, with respect

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to monies received and spent, sales and purchases made, and assets and liabilities, in
the course of or in relation toits business in India.
(4) The provisions of Chapter VI (Registration of Charges) shall apply mutatis mutandis to
charges on properties which are created or acquired by any foreign company.
(5) The provisions of Chapter XIV (Inspection, inquiry and investigation) shall apply
mutatis mutandis to the Indian business of a foreign company as they apply to a
company incorporated in India.

FEE FOR REGISTRATION OF DOCUMENTS [SECTION 385]

 There shall be paid to the Registrar for registering any document required
by the provisions of this Chapter to be registered by him, such fee, as may
be prescribed.

 According to the Companies (Registration of Foreign Companies) Rules,

2014, the fees to be paid to the Registrar for registering any document
relating to a foreign company shall be such as provided in the
Companies (Registration Offices and Fees) Rules, 2014.

INTERPRETATION [SECTION 386]

For the purposes of the foregoing provisions of this Chapter, the expression:

(a) “Certified” means certified in the prescribed manner to be a true copy or a correct
translation;

(b) “Director”, in relation to a foreign company, includes any person in accordance with
whose directions or instructions the Board of Directors of the company is accustomed
to act; and

(c) “Place of business” includes a share transfer or registration office.

Illustration 2: Examine with reference to the provisions of the Companies Act, 2013
whether the following companies can be treated as foreign companies:
(i) A company incorporated outside India having a share registration office at
Mumbai.

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(ii) Indian citizens incorporated a company in Singapore for the purpose of

carrying on business there.

Answer: Section 2(42) of the Companies Act, 2013 defines a ―foreign company‖
as
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.

According to section 386 of the Companies Act, 2013, for the purposes of
Chapter XXII of the Companies Act, 2013 (Companies incorporated outside
India), expression “Place of business” includes a share transfer or registration office.

Further, to qualify as a „foreign company‟ a company must have the following

features:
(a) it must be incorporated outside India; and
(b) it should have a place of business in India.
(c) That place of business may be either in its own name or through an
agentor may even be through the electronic mode; and
(d) It must conduct a business activity of any nature in India.
(i) Therefore, a company incorporated outside India having a share
registration office at Mumbai will be treated as a foreign company
provided it conducts any business activity in India.

(ii) In the case of a company incorporated in Singapore for the purpose of

carrying on business in Singapore, it will not fall within the
definition of a foreign company. Its incorporation outside India
by Indian citizen is immaterial. In order to be a foreign company it
has to have a place of business in India and must also conduct a
business activity in India.

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DATING OF PROSPECTUS AND PARTICULARS TO BE CONTAINED

THEREIN [SECTION 387]
According to this section:
(i) Prospectus to be dated and signed [Section 387(1)]:
No person shall issue, circulate or distribute in India any prospectus
offering to subscribe for securities of a company unless the prospectus is dated and
signed, and—
(a) contains particulars with respect to the following matters, namely:—
(1) the instrument constituting or defining the constitution of the
company;
(2) the enactments or provisions by or under which the
incorporation of the company was effected;
(3) address in India where the said instrument, enactments or
provisions, or copies thereof, and if the same are not in the
English language, a certified translation thereof in the English
language can be inspected;
(4) the date on which and the country in which the company
would be or was incorporated; and
(5) whether the company has established a place of business in
India and, if so, the address of its principal office in India; and
(b) states the matters specified under section 26 (Matters to be stated in
prospectus).
Provided that points (1), (2) and (3) of point (a) above shall not apply in the
case of a prospectus issued more than 2 years after the date at which the company is
entitled to commence business.

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Example : Mir Company LLC, a company incorporated in Dubai, on 28th

April 2017. Mir Company LLC has established a place of Business in
Mumbai in the year 2020. Now the place of business in India proposes to
offer subscription to securities of Mir Company LLC. Now the place of
business in India before going with the subscription will have to file a
prospectus dated and signed and the prospectus shall not be required to
contain the particulars mentioned in points (1), (2) and (3) of point (a)
above as the prospectus will be getting issued after a period of more
than 2 years since the Mir Company LLC has commenced its business

2. No waiver of compliance in prospectus [Section 387(2)]:

Any condition requiring or binding an applicant for securities to waive
compliance with any requirement imposed by virtue of section 387(1) or
purporting to impute him with notice of any contract, documents or
matter not specifically referred to in the prospectus, shall be void.
It is to be understood that section 387 (2) does not provides any exception
with respect to the non-compliance of the requirements stated under
section 387 (1) by any person responsible for issuing or circulating
prospectus.

3. Form of application for securities to be issued along with

prospectus [Section 387(3)]:
 No person shall issue to any person in India a form of
application for securities of such a company mentioned in section
387(1),
 unless the form is issued with a prospectus which complies with
the provisions of this Chapter (Chapter XXII) and such issue does
not contravene the provisions of section 388:

Exception: If it is shown that the form of application was issued in connection

with a bona fide invitation to a person to enter into an underwriting
agreement with respect to securities.

