Intermediate Course

Study Material
(Modules 1 to 3)

Paper 2

Corporate and
Other Laws
(Relevant for May, 2025 and
onward Examinations)

Module – 1

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Study Material has been prepared by the faculty of the Board of Studies. The
objective of the Study Material is to provide teaching material to the students to
enable them to obtain knowledge in the subject. In case students need any
clarification or have any suggestion for further improvement of the material
contained herein, they may write to the Joint Director, Board of Studies.
All care has been taken to provide interpretations and discussions in a manner
useful for the students. However, the Study Material has not been specifically
discussed by the Council of the Institute or any of its committees and the views
expressed herein may not be taken to necessarily represent the views of the
Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this
material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transmitted, in any form, or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior permission, in writing, from the
publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel

Edition : July, 2024

Committee/Department : Board of Studies

E-mail : bosnoida@icai.in

Website : www.icai.org

Price : ` /- (For All Modules)

ISBN No. : 978-81-19472-24-6

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)
Printed by :

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BEFORE WE BEGIN …

Evolving role of a CA - Shift towards strategic decision making

The traditional role of a Chartered Accountant restricted to accounting and

auditing, has now changed substantially and there has been a marked shift towards
strategic decision making and entrepreneurial roles that add value beyond
traditional financial reporting. The primary factors responsible for the change are
the increasing business complexities on account of plethora of laws, borderless
economies consequent to giant leap in e-commerce, emergence of new financial
instruments, emphasis on Corporate Social Responsibility, significant
developments in information technology, to name a few. These factors necessitate
an increase in the competence level of Chartered Accountants to take up the role
of not merely an accountant or auditor, but a global solution provider. Towards this
end, the scheme of education and training is being continuously reviewed so that
it is in sync with the requisites of the dynamic global business environment. The
competence requirements are being continuously reviewed to enable aspiring
Chartered Accountants to acquire the requisite professional competence to take on
new roles.

Skill requirements at Intermediate Level

At the Intermediate Level, you are expected to not only acquire professional
knowledge but also the ability to apply such knowledge in problem solving. The
process of learning should also help you to inculcate the requisite professional
skills, i.e., the intellectual skills and communication skills, necessary for achieving
the desired level of professional competence.

Corporate and Other Laws: Dynamic & Interesting

Laws and rules, in general, regulate the relationship between business and
profession. In specific, a student should have knowledge of the legal framework,
which influences business transactions. This paper intends to make the students
aware of legal provisions of the selected laws and to analyse and apply the related
provisions addressing issues in moderately complex scenarios.
Paper 2 on Corporate and Other Laws is comprising of Company Law and Other
Laws. The syllabus of Corporate and Other Laws has been segregated into two parts
covering the following topics:

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Part I: Company Law (70 Part II: Other Laws (30 Marks)
Marks)

I. The Companies Act, 2013 1. The General Clauses Act, 1897

II. The Limited Liability 2. Interpretation of Statutes

Partnership Act, 2008
3. The Foreign Exchange Management
Act, 1999

These laws of the country undergo significant changes through amendments/

notifications /circulars which are issued from time to time by their respective
governing authorities. Owing to the dynamic nature of the specified Acts especially
the Companies Act, 2013, the Limited Liability Partnership Act, 2008 and the
Foreign Exchange Management Act, 1999, learning, understanding and applying
the provisions of law in problem solving is very interesting and challenging.
The study material has been revised on the basis of the legislative developments
made up till 30th June, 2024.
Further, the legislative amendments (if any) which will be notified after 30th June,
2024 and which are relevant for a particular attempt, would be informed to the
students separately. Students are advised to check the Board of Studies Knowledge
Portal regularly for further development.

BoS – Value added study materials

The Board of Studies is the department which serves as the Institute’s interface with
its students. BoS leaves no stone unturned to provide the best-in-class services to
you in terms of value-added study materials wherein the concepts and provisions
are explained in lucid language with illustrations, diagrams, and examples to aid
understanding the application of concepts and provisions. Also, the representation
of provisions has been changed, wherever required, to bring more clarity and
understanding of the concepts. Test Your Knowledge Questions at the end of each
chapter contain a rich bank of questions which will hone your analytical skills.

Framework of Chapters– Uniform Structure comprising of specific

components

Efforts have been made to present the complex laws in a lucid manner. Care has
been taken to present the chapters in a logical sequence to facilitate easy
understanding by the students. The Study Material has been divided into three
modules for ease of handling by students.

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The various chapters/units of each subject at the Intermediate level have been
structured uniformly and comprises of the following components:

Components of About the component

each Chapter
1. Learning Learning outcomes which you need to demonstrate
Outcomes after learning each topic have been given in the first
page of each chapter.
2. Chapter As the name suggests, the flow chart/ table/ diagram
Overview given at the beginning of each chapter would give a
broad outline of the contents covered in the chapter
3. Introduction A brief introduction is given at the beginning of each
chapter which would help you get a feel of the topic.
4. Content The concepts and provisions of specified Acts are
explained in student-friendly manner with the aid of
examples/ diagrams/ flow charts. Diagrams and Flow
charts would help you understand and retain the
concept/ provision learnt in a better manner.
Examples would help you understand the application
of provisions. These value additions would, thus, help
you develop conceptual clarity and get a good grasp
of the topic.
5. Summary A summary of the chapter is given at the end to help
you revise what you have learnt.
6. Test Your MCQ based questions: Solving MCQs will enhance
Knowledge your conceptual clarity and sharpen your analytical skills.
Descriptive Questions: The exercise questions and
answers would help you to apply what you have learnt
in problem solving. In effect, it would sharpen your
application skills and test your understanding as well
as your application of concepts/provisions.

We hope that these student-friendly features in the Study Material makes your
learning process more enjoyable, enriches your knowledge and sharpens your
application skills.

Happy Reading and Best Wishes!

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SYLLABUS

PAPER – 2: CORPORATE AND OTHER LAWS

(100 Marks)

PART I – COMPANY LAW AND LIMITED LIABILITY PARTNERSHIP LAW

(70 MARKS)

Objective:
To develop an understanding of the legal provisions and acquire the ability to
analyse and apply the laws in practical situations.
Contents:

I. The Companies Act, 2013 – including important rules and drafting of

notices, resolutions etc.–
1. Preliminary
2. Incorporation of Company and Matters Incidental thereto

3. Prospectus and Allotment of Securities

4. Share Capital and Debentures
5. Acceptance of Deposits by Companies

6. Registration of Charges
7. Management and Administration
8. Declaration and Payment of Dividend

9. Accounts of Companies
10. Audit and Auditors
11. Companies Incorporated Outside India

II. The Limited Liability Partnership Act, 2008 including important Rules

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PART II- OTHER LAWS (30 MARKS)

Objectives:
(a) To develop an understanding of the General Clauses Act.
(b) To develop an understanding of the rules for interpretation of statutes
(c) To have basic understanding of the Foreign Exchange Management Act, 1999.
Contents:
1. The General Clauses Act, 1897: Important Definitions, Extent and
Applicability, General Rules of Construction, Powers and Functionaries,
Provisions as to Orders, Rules, etc. made under Enactments and
Miscellaneous Provisions.
2. Interpretation of Statutes: Rules of Interpretation of Statutes, Aids to
Interpretation, Rules of Interpretation/ Construction of Deeds and
Documents.
3. The Foreign Exchange Management Act, 1999: Significant definitions and
concepts of Current and Capital Account Transactions.
Note: If new legislations are enacted in place of the existing legislations, the syllabus
would include the corresponding provisions of such new legislations with effect from
a date notified by the Institute.
The specific inclusions/exclusions in the various topics covered in the syllabus will be
effected every year by way of Study Guidelines, if required.

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CONTENTS

MODULE 1
CHAPTER-1: Preliminary
CHAPTER-2: Incorporation of Company and Matters Incidental thereto
CHAPTER-3: Prospectus and Allotment of Securities
CHAPTER-4: Share Capital and Debentures
CHAPTER-5: Acceptance of Deposits by companies
CHAPTER-6: Registration of Charges

MODULE 2
CHAPTER-7: Management and Administration
CHAPTER-8: Declaration and Payment of Dividend
CHAPTER-9: Accounts of Companies
CHAPTER-10: Audit and Auditors
CHAPTER-11: Companies Incorporated Outside India

MODULE 3
CHAPTER-12: The Limited Liability Partnership Act, 2008
Other Laws
CHAPTER-1: The General Clauses Act, 1897
CHAPTER-2: Interpretation of Statutes
CHAPTER-3: The Foreign Exchange Management Act, 1999

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DETAILED CONTENTS: MODULE – 1

CHAPTER 1 : PRELIMINARY

Learning Outcomes............................................................................................................. ..... .1.1

Chapter Overview .................................................................................................................... 1.2

1. Introduction .................................................................................................................... 1.2

2. Short Title, Extent, Commencement and Application ......................................... 1.3

3. Definitions.............................................................................................................. ........... 1.4

Test Your Knowledge ............................................................................................................ 1.27

CHAPTER 2 : INCORPORATION OF COMPANY AND MATTERS INCIDENTAL

THERETO

Learning Outcomes ................................................................................................................. 2.1

Chapter Overview .................................................................................................................... 2.2

1. Introduction to Incorporation of Companies & Promotor ................................ 2.3

2. Formation of Company ..................................................................... ........................... 2.4