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Section 387(4) further provides that the provisions of section 387—

a. shall not apply to the issue to existing members or debenture

holders of a company of a prospectus or form of application
relating to securities of the company, whether an applicant for
securities will or will not have the right to renounce in favour of
other persons; and
b. except in so far as it requires a prospectus to be dated, to the
issue of a prospectus relating to securities which are or are to be in
all respects uniform with securities previously issued and for the
time being dealt in or quoted on a recognised stock exchange, but,
subject as aforesaid, section 387 shall apply to a prospectus or
form of application whether issued on or with reference to the
formation of acompany or subsequently.

According to section 387(4), the provisions of section 387 shall not apply to
the issue of prospectus or form of application relating to securities of the company
to existing member or debenture holders of a company; and

The provisions of section 387 shall not apply in respect of issue of

prospectus dealing with offer for securities which are uniform in all respects
with securities previously issued and such previously issued securities are
listed on a recognised stock exchange. However, provisions relating to dating
of prospectus shall continue to apply.

Nothing in Section 387 shall limit or diminish any liability which

any person may incur under any law for the time being in force in
India or under the Companies Act, 2013 apart from Section 387.

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PROVISIONS AS TO EXPERT’S CONSENT AND ALLOTMENT [SEC 388]

According to this section:

(i) No person shall issue, circulate or distribute in India any prospectus offering
for subscription in securities of a company incorporated or to be
incorporated outside India, whether the company has or has not been
established, or when formed will or will not establish, a place of business in
India,—
(a) if, where the prospectus includes a statement purporting to be
made by an expert, he has not given, or has before delivery of the
prospectus for registration withdrawn, his written consent to the
issue of the prospectus with the statement included in the form
and context in which it is included, or there does not appear in the
prospectus a statement that he has given and has not
withdrawn his consent as aforesaid; or
(b) if the prospectus does not have the effect, where an application is
made in pursuance thereof, of rendering all persons concerned bound
by all the provisions of section 33 (Issue of application forms for
securities) and section 40 (Securities to be dealt with in stock
exchanges), so far as applicable.
(II) FOR THE PURPOSES OF THIS SECTION, A STATEMENT SHALL BE
DEEMED TO BE INCLUDED IN A PROSPECTUS, IF IT IS CONTAINED IN
ANY REPORT OR MEMORANDUM APPEARING ON THE FACE THEREOF
OR BY REFERENCE INCORPORATED THEREIN OR ISSUED THEREWITH.

REGISTRATION OF PROSPECTUS [SECTION 389]

According to this section:
No person shall issue, circulate or distribute in India any prospectus
offering for subscription in securities of a company incorporated or to be
incorporated outside India, whether the company has or has not established,
or when formed will or will not establish, a place of business in India, unless

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before the issue, circulation or distribution of the prospectus in India;

 a copy thereof certified by the chairperson of the company and two
other directors of the company as having been approved by resolution
of the managing body has been delivered for registration to the
Registrar; and
 the prospectus states on the face of it that a copy has been so
delivered,and
 there is endorsed on or attached to the copy, any consent to the
issue of the prospectus required by section 388 and such documents as
may be prescribed.

According to the Companies (Registration of Foreign Companies) Rules,

2014, the following documents shall be annexed to the prospectus, namely:
(a) any consent to the issue of the prospectus required from any
person as an expert;
(b) a copy of contracts for appointment of managing director or
manager and in case of a contract not reduced into writing, a
memorandum giving full particulars thereof;
(c) a copy of any other material contracts, not entered in the ordinary
courseof business, but entered within preceding 2 years;
(d) a copy of underwriting agreement; and
(e) a copy of power of attorney, if prospectus is signed through duly
authorized agent of directors.

OFFER OF INDIAN DEPOSITORY RECEIPTS [SECTION 390]

For the purposes of this section, and according to the Companies
(Registration of Foreign Companies) Rules, 2014,

 Indian Depository Receipts (IDR) means any instrument in the

form of a depository receipt created by a Domestic Depository
in India and

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 authorized by a company incorporated outside India making an

issue of such depository receipts.
According to section 390, notwithstanding anything contained in any other
law for the time being in force, the Central Government may make rules
applicable for—
(i) the offer of Indian Depository Receipts (IDR);
(ii) the requirement of disclosures in prospectus or letter of offer
issued in connection with IDR;
(iii) the manner in which the IDR shall be dealt with in a depository
mode and by custodian and underwriters; and
(iv) the manner of sale, transfer or transmission of IDR, by a company
incorporated or to be incorporated outside India, whether the
company has or has not established, or will or will not establish, any
place ofbusiness in India.
According to Rule 13 of the Companies (Registration of Foreign
Companies) Rules, 2014,
 no company incorporated or to be incorporated outside India,
whether the company has or has not established, or may or
may not establish, any place of business in India shall make an
issue of Indian Depository Receipts (IDRs) unless
 it complies with the conditions mentioned under this rule, in
addition to the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 and any
directions issued by the Reserve Bank of India.
The Rules relating to offer, disclosure requirements and manner of
transfer, sale etc., related to IDR are contained in Companies Rules, 2014.

Standard Chartered PLC was the first global company to file for an issue of IDR in
India in 2010.

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Application of Chapter XV (Compromises, Arrangements & Amalgamations):

 Section 234 of the Companies Act, 2013 deals with merger or

amalgamation of company with foreign company.
 Section 234(1) states that the provisions of Chapter XV unless otherwise
provided under any other law for the time being in force, shall apply
mutatis mutandis to schemes or mergers and amalgamations
between companies registered under this Act and companies
incorporated in the jurisdictions of such countries as may be notified
from time to time by the Central Government.
 Provided that the Central Government may make rules, in
consultation with the Reserve Bank of India, in connection with
mergers and amalgamations provided under this section.
 Section 234(2) states that subject to the provisions of any other law for
the time being in force, a foreign company, may with the prior
approval of the Reserve Bank of India, merge into a company registered
under this Act or vice versa and the terms and conditions of the scheme
of merger may provide, among other things, for the payment of
consideration to the shareholders of the merging company in cash, or in
Depository Receipts, or partly in cash and partly in Depository Receipts,
as the case may be, as per the scheme to be drawn up for the purpose.

Explanation: For the purposes of sub-section (2) above, the expression

―foreign company‖ means any company or body corporate incorporated
outside India whether having a place of business in India or not.

APPLICATION OF SECTIONS 34 TO 36 AND CHAPTER

XX [SECTION 391]
According to sub-section (1), the provisions of sections 34 to 36 (both
inclusive) shall apply to—
(i) t

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he issue of a prospectus by a company incorporated outside India

undersection 389 as they apply to prospectus issued by an Indian company;
(ii) t
he issue of IDR by a foreign company.
(a) Section 34 deals with criminal liability for mis-statements in

prospectus.

(b)Section 35 deals with Civil Liability for mis-statement in

prospectus.

(c) Section 36 deals with punishment for fraudulently inducing

persons to invest money.

The provisions of Chapter XX (i.e. Chapter on Winding up) shall apply

mutatis mutandis for closure of the place of business of a foreign company
in India as

(a) if it were a company incorporated in India in case such foreign

company has raised monies through offer or issue of securities
under this Chapter

(b) which have not been repaid or redeemed.

PUNISHMENT FOR CONTRAVENTION [SECTION 392]

Without prejudice to the provisions of section 391, If a foreign company
contravenes the provisions of Chapter XXII of the Companies Act, 2013,
 the foreign company shall be punishable with fine which shall not
be less than 1,00,000 rupees but which may extend to 3,00,000
rupees and
 in the case of a continuing offence, with an additional fine
which may extend to 50,000 rupees for every day after the
first during which the contravention continues

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 and every officer of the foreign company who is in default

shall be punishable with fine which shall not be less than
25,000 rupees but which may extend to 5,00,000 rupees.

COMPANY’S FAILURE TO COMPLY WITHPROVISIONS OF THIS CHAPTER NOT

TO AFFECT VALIDITY OF CONTRACTS, ETC [SECTION 393]
 Any failure by a company to comply with the provisions of
Chapter XXII of the Companies Act, 2013,

 shall not affect the validity of any contract, dealing or transaction

entered into by the company or its liability to be sued in
respect thereof.

However,

 the company shall not be entitled to bring any suit, claim any set-
off, make any counter-claim or

 institute any legal proceeding in respect of any such contract,

dealing or transaction,

 until the company has complied with the provisions of the

Companies Act, 2013, applicable to it.

RULE 12 OF COMPANIES (REGISTRATION OF FOREIGN COMPANIES) RULES, 2014

Action for Improper Use or Description as Foreign Company:

 It states that if any person or persons trade or carry on

business in any manner

 under any name or title or description as a foreign company

registered under the Act or the rules made thereunder,

 that person or each of those persons shall, unless

 duly registered as foreign company under the Act and rules made
thereunder,

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 shall be liable for investigation under section 210 of the Act

and action consequent upon that investigation shall be taken
against that person.

EXEMPTIONS UNDER THIS CHAPTER

The Central Government may, by notification, exempt any class of-
(a) foreign companies;
(b) companies incorporated or to be incorporated outside India,
whether the company has or has not established, or when
formed may or may not establish, a place of business in India,
(c) in so far as they relate to the offering for subscription in the
securities, requirements related to the prospectus, and all matters
incidental thereto in the International Financial Services Centres
set up under section 18 of the Special Economic Zones Act, 2005.

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