3. Members Severally liable in certain cases i.e. Reduction in Minimum

Membership .................................................................................... ................................ 2.9

4. Incorporation of Company ........................... ........................................................... 2.10

5. Formation of Companies with Charitable Objects, etc. .................................... 2.20

6. Effect of Registration ................................................................................................. 2.27

7. Memorandum of Association – MOA .................................................................... 2.28

8. Articles of Association – AOA .................................................................................. 2.38

9. Doctrine of Constructive Notice and Doctrine of Indoor

Management. ............................................................................................................... 2.42

10. Act to Override Memorandum, Articles, etc. ....................................................... 2.46

11. Effect of Memorandum and Articles .................................................................... 2.46

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12. Alteration of memorandum ..................................................................................... 2.48

13. Alteration of articles ................................................................................................... 2.54

14. Alteration of memorandum or articles to be noted in every copy .............. 2.55

15. Registered office of company ................................................................................ 2.55

16. Commencement of business etc. .......................................................................... 2.59

17. Conversion of companies already Registered ................................................... 2.61

18. Subsidiary company not to hold shares in its Holding Company ................ 2.62

19. Service of documents ............................................................................................... 2.63

20. Authentication of documents, Proceedings and Contracts ........................... 2.65

21. Execution of Bills of Exchange, etc. ....................................................................... 2.65

Summary .................................................................................................................................. 2.67

Test Your Knowledge ............................................................................................................ 2.68

CHAPTER 3 : PROSPECTUS AND ALLOTMENT OF SECURITIES

Learning Outcomes ................................................................................................................. 3.1

Chapter Overview .................................................................................................................... 3.2
1. Introduction ................................................................................................................. 3.3
2. Public offer and Private Placement ...................................................................... 3.3
3. Regulation of issue and transfer of Securities etc. .......................................... 3.7
4. Prospectus .................................................................................................................... 3.8
5. Mis-statements in prospectus .............................................................................. 3.23
6. Punishment for fraudulently inducing persons to invest money .............. 3.31
7. Action by affected persons .................................................................................. 3.32
8. Punishment for personation for acquisition, etc., of securities .................. 3.33
9. Punishment for fraud .............................................................................................. 3.34
10. Allotment of securities by company ................................................................... 3.36
11. Securities to be dealt with in stock exchanges ............................................... 3.40

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12. Global Depository Receipt .................................................................................... 3.44

13. Private Placement ................................................................................................... 3.45
Summary .................................................................................................................................. 3.52
Test Your Knowledge ........................................................................................................... 3.53

CHAPTER 4 : SHARE CAPITAL AND DEBENTURES

Learning Outcomes ................................................................................................................. 4.1

Chapter Overview .................................................................................................................... 4.3
1. Introduction ................................................................................................................. 4.3
2. Share Capital-Types ................................................................................................... 4.4
3. Certificate of shares ................................................................................................. 4.10
4. Voting Rights ............................................................................................................ 4.15
5. Variation of shareholders’ rights ........................................................................ 4.17
6. Calls on share ........................................................................................................... 4.19
7. Issue of shares at a premium or discount ........................................................ 4.21
8. Issue of Sweat Equity Shares ............................................................................... 4.25
9. Issue and Redemption of Preference Shares .................................................... 4.29
10. Transfer and Transmission of Securities and the Allied Provisions ........... 4.34
11. Alteration of share capital .................................................................................... 4.46
12. Debenture ................................................................................................................. 4.73
Summary .................................................................................................................................. 4.84
Test Your Knowledge ........................................................................................................... 4.86

CHAPTER 5 : ACCEPTANCE OF DEPOSITS BY COMPANIES

Learning Outcomes ................................................................................................................. 5.1

Chapter Overview ................................................................................................................... 5.2
1. Introduction ................................................................................................................. 5.2
2. Certain important terms explained ....................................................................... 5.2
3. Prohibitive provisions and exempted companies ........................................... 5.12

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4. Provisions regarding acceptance of deposits from members ..................... 5.13

5. Provisions regarding acceptance of deposits from public by
eligible companies .................................................................................................. 5.21
6. Punishment for Contravention of Section 73 or Section 76......................... 5.30
7. Repayment of deposits accepted before commencement of the
Companies Act, 2013 ............................................................................................. 5.31
8. Power of Central Government to Decide Certain Questions ....................... 5.32
Summary .................................................................................................................................. 5.33
Test Your Knowledge ............................................................................................................ 5.35

CHAPTER 6 : REGISTRATION OF CHARGES

Learning Outcomes ................................................................................................................. 6.1

Chapter Overview ................................................................................................................... 6.2

1. Introduction ................................................................................................................. 6.2

2. Duty to Register Charges, etc. ............................................................................... 6.5

3. Deemed notice of charge ..................................................................................... 6.10

4. Consequences of non-registration of charge ................................................. 6.11

5. Application for Registration of Charge by charge-holder ............................ 6.13

6. Acquisition of property subject to charge and modification of charge ... 6.14

7. Register of Charges ................................................................................................. 6.15

8. Company to Report Satisfaction of Charge ..................................................... 6.17

9. Power of Registrar to Make Entries of Satisfaction and Release in

Absence of Intimation from Company .............................................................. 6.19

10. Intimation of Appointment of Receiver or Manager ...................................... 6.20

11. Punishment for Contravention ............................................................................. 6.21

12. Rectification by Central Government in Register of Charges ..................... 6.21

Summary .................................................................................................................................. 6.23

Test Your Knowledge ............................................................................................................ 6.24

© The Institute of Chartered Accountants of India

CHAPTER 1

PRELIMINARY

LEARNING OUTCOMES

At the end of this chapter, you will be able to:

♦ To know about the extent and commencement of the
Companies Act, 2013.
♦ Identify about the application of the Act.
♦ Gain familiarity with the definition clause given in the Act.

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 1.2 CORPORATE AND OTHER LAWS

CHAPTER OVERVIEW

Preliminary chapter of the Act covers

Short title,
extent and Application Definitions
commencement

1. INTRODUCTION
The Companies Act, 2013 is an Act to consolidate and amend the law relating to
companies. The legislation was necessitated to meet changes in the national and
international economic environment and for expansion and growth of economy of
our country.

The Companies Act, 2013 received the assent of the Hon’ble President of India on
29th August 2013 and was notified in the Official Gazette on 30th August 2013 for
public information stating that different dates may be appointed for enforcement
of different provisions of the Companies Act, 2013, through notifications.
Section 1 came into force on 30th August 2013; 98 sections came into force on 12th
September 2013; 143 sections were enforced from 1st April 2014 and so on.
The Companies Act, 2013 is rule based legislation with 470 sections and seven
schedules. The entire Act has been divided into 29 chapters. Each chapter has at
least one set of Rules. The Companies Act, 2013 aims to improve corporate
governance, simplify regulations and strengthen the interests of investors. Thus,
this enactment makes our corporate regulations more contemporary.

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2. SHORT TITLE, EXTENT, COMMENCEMENT

AND APPLICATION
Section 1 of the Companies Act, 2013 deals with the title of the Act according to
which this Act may be called as the Companies Act, 2013.

Further, section deals with the extent to the applicability of the Act. It says that the
Act shall extend to the whole of India.
This section also specifies the date of commencement of this Act. Accordingly, this
section shall come into force at once and the remaining provisions of this Act shall
come into force on such date as the Central Government may, by notification in the
Official Gazette, appoint and different dates may be appointed for different
provisions of this Act and any reference in any provision to the commencement of
this Act shall be construed as a reference to the coming into force of that provision.
This Section furthermore states of the applicability of the Act. The provisions of this
Act shall apply to-
(a) companies incorporated under this Act or under any previous company law;
Example 1: ABC Ltd. was incorporated on 1.1.1972 under the Companies Act, 1956.
So, the Companies Act, 2013 shall also be applicable on ABC Ltd.
(b) insurance companies, except in so far as the said provisions are inconsistent
with the provisions of the Insurance Act, 1938 or the Insurance Regulatory
and Development Authority Act, 1999;
(c) banking companies, except in so far as the said provisions are inconsistent
with the provisions of the Banking Regulation Act, 1949;

(d) companies engaged in the generation or supply of electricity, except in so far

as the said provisions are inconsistent with the provisions of the Electricity
Act, 2003;

(e) any other company governed by any special Act for the time being in force,
except in so far as the said provisions are inconsistent with the provisions of
such special Act, and

(f) such body corporate, incorporated by any Act for the time being in force, as
the Central Government may, by notification, specify in this behalf, subject to

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 1.4 CORPORATE AND OTHER LAWS

such exceptions, modifications or adaptation, as may be specified in the

notification.
Example 2: Food Corporation of India (FCI), National Highway Authority of India
(NHAI) etc.

Note: The term “except in so far as” shall mean excluding to the extent of i.e. if any
provision of the Companies Act is inconsistent with any of the provisions of other
Act (Insurance Act, Banking Regulation Act, Electricity Act, etc.) to which the
company is regulated than that company shall comply with the provisions of
respective Act/Acts to which it is governed and regulated by.

Companies Whole of India Section 1 1. Companies

Commencement

Application
Title

Extent

Act, 2013 came into 2. Insurance

force at once companies
and the
remaining 3. Banking
provisions on companies
different dates 4. Companies
through producing /
Notifications. supplying
electricity
5. Company
regulated by
special Act
6. Entities as
notified by
Central
Government

3. DEFINITIONS
Section 2 of the Companies Act, 2013 is a definition section. It provides various
terminologies used in the Act. Definitional Sections or Clauses, are known as
‘internal aids to construction’ and can be of immense help in interpreting or
construing the enactment or any of its parts.

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Also, according to clause 95 of section 2, words and expressions used and not
defined in this Act but defined in the Securities Contracts (Regulation) Act, 1956 or
the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996
shall have the meanings respectively assigned to them in those Acts.
When a word or phrase is defined as having a particular meaning in the enactment,
it is that meaning alone which must be given to it while interpreting a Section of
the Act unless there be anything repugnant in the context.
Section 2 1 states that- In this Act, unless the context otherwise requires, —
(1) Abridged prospectus means a memorandum containing
such salient features of a prospectus as may be specified
by the Securities and Exchange Board by making
regulations in this behalf;
(2) Accounting standards means the standards of accounting or any addendum
thereto for companies or class of companies referred to in section 133;
Section 133 of the Act deals with the Central Government to Prescribe
Accounting Standards. As per the section, the Central Government may
prescribe the standards of accounting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India, constituted
under section 3 of the Chartered Accountants Act, 1949, in consultation with
and after examination of the recommendations made by the National
Financial Reporting Authority.
Section 133 is to be read with Rule 7 of the Companies (Accounts) Rules, 2014.
Accordingly,
(i) The standards of accounting as specified under the Companies Act,
1956 shall be deemed to be the accounting standards until accounting
standards are specified by the Central Government under section 133.
(ii) Till the National Financial Reporting Authority* is constituted under
section 132 of the Act, the Central Government may prescribe the
standards of accounting or any addendum thereto, as recommended
by the Institute of Chartered Accountants of India in consultation with
and after examination of the recommendations made by the National

1
The number given in brackets i.e. ( ) at the start of definition, denotes the clauses to section 2.

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 1.6 CORPORATE AND OTHER LAWS

Advisory Committee on Accounting Standards constituted under

section 210A of the Companies Act, 1956.
Further, in exercise of the powers conferred by section 133, the Central
Government in consultation with the National Advisory Committee on
Accounting Standards prescribed that Companies (Accounting Standards)
Rules, 2006 and the Companies (Indian Accounting Standards) Rules, 2015 may
be followed.
*The Central Government hereby appoints the 1st October 2018 as the date
of constitution of National Financial Reporting Authority.
(3) Alter or Alteration includes the making of additions, omissions and
substitutions;
(5) Articles means-
♦ the articles of association of a company as originally framed, or
♦ as altered from time to time, or
♦ applied in pursuance of any previous company law, or
♦ applied in pursuance of this Act;
(6) Associate company, in relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.

Explanation. — For the purpose of this clause, —

(a) the expression "significant influence" means control of at least twenty
per cent. of total voting power, or control of or participation in business
decisions under an agreement;
(b) the expression "joint venture" means a joint arrangement whereby the
parties that have joint control of the arrangement have rights to the net
assets of the arrangement;

Vide Circular dated 25/06/2014 it has been clarified that the shares held by a
company in another company in a fiduciary capacity (a fiduciary is a person who
holds a legal or ethical relationship of trust with one of more parties (persons or
group of persons. Typically, a fiduciary prudently takes care of money or other

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assets for another person) shall not be counted for the purpose of determining the
relationship of associate company.
Note: Students may please note that the definition of Associate company as
defined under AS 23/ Ind AS 28 (Accounting for Investments in Associates in
Consolidated Financial Statements/ Investment in Associates and Joint Ventures) is
slightly different from the above definition as given in the Companies Act, 2013.

(7) Auditing standards means the standards of auditing or any addendum

thereto for companies or class of companies referred to in sub-section (10)
of section 143.
Section 143 of the Companies Act, 2013 deals with the Powers and
∗∗

Duties of Auditors and Auditing Standards. Sub-section (10) to section 143

provides that the Central Government may prescribe the standards of
auditing or any addendum thereto, as recommended by the Institute of
Chartered Accountants of India, constituted under section 3 of the Chartered
Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority:
Provided that until any auditing standards are notified, any standard or
standards of auditing specified by the Institute of Chartered Accountants of
India shall be deemed to be the auditing standards.
(8) Authorised capital or Nominal capital means such capital as is
authorised by the memorandum of a company to be the maximum amount
of share capital of the company;
(10) Board of Directors or Board, in relation to a company, means the
collective body of the directors of the company;
(11) Body corporate or Corporation includes a company incorporated outside
India, but does not include—
(i) a co-operative society registered under any law relating to co-operative
societies; and

∗∗
Just for information of the students

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 1.8 CORPORATE AND OTHER LAWS

(ii) any other body corporate (not being a company as defined in this Act),
which the Central Government may, by notification, specify in this
behalf;
(12) Book and Paper and Book or Paper include books of account, deeds,
vouchers, writings, documents, minutes and registers maintained on paper or
in electronic form;
(13) “Books of account” includes records maintained in
respect of:
(i) all sums of money received and expended by a
company and matters in relation to which the receipts
and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 2 in the case
of a company which belongs to any class of companies specified under
that section;

Books of Account

In case of
companies specified Other Companies
under section 148

Items cost
(i) receipts and (ii) Sales and (iii) Assets and
specified u/s 148
expenditure Purchase Liabilities
and (i), (ii), (iii)

2
Section 148 of the Companies Act, 2013 authorises Central Government to Specify Audit
of Items of Cost in Respect of Certain Companies.

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(14) Branch office, in relation to a company, means any establishment described

as such by the company;
(15) Called-up capital means such part of the capital, which has been called for
payment;
(16) Charge means an interest or lien created on the property or assets of a
company or any of its undertakings or both as security and includes a
mortgage;
(17) Chartered Accountant means a chartered accountant as defined in clause
(b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who
holds a valid certificate of practice under sub-section (1) of section 6 of that
Act;
(18) Chief Executive Officer (CEO) means an officer of a company, who has
been designated as such by it;
(19) Chief Financial Officer (CFO) means a person appointed as the Chief
Financial Officer of a company;
These definitions of CEO & CFO should be read with section 2(51) and 203
which deals with the definition and appointment of Key Managerial Personnel
(KMP) of the Companies Act, 2013.
(20) Company means a company incorporated under this Act or under any
previous company law;

Example 3: Reliance Industries Limited incorporated in year 1973, Tata Steel

Limited incorporated in year 1907, Infosys Limited incorporated in year 1981.
Such companies are incorporated under Companies Act, 1956 (previous
company law) are also included in the above definition for being treated as
a Company.
(21) Company limited by guarantee means a company having the liability of
its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in the
event of its being wound up;
(22) Company limited by shares means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them;

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 1.10 CORPORATE AND OTHER LAWS

Example 4: A shareholder who has paid rupees 75 on a share of face value

rupees 100 can be called upon to pay the balance of rupees 25 only.
(26) Contributory means a person liable to contribute towards the assets of the
company in the event of its being wound up
Explanation: For the purpose of this clause, it is hereby clarified that a person
holding fully paid-up shares in a company shall be considered as a
contributory.
(27) Control shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;
It is an inclusive definition and relevant for the provisions relating to
subsidiary and holding companies.
(30) Debenture includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of
the company or not;
Provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India
Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government

in consultation with the Reserve Bank of India, issued by a company,
shall not be treated as debenture;
(34) Director means a director appointed to the Board of a company;

(35) Dividend includes any interim dividend;

(36) Document includes summons, notice, requisition, order, declaration, form

and register, whether issued, sent or kept in pursuance of this Act or under
any other law for the time being in force or otherwise, maintained on paper
or in electronic form;
(37) Employees’ stock option means the option given to the directors, officers
or employees of a company or of its holding company or subsidiary company

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or companies, if any, which gives such directors, officers or employees, the

benefit or right to purchase, or to subscribe for, the shares of the company
at a future date at a pre-determined price;
(38) Expert includes an engineer, a valuer, a Chartered Accountant, a Company
Secretary, a Cost Accountant and any other person who has the power or
authority to issue a certificate in pursuance of any law for the time being in
force;
(40) Financial statement in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the
financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):

Provided that the financial statement, with respect to One Person Company,
small company and dormant company, may not include the cash flow
statement;

Exemptions

For private companies, the proviso to section 2(40) shall be read as follows:

“Provided that the financial statement, with respect to one person company,
small company, dormant company and private company (if such private
company is a start-up) may not include the cash flow statement;
Explanation. - For the purposes of this Act, the term “start-up” or “start-up
company” means a private company incorporated under the Companies Act,
2013 or the Companies Act, 1956 and recognised as start-up in accordance
with the notification issued by the Department of Industrial Policy and
Promotion, Ministry of Commerce and Industry.”
The exceptions, modifications and adaptations shall be applicable to a
private company which has not committed a default in filing its financial

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statements under section 137 of the said Act or annual return under section
92 of the said Act with the Registrar.

Note: Students may note that ‘Profit and Loss Account’ may also be referred
as ‘Statement of Profit and Loss’ under the Act at some places.

(41) 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: 3
Provided that where a company or body corporate, which is a holding
company or a subsidiary or associate company of a company incorporated
outside India and is required to follow a different financial year for
consolidation of its accounts outside India, 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. 4

Note: The term “company incorporated outside India” refers to Foreign

Company incorporated under any applicable laws for the constitution of
company outside India.

(43) Free reserves means such reserves which, as per the latest audited balance
sheet of a company, are available for distribution as dividend:

3
With respect to specified IFSC public company & specified IFSC Private company, a proviso
has been inserted vide notification dated 5th January, 2017 stating that above stated company
which is subsidiary of a foreign company, the financial year of the subsidiary may be same as
the financial year of its holding company & approval of Tribunal shall not be required.
4
Provided also that any application pending before the Tribunal as on the date of
commencement of the Companies (Amendment) Ordinance, 2019, shall be disposed of by
the Tribunal in accordance with the provisions applicable to it before such commencement.
Provided also that a company or body corporate, existing on the commencement of this
Act, shall, within a period of two years from such commencement, align its financial year as
per the provisions of this clause. (this provision is not relevant now, however, it is still
forming part of the Act)

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Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation
of assets, whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in
equity, including surplus in profit and loss account on measurement of
the asset or the liability at fair value,

shall not be treated as free reserves;

(44) Global Depository Receipt means any instrument in the form of a
depository receipt, by whatever name called, created by a foreign depository
outside India and authorised by a company making an issue of such
depository receipts.
(45) Government company means any company in which not less than 51% of
the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly
by one or more State Governments, and includes a company which is a
subsidiary company of such a Government company;
5
Explanation. - For the purposes of this clause, the "paid-up share capital"
shall be construed as "total voting power", where shares with differential
voting rights have been issued.
Example 5: X Industries Ltd. is a company in which 25% of shareholding is
held by Central Government; 10% shareholding is held by Government of
Maharashtra and 15% shareholding is held by Central Government and
Government of Rajasthan. Here, X Industries Ltd. is not a government
company as there is no compliance of minimum holding of paid-up share
capital i.e. at least 51 % by the Central Government, or by any State
Government or Governments or partly by the Central Government and partly
by one or more State Government.
(46) Holding company in relation to one or more other companies, means a
company of which such companies are subsidiary companies

5
Inserted by Exemptions to Government Companies under section 462 of the CA 2013,
notification dated 02.03.2020 (Effective From 03rd March 2020).

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 1.14 CORPORATE AND OTHER LAWS

Explanation. — For the purposes of this clause, the expression "company"

includes any body corporate.
For meaning of “subsidiary company” refer the definition given in section
2(87) of the Companies Act, 2013.
(50) Issued capital means such capital as the company issues from time to time
for subscription;
(51) Key Managerial Personnel, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is
in whole-time employment, designated as key managerial personnel by
the Board; and
(vi) such other officer as may be prescribed;
Note: However, till now no other officer has been prescribed.

CEO/ MD/ Manager

CS

WTD
KMP

Such other officer- not one below directors+ in whole time

employment+ designated as KMP

Other prescribed officer

(52) Listed company means a company which has any of its securities listed on
any recognised stock exchange;

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Provided that such class of companies, which have listed or intend to list such
class of securities, as may be prescribed in consultation with the Securities
and Exchange Board, shall not be considered as listed companies.
According to rule 2A of the Companies (Specification of definitions details)
Rules, 2014, the following classes of companies shall not be considered as
listed companies, namely:-

(a) Public companies which have not listed their equity shares on a
recognized stock exchange but have listed their –
(i) non-convertible debt securities issued on private placement basis
in terms of SEBI (Issue and Listing of Debt Securities) Regulations,
2008; or
(ii) non-convertible redeemable preference shares issued on private
placement basis in terms of SEBI (Issue and Listing of Non-
Convertible Redeemable Preference Shares) Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Private companies which have listed their non-convertible debt
securities on private placement basis on a recognized stock exchange
in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
(c) Public companies which have not listed their equity shares on a
recognized stock exchange but whose equity shares are listed on a
stock exchange in a jurisdiction as specified in sub-section (3) of section
23 of the Act.
(53) Manager means an individual who, subject to the superintendence, control
and direction of the Board of Directors, has the management of the whole, or
substantially the whole, of the affairs of a company, and includes a director
or any other person occupying the position of a manager, by whatever name
called, whether under a contract of service or not;
(54) Managing Director means a director who, by virtue of the articles of a
company or an agreement with the company or a resolution passed in its
general meeting, or by its Board of Directors, is entrusted with substantial
powers of management of the affairs of the company and includes a director
occupying the position of managing director, by whatever name called.

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Explanation.— For the purposes of this clause, the power to do administrative

acts of a routine nature when so authorised by the Board such as:
• the power to affix the common seal of the company to any document
or
• to draw and endorse any cheque on the account of the company in any
bank or

• to draw and endorse any negotiable instrument or

• to sign any certificate of share or to direct registration of transfer of any
share,

shall not be deemed to be included within the substantial powers of

management;
Explanation.- For any individual to be called as managing director, an
individual shall first be a director duly appointed by the Company under the
provisions of the Companies Act, 2013. This also implies that an individual
who is not a director in the company cannot be appointed as Managing
Director of that company.
(55) Member, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be

deemed to have agreed to become member of the company, and on its
registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of
the company and whose name is entered in the register of members of
the company;
(iii) every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository;
(56) Memorandum means the memorandum of association of a company as
originally framed or as altered from time to time in pursuance of any previous
company law or of this Act;
(57) Net worth means the aggregate value of the paid-up share capital and all
reserves created out of the profits, securities premium account and debit or
credit balance of profit and loss account, after deducting the aggregate

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value of the accumulated losses, deferred expenditure and miscellaneous

expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation;
Example 6: The statutory auditors of a company were required to issue a certificate
on the net worth of the company as per the requirement of the management as on
30th September 2024 computed as per the provision of section 2(57) of the
Companies Act, 2013.
The company had fair valued its property, plant and equipment in the current year
which was mistakenly taken into retained earnings of the company in its books of
accounts. Advise whether this fair valuation would be covered in the net worth of
the company as per the legal requirements.

Answer: As per sec 2(57) of the Companies Act 2013, any reserves created out of
revaluation of assets doesn’t form part of net worth. The company fair valued its
property, plant and equipment and took that to retained earnings.

Even if the company has taken the fair valuation to the retained earnings in its
books of accounts, the resultant credit in reserves (by whatever name called) would
be in the category of ‘reserves created out of revaluation of assets’ which is
specifically excluded in the definition of ‘net worth’ in section 2 (57) and hence
should be excluded by the company.
Further the auditors should also consider the matter related to accounting of this
reserve separately at the time of audit of books of accounts of the company.
(58) Notification means a notification published in the Official Gazette and the
expression “notify” shall be construed accordingly;
(59) Officer includes any director, manager or key managerial personnel or any
person in accordance with whose directions or instructions the Board of
Directors or any one or more of the directors is or are accustomed to act;
(60) Officer who is in default, for the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any
penalty or punishment by way of imprisonment, fine or otherwise, means any
of the following officers of a company, namely:—
(i) whole-time director (WTD);

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(ii) key managerial personnel (KMP);

(iii) where there is no key managerial personnel, such director or directors
as specified by the Board in this behalf and who has or have given his
or their consent in writing to the Board to such specification, or all the
directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key
managerial personnel, is charged with any responsibility including
maintenance, filing or distribution of accounts or records, authorises,
actively participates in, knowingly permits, or knowingly fails to take
active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions
the Board of Directors of the company is accustomed to act, other than
a person who gives advice to the Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of
this Act, who is aware of such contravention by virtue of the receipt by
him of any proceedings of the Board or participation in such
proceedings without objecting to the same, or where such
contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share
transfer agents, registrars and merchant bankers to the issue or transfer;
Example 7: In a company, a default was committed with respect to the
allotment of shares by the officers. In company there were no managing
director, whole time director, a manager, secretary, a person charged by the
Board with the responsibility of complying with the provisions of the Act, and
neither any director/directors specified by the board. Therefore, in such
situation, all the directors of the company may be treated as officers in
default.
(62) One Person Company means a company which has only one person as a
member;
(63) Ordinary or special resolution means an ordinary resolution, or as the
case may be, special resolution referred to in section 114 (Ordinary and
Special Resolution);

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(64) Paid-up share capital or share capital paid-up means such aggregate
amount of money credited as paid-up as is equivalent to the amount received
as paid-up in respect of shares issued and also includes any amount credited
as paid-up in respect of shares of the company, but does not include any
other amount received in respect of such shares, by whatever name called;
(65) Postal ballot means voting by post or through any electronic mode;

This definition is related to section 110 to be read with Rule 22 of the

Companies (Management and Administration) Rules, 2014 specifying the
procedure to be followed for conducting of business through postal ballot
and provides the list of items of business which should be transacted only by
means of voting through a postal ballot.
(66) Prescribed means prescribed by rules made under this Act;

(68) Private company means a company having a minimum paid-up share

capital as may be prescribed 7, and which by its articles,:
(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated
as a single member:
Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the
company, were members of the company while in that
employment and have continued to be members after the
employment ceased,
shall not be included in the number of members; and

7
Since nothing has been prescribed so far, thus, there is no minimum paid up share capital to
form a private company.

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(iii) prohibits any invitation to the public to subscribe for any securities of
the company;

The requirement of having a minimum paid up share capital shall not apply
to a section 8 company (Formation of companies with charitable objects, etc.)
vide notification dated 5th June 2015.
The above-mentioned exemption shall be applicable to a section 8 company
which has not committed a default in filing its financial statements under
section 137 of the Companies Act, 2013, or annual return under section 92 of
the said Act with Registrar. [Vide amendment notification G.S.R. 584(E) dated
13th June 2017.]

(69) Promoter means a person—

(a) who has been named as such in a prospectus or is identified by the

company in the annual return referred to in section 92, or

(b) who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is
acting merely in a professional capacity;
(70) Prospectus means any document described or issued as a prospectus and
includes a red herring prospectus or shelf prospectus or any notice, circular,
advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate;
(71) Public company means a company which—

(a) is not a private company; and

(b) has a minimum paid-up share capital as may be prescribed 8:
Provided that a company which is a subsidiary of a company, not being a
private company, shall be deemed to be public company for the purposes of

8
Since nothing has been prescribed so far, thus, there is no minimum paid up share capital to
form a public company.

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this Act even where such subsidiary company continues to be a private

company in its articles;
Example 8: A Pvt. Ltd. is wholly owned subsidiary of AB Ltd., a public company
incorporated under the Companies Act, 2013. A Pvt. Ltd. wanted to avail
exemptions as provided to private companies. In this case, since A Pvt. Ltd. is
subsidiary of AB Ltd., which is a public company, therefore A Pvt. Ltd. will be
deemed to be a public company and will be not allowed to avail exemptions
provided to a private company.

The requirement of having a minimum paid up share capital shall not apply
to a section 8 company vide notification dated 5th June 2015.

(74) Register of companies means the register of companies

maintained by the Registrar on paper or in any electronic mode
under this Act;
(75) Registrar means a Registrar, an Additional Registrar, a Joint Registrar, a
Deputy Registrar or an Assistant Registrar, having the duty of registering
companies and discharging various functions under this Act;
(76) Related party, with reference to a company, means—

(i) a director or his relative;

(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a
member or director;
(v) a public company in which a director or manager is a director and
holds along with his relatives, more than two per cent of its paid-up
share capital;
(vi) any body corporate whose Board of Directors, managing director or
manager is accustomed to act in accordance with the advice, directions
or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or
manager is accustomed to act:

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Provided that nothing in sub-clauses (vi) and (vii) shall apply to the
advice, directions or instructions given in a professional capacity;
9
(viii) any body corporate which is-

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary;
or

(C) an investing company or the venturer of the company;

Explanation.- For the purpose of this clause, “the investing company
or the venturer of a company” means a body corporate whose
investment in the company would result in the company becoming an
associate company of the body corporate.

Exemption - This Clause (viii) shall not apply with respect to section 188
(Related Party transactions) to a private company vide Notification No. G.S.R.
464(E) dated 5th June, 2015.

(ix) such other person as may be prescribed;

As per Rule 3 given in the Companies (Specification of Definitions
Details) Rules, 2014, for the purposes of sub-clause (ix) of clause (76) of
section 2 of the Act, a director (other than an independent director) or
key managerial personnel of the holding company or his relative with
reference to a company, shall be deemed to be a related party.
Example 9: XYZ Pvt. Ltd. has two subsidiary companies, Y Pvt. Ltd. and
Z Pvt. Ltd. Here as per the section 2(76)(viii)(B), Y Pvt. Ltd and Z Pvt. Ltd.
are related parties. However, as per the Notification No. G.S.R. 464(E)
dated 5th June, 2015, clause (viii) shall not apply with respect to section
188 to a private company. Therefore Y Pvt. Ltd and Z Pvt. Ltd are not
related parties for the purpose of section 188. However, if Y Pvt. Ltd
and Z Pvt. Ltd. have common directors, then they will be deemed to be
related parties because of section 2(76)(iv).

Example 10: Now suppose, XYZ Ltd. a public company, has two
subsidiary companies, Y Pvt. Ltd and Z Pvt. Ltd. Here as per section

9
The above clause (viii) shall not apply with respect to section 188 to a Specified IFSC Public
company vide Notification no. G. S.R. 08(E) dated 4th January, 2017.

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2(71), a private company which is a subsidiary of a public company will

be deemed to be a public company, so Y Pvt. Ltd and Z Pvt. Ltd will not
be eligible to avail exemption under the Notification No. G.S.R. 464(E)
dated 5th June, 2015. Therefore, as per section 2(76)(viii)(B), Y Pvt. Ltd
and Z Pvt. Ltd are related parties. In addition, XYZ Ltd. will also be
related Party to Y Pvt. Ltd and Z Pvt. Ltd.
(77) Relative, with reference to any person, means anyone who is related to
another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;
Rule 4 given in the Companies (Specification of Definitions Details) Rules, 2014
provides of the List of Relatives in terms of Clause (77) of section 2.
Accordingly, a person shall be deemed to be the relative of another, if he or
she is related to another in the following manner, namely:-

(1) Father: Provided that the term “Father” includes step-father.

(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.
(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister.
(78) Remuneration means any money or its equivalent given or passed to any
person for services rendered by him and includes perquisites as defined under
the Income Tax Act, 1961.
(84) Share means a share in the share capital of a company and includes stock;

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(85) Small company means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than ten
crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately
preceding financial year does not exceed two crore rupees or such
higher amount as may be prescribed which shall not be more than one
hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
As per the Companies (Specification of Definitions Details) Rules, 2014, for
the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not exceed
rupees four crore and rupees forty crore respectively.

Capital- ` 4 crore

Turnover- ` 40 crore

Example 11: H Ltd. is the holding company of S Pvt. Ltd. As per the last profit
and loss account for the year ending 31st March, 2024 of S Pvt. Ltd., its
turnover was to the extent of ` 1.50 crore; and paid up share capital was
` 40 lakh. Since S Pvt. Ltd., as per the turnover and paid up share capital
norms, qualifies for the status of a ‘small company’ it wants to be categorized
as ‘small company’. S Pvt. Ltd. cannot be categorized as a ‘small company’
because it is the subsidiary of another company (H Ltd.). [Proviso to section
2(85)].

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(86) Subscribed capital means such part of the capital which is for the time
being subscribed by the members of a company;
Example 12: ABC Ltd. was registered with Registrar with an Authorised
capital of ` 2,00,00,000 where each share is of ` 10.
In response to the advertisements made by the company to buy shares in the
company, applications have been received for 10,00,000 shares but company
actually issued 700,000 shares where company has called for ` 8 per share.
All the calls have been met in full except three shareholders who still owe for
their 6000 shares in total.

Amount of various share capital

Authorized share capital = ` 2,00,00,000 (2 crore)
Subscribed capital = 10,00,000 x 10 = ` 1,00,00,000 (1 Crore)

Issued capital = 7,00,000 x 10 = ` 70,00,000

Called-up capital = 7,00,000 x 8 = ` 56,00,000
Paid-up capital = 56,00,000 – (6000 x ` 8) = ` 55,52,000
(87) Subsidiary company or Subsidiary, in relation to any other company (that
is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:
Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers as may
be prescribed.

Explanation—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding
company even if the control referred to in sub-clause (i) or sub-clause
(ii) is of another subsidiary company of the holding company;

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(b) the composition of a company’s Board of Directors shall be deemed to

be controlled by another company if that other company by exercise of
some power exercisable by it at its discretion can appoint or remove all
or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or
subsidiaries;

As per the notification dated 27th December 2013, Ministry clarified that the
shares held by a company or power exercisable by it in another company in
a fiduciary capacity shall not be counted for the purpose of determining the
holding –subsidiary relationship in terms of the provision of section 2(87) of
the Companies Act, 2013.

(88) Sweat equity shares means such equity shares as are issued by a company
to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name called;
(89) Total voting power, in relation to any matter, means the
total number of votes which may be cast in regard to that
matter on a poll at a meeting of a company if all the members
thereof or their proxies having a right to vote on that matter
are present at the meeting and cast their votes;
(90) Tribunal means the National Company Law Tribunal constituted under
section 408;
(91) Turnover means the gross amount of revenue recognised in the profit and
loss account from the sale, supply, or distribution of goods or on account of
services rendered, or both, by a company during a financial year;
(92) Unlimited company means a company not having any limit on the liability
of its members;
(93) Voting right means the right of a member of a company to
vote in any meeting of the company or by means of postal
ballot.

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TEST YOUR KNOWLEDGE

MCQ based Questions
1. Green Ltd. is incorporated on 3rd January, 2023. As per the Companies Act,
2013, what will be the financial year for the company:
(a) 31st March, 2023
(b) 31st December, 2023

(c) 31st March, 2024

(d) 30th September, 2024
2. Roma along with her six friends has incorporated Roma Trading Ltd. in May
2023. The paid-up share capital of the company is ` 2 crore. Further, in April
2024, she noticed that in the last financial year, the turnover of the company
was well below ` 40 crore. Advise whether the company can be treated as a
‘small company’.
(a) Roma Trading Ltd. is definitely a ‘small company’ since its paid-up capital
is much below ` 4 crore and also its turnover has not exceeded the
threshold limit of ` 40 crore.
(b) The concept of ‘small company’ is applicable only in case of a private
limited company/OPC and therefore, despite meeting the criteria of
‘small company’ it being a public limited company it cannot enjoy
benefits of ‘small company’.
(c) Unlike a private limited company/OPC which automatically becomes a
‘small company’ as soon as it meets the criteria of ‘small company’, Roma
Trading Ltd. being a public limited company has to maintain the norms
applicable to a ‘small company’ continuously for two years so that,
thereafter, it will be treated as a ‘small company’.
(d) If all the shareholders of Roma Trading Ltd. give an undertaking to the
ROC stating that they will not let the paid-up share capital and also
turnover exceed the limits applicable to a ‘small company’ in the next two
years, then it can be treated as a ‘small company’.
3. Abhilasha and Amrita have incorporated a ‘not for profit’ private limited
company which is registered under Section 8 of the Companies Act, 2013. One

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 1.28 CORPORATE AND OTHER LAWS

of their friends has informed them that their company can be categorized as a
‘small company’ because as per the last profit and loss account for the year
ending 31st March, 2024, its turnover was less than ` 40 crore and its paid up
share capital was less than ` 4 crore. Advise.
(a) A section 8 company, which meets the criteria of ‘turnover’ and ‘paid-up
share capital’ in the last financial year, can avail the status of ‘small
company’ only if it acquires at least 5% stake in another ‘small company’
within the immediately following financial year.
(b) If the acquisition of minimum 5% stake in another ‘small company’
materializes in the second financial year (and not in the immediately
following financial year) after meeting the criteria of ‘turnover’ and ‘paid-
up share capital’ then with the written permission of concerned ROC, it
can acquire the status of ‘small company’.
(c) The status of ‘small company’ cannot be bestowed upon a ‘not for profit’
company which is registered under Section 8 of the Companies Act, 2013.
(d) A section 8 company, if incorporated as a private limited company (and
not as public limited company) can avail the status of ‘small company’
with the permission of concerned ROC, after it meets the criteria of
‘turnover’ and ‘paid-up share capital’.
4. “Associate company”, in relation to another company, means a company in
which that other company has a significant influence, but which is not
a subsidiary company of the company having such influence and includes
a joint venture company. Here, the words ‘significant influence’ means:
(a) Control of at least 10% of total voting power
(b) Control of at least 15% of total voting power
(c) Control of at least 20% of total voting power
(d) Control of at least 25% of total voting power

Descriptive Questions
1. MNP Private Ltd. is a company registered under the Companies Act, 2013 with
a paid-up share capital of ` 2 crore and turnover of ` 60 crore. Explain the

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 PRELIMINARY 1.29

meaning of the “Small Company” and examine the following in accordance

with the provisions of the Companies Act, 2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is ` 30 crore?
2. Flora Fauna Limited was registered as a public company. There are 230
members in the company as noted below:

(a) Directors and their relatives 50

(b) Employees 15

(c) Ex-Employees (Shares were allotted when they were employees) 10

(d) 5 couples holding shares jointly in the name of husband and wife 10
(5*2)

(e) Others 145

The Board of Directors of the company propose to convert it into a private

company. Also advise whether reduction in the number of members is
necessary.

ANSWERS
Answer to MCQ based Questions
1. (c) 31st March, 2024

2. (b) The concept of ‘small company’ is applicable only in case of a

private limited company/OPC and therefore, despite meeting
the criteria of ‘small company’ it being a public limited
company cannot enjoy benefits of ‘small company’.

3. (c) The status of ‘small company’ cannot be bestowed upon a ‘not

for profit’ company which is registered under Section 8 of the
Companies Act, 2013.

4. (c) Control of at least 20% of total voting power

Answer to Descriptive Questions

1. Small Company: According to Section 2(85) of the Companies Act, 2013,

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 1.30 CORPORATE AND OTHER LAWS

Small Company means a company, other than a public company,—

(1) paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than ten
crore rupees; and

(2) turnover of which as per its last profit and loss account does not exceed
two crore rupees or such higher amount as may be prescribed which
shall not be more than one hundred crore rupees.

Nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

As per the Companies (Specification of Definitions Details) Rules, 2014, for

the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not exceed
rupees four crore and rupees forty crore respectively.
(i) In the present case, MNP Private Ltd., is a company registered under
the Companies Act, 2013 with a paid up share capital of ` 2 crore and
having turnover of ` 60 crore. Since only one criteria of share capital
not exceeding ` 4 crore is met, but the second criteria of turnover not
exceeding ` 40 crore is not met and the provisions require both the
criteria to be met in order to avail the status of a small company, MNP
Ltd. cannot avail the status of small company.
(ii) If the turnover of the company is ` 30 crore, then both the criteria will
be fulfilled and MNP Ltd. can avail the status of small company.
2. According to section 2(68) of the Companies Act, 2013, "Private company"
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles, except in case of One Person Company,
limits the number of its members to two hundred.
However, where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single
member.

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 PRELIMINARY 1.31

It is further provided that -

(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have
continued to be members after the employment ceased,
shall not be included in the number of members.
In the instant case, Flora Fauna Limited may be converted* into a private
company only if the total members of the company are limited to 200. Total
Number of members

(i) Directors and their relatives 50

(ii) 5 Couples (5x1) 5

(iii) Others 145

Total 200

Therefore, there is no need for reduction in the number of members since

existing number of members are 200 which does not exceed maximum limit
of 200.
*The provisions relating to conversion of public company to private company
is covered in the Chapter 2 – Incorporation of Company and Matters
incidental thereto.

© The Institute of Chartered Accountants of India

CHAPTER
2

INCORPORATION OF
COMPANY AND
MATTERS
INCIDENTAL THERETO

LEARNING OUTCOMES
At the end of this chapter, you will be able to:
♦ Explain the Formation & Incorporation of company (Private
Limited/ Public Limited), One person company (OPC) and the
formation of Not for Profit Organization (Section 8
Company).
♦ Identify the need for Memorandum of Association (MOA) and
Articles of Association (AOA) and changes incidental thereto.
♦ Know the effect of registration.
♦ Explain and identify the concepts related to registered office
of company.
♦ Understand how documents may be served and filing thereof.
♦ Know about Authentication of documents, proceedings and
contracts and Execution of bills of exchange, etc.

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 2.2 CORPORATE AND OTHER LAWS

CHAPTER OVERVIEW

This chapter will discuss in detail the provisions contained in Chapter II of the
Companies Act 2013 pertaining to the incorporation of companies and matters
incidental thereto. The scope of this chapter is shown in below figure:

Incorporation of company and related matters

Formation and Memorandum Other

Documents
Incorporation and Articles Provisions

Minimum Commencement
Memorandum
members & Service (Sec 20) of Business
(MOA) (Sec 4)
OPC (Sec 10A)
(Sec 3 & 3A)

Article (AOA) Authentication Registered Office

Documents
(Sec 5) (Sec 21) (Sec 12)
required for inc
(Sec 7)
Act to override
Execution Rectify Name
Not for profit MOA/AOA
(Sec 22) (Sec 16)
company (Sec (Sec 6)
8)
Alteration in Convert
Effect of Memorandum Company
registration (Sec 13) (Sec 18)
(Sec 9)
Subsidiary
Alteration in
Can't hold
Article (Sec 14)
shares in
holding
(Sec 19)
Updation of changes to be
noted in every copy of
MOA/AOA (Sec 15)

Give copy of MOA/AOA to

members (Sec 17)

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 INCORPORATION OF COMPANY & MATTERS 2.3
INCIDENTAL THERETO

1. INTRODUCTION TO INCORPORATION OF
COMPANIES & PROMOTOR
Chapter II Consists of sections 3 to 22 as well as the Companies
(Incorporation) Rules, 2014.

A company is a separate legal entity from its members. It has perpetual succession
and can be incorporated only for lawful purposes. Prior to incorporation, promotion
activities are essential. Promotion signifies a number of business operations familiar
to the commercial world by which a company is brought into existence. 1

Persons who undertake promotion activities in order to incorporate the company

are generally known as promoters. The section 2(69) of Companies Act, 2013
(herein after referred to as ‘the Act’) defines the term “Promoter” (already
mentioned in chapter 1 of module; elaborated here). Promoter means a person:

a. Who has been named as promoter in a prospectus; or

b. Who is identified as promoter by the company in the annual return; or

c. Who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or

d. In accordance with whose advice, directions or instructions the Board of

Directors of the company is accustomed to act, but shall not include a
person who is acting merely in a professional capacity such as attorney,
technical or functional experts.

Students are advised to take note that above definition serves the purpose to make
a person liable ‘in capacity of promoter’ for fraud through misstatement, but not
highlighting what actually promoters do. Hence, considering the judicial
pronouncements improves our understanding regarding role of promoter.

Promoter is one who undertakes to form a company with reference to a given

project, and to set it going, and who takes the necessary steps to accomplish that

1
Whaley Bridge Printing Co. v. Green (1880) 5 B.D. 109

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 2.4 CORPORATE AND OTHER LAWS

purpose. 2 To be a promoter, one need not necessarily be associated with the initial
formation of the company; one who subsequently helps to arrange floating of its
capital will equally be regarded as a promoter. 3

Hence, “promoter” denotes any individual, association, partnership or a company

that takes all the necessary steps to incorporate (create and mould) 4 a company
and set it going, in a fiduciary position. 5

Illustration (True/False)

Statement – To be a promoter one necessarily be associated with the initial formation

of the company.

Answer - False, one who subsequently helps company to keep going, raise fund &
advice to board (other than in professional capacity) will equally be regarded as a
promoter.

2. FORMATION OF COMPANY [SECTION 3]

In the pre independence era, companies were granted rights by royal charter, but
now a company is incorporated by either a special Act of the legislature or under
the Companies Act, 2013. Accordingly, an incorporated company may be either
Chartered Company, Statutory Company, or Registered Company. Section 3 of the
Act deals with registered companies.

FORMS OF COMPANIES

The Companies are broadly classified into categories shown below in figure.
Definitions of many of these are already covered under chapter 1 of this module.

2
Twycross v. Grant (1877) 2 C.P.D. 469
3
Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch. 392.
4
Erlanger v New Sombrero Phosphate Co. (1878) 48 LJ Ch. 73
5
ibid

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 INCORPORATION OF COMPANY & MATTERS 2.5
INCIDENTAL THERETO

Kind of Companies

Company

Incorporated Companies Un-incorporated

On the basis of mode of registration

Registered Statutory Chartered

Companies Companies Companies

On the basis of liabilty

Limited by Shares Limited by Guarantee Unlimited

Public Private with capital without capital with capital without capital

Public Private Public Private Public Private Public Private

Sub-section 1 to section 3 provides that for lawful purpose, by subscribing their

name to memorandum and complying with requirement of this Act:

a. A public company may be formed by seven (7) or more persons

b. A private company may be formed by two (2) or more persons

c. A one person company (as private company) may be formed by one (1)
person.

Further, sub-section 2 to section 3 provides that, company formed as specified

above may be incorporated either as:

a. Companies limited by shares; or

b. Companies limited by guarantee; or

c. Unlimited liability companies.

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 2.6 CORPORATE AND OTHER LAWS

Note: A limited liability companies may be companies limited by guarantee as well

as shares.
Specified IFSC Public or Specified IFSC Private Company shall be formed only as a
company limited by shares. IFSC Company means a company licensed to set up
businesses in any International Financial Services Center in India, example in Gujarat
International Finance Tec-City.

ONE PERSON COMPANY (OPC)

The Companies Act, 2013 for the first time allowed the formation of company by
just one person with limited liability, called one person company; such a company
is described as a private company under section 3(1)(c). Further section 3(1) along
with rule 3 and 4 of the Companies (Incorporation) Rules, 2014, provides certain
provisions specifically applicable in case of One Person Company listed below.
Who can form one person company?

Only a natural person, other than minor; who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.

Resident in India means a person who has stayed in India for a period of not less
than 120 days during the immediately preceding financial year.

OPC can’t be incorporated or converted into a company under section 8 of the Act.
Further, OPC can’t carry out Non-Banking Financial Investment activities including
investment in securities of any body-corporates.

Indicate Name & Consent Nominee

The memorandum of One Person Company shall also indicate the name of the
natural person, other than minor; who is an Indian citizen, whether resident in India
or otherwise (as nominee), along with his prior written consent in requisite form,
who shall, in the event of the subscriber’s death or his incapacity to contract
become the member of the company.

Note: This provision is to ensure perpetual succession of legal existence of OPC.

Example – Ms. Madhu formed an OPC wherein Mr. Sudan is nominee as his name
is specified in MOA along with his consent. Ms. Madhu declared insolvent, pending

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 INCORPORATION OF COMPANY & MATTERS 2.7
INCIDENTAL THERETO

to discharge insolvency, she becomes incompetent to contract, hence, Mr. Sudan

becomes the member of such OPC.
The name of such nominated person in Form No. INC-32 (SPICe) along with consent
of such nominee obtained in Form No. INC-4 and fee as provided in the Companies
(Registration offices and fees) Rules, 2014 shall be filed with the Registrar at the
time of incorporation of the company along with its memorandum and articles.

Note: A natural person shall not be member of more than a One Person Company
at any point of time and the said person shall not be a nominee of more than a
One Person Company. [Sub rule 2 of Rule 3]

Where a natural person, being member in One Person Company in accordance with
this rule [Rule 3(2)] becomes a member in another such Company by virtue of his
being a nominee in that One Person Company, such person shall meet the above
specified criteria (can be member of only one OPC) within a period of 180 days.
Withdraw of Consent by Nominee
Such other person (nominee) may withdraw his consent by giving a notice in
writing to such sole member and to the One Person Company.
In this case, the sole member shall nominate another person as nominee within 15
days of the receipt of the notice of withdrawal and shall send an intimation of such
nomination in writing to the company, along with the written consent of such other
person so nominated in form of a declaration in Form No. INC- 4.

Note: Despite name of such other (old nominee) and another person (new
nominee) specified in memorandum, any such change in the name of the person
shall not be deemed to be an alteration of the memorandum.

Replacing Nominee with another one

The member may change the name of the person nominated by him at any time
for any reason including in case of death or incapacity to contract of nominee and
nominate another person (new nominee) after obtaining the prior consent of such
another person.
Member can do so by giving intimation in writing to the company.

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 2.8 CORPORATE AND OTHER LAWS

This is not specified, either in Act or rules whether intimation shall be prior to
making change or can be made afterward, but if we consider reasonable
construction the intimation shall be ‘Prior Intimation’.
Any such change in the name of the person shall not be deemed to be an alteration
of the memorandum.
Example - Rajesh has formed a ‘One Person Company (OPC), wherein his wife
Roopali is named as nominee. For the last two years, his wife Roopali is suffering
from terminal illness and due to this hard fact he wants to change her as nominee.
He has a trusted and experienced friend Ramnivas who could be made nominee or
his (Rajesh) son Rakshak who is of seventeen years of age. In the instant case, Rajesh
can appoint his friend Ramnivas as nominee in his OPC and not Rakshak because
Rakshak is a minor.
When Nominee become Member
Where the sole member ceases to be the member and nominee become new
member, then such new member shall nominate within fifteen days of becoming
member, a person (new nominee) who shall in the event of his death or his
incapacity to contract become the member of such company.
Notice of change to Registrar
In all the three case of change discussed above (Withdraw of Consent by Nominee,
Replacing Nominee with another one and When Nominee become Member) the
company within 30 days of receipt of notice of withdrawal of consent by nominee,
intimation of change of nominee from member, or cessation; shall file the notice
with the Registrar of such withdrawal of consent, change or cessation respectively
and intimate the name of such another person (new nominee) in Form No. INC-4
along with the fee as provided in the Companies (Registration offices and fees)
Rules, 2014 and the written consent of such another person so nominated in form
of a declaration in Form No. INC-4 .
Illustration (True/False)
Statement – Even a Non-Resident Indian can form and become member of OPC.

Answer – True. [As per Rule 3(1) of the Companies (Incorporation) Rules, 2014.]
Only a natural person, other than minor; who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.

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 INCORPORATION OF COMPANY & MATTERS 2.9
INCIDENTAL THERETO

Additional reading
Relaxations available to an OPC include:

♦ Not required to prepare a cash-flow statement with effect of section 2(40).

♦ The annual return to be furnished under section 92 can be signed by the
Director and not necessarily a Company Secretary. Even abridged annual
return may be prescribed.
♦ Further, following the similar line, section 134 provides it would suffice if one
director signs the audited financial statements and abridged form of director
report may be prescribed.
♦ Holding annual general meeting as required under section 96 is not necessary
in case of OPC. Moreover, certain specific provisions related to general
meetings and extraordinary general meetings, specified under sections 100
to 111 may not be applicable to OPC.
♦ Even relaxation is also there in convening board meetings. Section 173 6
requires an OPC to hold only one meeting of the Board of Directors in each
half of a calendar year.
♦ Vide section 137, the OPC are allowed to file financial statements within six
months from the close of the financial year as against 30 days.

3. MEMBERS SEVERALLY LIABLE IN CERTAIN

CASES i.e. REDUCTION IN MINIMUM
MEMBERSHIP [SECTION 3A]
Member may have limited or unlimited liability depending upon nature of
company. Generally, the members are jointly liable for the debt of company, but
they shall be severally liable for the payment of the debts of the company and may
be severally sued therefor; if at any time:
1. The number of members of a company is reduced below seven (7) and two
(2) in case of a public and private company, respectively; and

6
Section 173 of the Companies Act, 2013, does not form part of syllabus at Intermediate level
and has been given for reference purpose only and necessary to build understanding.

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 2.10 CORPORATE AND OTHER LAWS

2. Such company carries on business for more than six months with reduced
number of members;
3. Every such person who carries on business after those six months is
cognizant (aware) of the fact that business is carried with reduced members,
Such members are liable for the payment of the whole debts of the company
contracted during that time (after elapse of six months).
Example – Amar, Akbar, and Anthony along with five of their friends were member
of Harmony Limited. Amar and Akbar died on 18th August 2022, resultantly
members count reduced to 6 and everyone was aware about it. Harmony Limited
continued its operation without increasing members. In March 2023, company took
loan for business operations, and defaulted in payment thereof. The lender of such
loan can sue company, or Anthony or any of rest of five friends, because members
shall be severally liable for said loan in the given case.
Illustration (True/False)
Statement – Members who knowingly operating the company for more than six months
with less than the minimum number of members specified in Section 3(1) are severally
liable for the payment of all debts contracted by the company during the period since
the number of members was first reduced.
Answer – False, refer section 3A of the Act. Such members are liable severally for the
payment of the whole debts of the company contracted during that time (after elapse
of six months).

4. INCORPORATION OF COMPANY [SECTION 7]

Section 7 of the Act provides for the procedure to be followed for incorporation of
a company. The steps involved in the process of incorporation are enumerated in
Figure shown below (Steps for Incorporation). Majority of steps are covered under
section 7 while some other related to documents such as MOA and AOA governed
by section 4 and 5 respectively. Corresponding procedural aspects are described
by rule 12 to 18 of the Companies (Incorporation) Rules, 2014 and Fees are notified
through rule 12 of the Companies (Registration Offices and Fees) Rules, 2014.

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 INCORPORATION OF COMPANY & MATTERS 2.11
INCIDENTAL THERETO

Steps for Incorporation

1. Determine the 2. Reservation of 3. Drafting and

nature of company name by filing an signing of MOA &
(private or public) apllication AOA

6. Submission of
5. Consent of 4. Submission of
statutory
persons nominated MOA and AOA to
declaration of
as directors ROC
compliances

7. Pay fees & 9. File declaration

8. Obtain certificate
amount of stamp about address of
of incorporation
duty Registered office

Note: Now, it is also required to submit a declaration that all the subscribers have
paid the value of shares agreed to be taken by him apart from filling of verification
of registered office before the commencement of business.

FILING OF THE DOCUMENTS AND INFORMATION WITH THE REGISTRAR

[SUB-SECTION 1]
An application for registration of a company shall be filed, with the Registrar within
whose jurisdiction the registered office of the company is proposed to be situated,
in SPICe+(Simplified Proforma for Incorporating company Electronically Plus: INC-
32) along with the fee as provided under the Companies (Registration offices and
fees) Rules, 2014 accompanied by following documents and information;

SPICe+ is an integrated Web form offering 10 services by 3 Central Govt. Ministries

& Departments. (Ministry of Corporate Affairs, Ministry of Labour & Department of
Revenue in the Ministry of Finance) thereby saving as many procedures, time and
cost for starting a business in India. SPICe+ is initiatives towards Ease of Doing
Business. Students may refer to FAQs on SPICe+ form at MCAs’ website for more
details https://www.mca.gov.in/MinistryV2/spicefaq.html

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 2.12 CORPORATE AND OTHER LAWS

The duly signed memorandum of association and articles of association

The memorandum (e-MOA in Form No. INC-33) and article (e-AOA in Form No.
INC-34) of company so furnished shall be duly signed by all the subscribers to the
memorandum in the manner prescribed by rule 13 of the Companies (Incorporation)
Rules, 2014 as stated below:
a. Each subscriber shall add his name, address, description & occupation, if
any, in the presence of at least one witness who shall attest the signature,
shall sign and add his name, address, description and occupation, if any.
b. Where a subscriber is illiterate, he shall affix his thumb impression or mark
which shall be described as such by the person, writing for him, who shall
place the name of the subscriber against or below the mark and authenticate
it by his own signature and he shall also write against the name of the
subscriber, the number of shares taken by him.

Note: The type written or printed particulars of the subscribers and witnesses
shall be allowed as if it is written, so long as appends signature or thumb
impression.

c. Where the subscriber is a body corporate, the memorandum and articles of

association shall be signed by director, officer or employee of the body
corporate duly authorized in this behalf by a resolution of the board of
directors.
d. Where the subscriber is a Limited Liability Partnership, it shall be signed by
a partner of the Limited Liability Partnership, duly authorized by a resolution
approved by all the partners of the Limited Liability Partnership:

Note: In either case c or d stated above, the person so authorized shall not,
at the same time, be a subscriber to the memorandum and articles of
Association.

e. Where subscriber to the memorandum is a foreign national residing outside

India his signatures and address on the memorandum and articles of
association and proof of identity shall be notarized by a Notary (Public)
with a certificate. Further, if such person residing in a country outside the
Commonwealth or which is not a party to the Hague Apostille Convention,
1961, the certificate of the Notary (Public) shall be authenticated by a
Diplomatic or Consular Officer.

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 INCORPORATION OF COMPANY & MATTERS 2.13
INCIDENTAL THERETO

f. Where subscriber to the memorandum is a foreign national residing outside

India and visited in India and intended to incorporate a company, in such case
the incorporation shall be allowed if, he/she is having a valid Business Visa.
In case of Person is of Indian Origin or Overseas Citizen of India, requirement
of business Visa shall not be applicable.

Practical Insight / Illustration

Extracts from Memorandum of Association of XYZ Limited (Corporate
Identification Number: L85XXXKA1981PLC01XX15)

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 2.14 CORPORATE AND OTHER LAWS

Declaration of Compliance by Professional & Director, Manager or Secretary

of company

A declaration that all the requirements of this Act and the rules made thereunder
in respect of registration and matters precedent or incidental thereto have been
complied with shall be be filled in Form No. INC-8 by:

a. an advocate, a chartered accountant, cost accountant or company secretary

in practice who is engaged in the formation of the company and

b. a person named in the articles as director, manager or secretary of the

company.

Declaration by subscribers to the memorandum and persons named as the

first directors

A declaration in Form No. INC-9 from each of the subscribers to the memorandum
and from persons named as the first directors (if any) in the articles, stating that all
the documents filed with the Registrar for registration of the company contain
information that is correct and complete and true to the best of his knowledge
and belief

a. He is not convicted of any offence in connection with the promotion,

formation or management of any company, or

b. He has not been found guilty of any fraud or misfeasance or of any breach
of duty to any company under this Act or any previous company law during
the last five years,

Address for correspondence

The address for correspondence till its registered office is established.

Particulars of persons named as the first directors

The particulars i.e name, including surname or family name, the Director
Identification Number (DIN), residential address, nationality and such other
particulars including proof of identity of each person mentioned in the articles as
first director of the company and his interest in other firms or bodies corporate
along with his consent (Form No. DIR-2) to act as director of the company shall be

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 INCORPORATION OF COMPANY & MATTERS 2.15
INCIDENTAL THERETO

filed in Form No. DIR-12 along with the fee as provided in the Companies
(Registration offices and fees) Rules, 2014.

Particulars of subscribers to the memorandum

The following particulars of every subscriber to the memorandum shall be filled;

a. Name (including surname or family name) and recent Photograph affixed

b. Father’s/Mother’s name

c. Nationality, Proof of nationality in case the subscriber is a foreign national

d. Date and Place of Birth (District and State)

e. Educational qualification and Occupation

f. Permanent Account Number

g. Email id and Phone number of Subscriber

h. Permanent residential address and also Present address

i. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile

Bill, provided that Bank statement Electricity bill, Telephone or Mobile bill
shall not be more than two months old

j. Proof of Identity (For Indian Nationals - Voter’s identity card, Passport copy,
Driving License copy, Unique Identification Number (UIN) & for Foreign
nationals and Non Resident Indians – Passport)

k. If the subscriber is already a director or promoter of a company(s), the

particulars relating to name of the company; Corporate Identity Number;
Whether interested as a director or promoter

Where the subscriber to the memorandum is a body corporate, then the following
particulars shall be filed with the Registrar

a. The name of the body corporate and Corporate Identity Number of the
Company or Registration number of the body corporate, if any

b. GLN, if any

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 2.16 CORPORATE AND OTHER LAWS

c. The registered office address or principal place of business

d. E-mail Id

e. If the body corporate is a company, certified true copy of the board resolution
specifying inter-alia the authorization to subscribe to the MOA

f. If the body corporate is a limited liability partnership or partnership firm,

certified true copy of the resolution agreed to by all the partners specifying
inter alia the authorization to subscribe to the MOA

g. In case of foreign bodies corporate, the details relating to the copy of

certificate of incorporation of the foreign body corporate; & the registered
office address.

As per rule 12 of the Companies (Incorporation) Rules, 2014

In case any of the objects of a company requires registration or approval from

sectoral regulators such as the RBI and SEBI, then such registration or approval shall
be obtained by the proposed company before pursuing such objects and a
declaration in this behalf shall be submitted at the stage of incorporation.

In case of a Company being incorporated as a Nidhi, the declaration by the Central

Government under Section 406 of the Act shall be obtained by the Nidhi before
commencing the business and a declaration in this behalf shall be submitted at the
stage of incorporation by the Company.

ISSUE OF CERTIFICATE OF INCORPORATION ON REGISTRATION

The Registrar on the basis of documents and information filed, shall register all the
documents and information in the register and issue a certificate of incorporation in
the Form No. INC-11 to the effect that the proposed company is incorporated under
this Act. Certificate of Incorporation shall mention permanent account number of the
company where if it is issued by the Income-tax Department.

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Practical Insight
Certificate of Incorporation

Students are advised to take note;

The Certificate contains the name of the company, the date of its issue, CIN
(Corporate Identity Number) and the signature of the Registrar with his seal.
Certificate of incorporation is evidence of registration (existence of separate legal
entity with perpetual succession). It effects are highlighted by section 9, explain
later in this chapter.
Earlier, the certificate of incorporation considered as conclusive proof, but as per
the Companies Act, 2013, certificate of Incorporation is not conclusive proof of
everything prior to incorporation being in order. Sub-section (6) and (7) of
section 7 signify this understanding.

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ALLOTMENT OF CORPORATE IDENTITY NUMBER (CIN)

On and from the date mentioned in the certificate of incorporation, the Registrar
shall allot to the company a corporate identity number, which shall be a distinct
identity for the company and which shall also be included in the certificate of
incorporation.

CIN is a 21 alpha-numeric digit based unique identification number, comprising

data sections/elements that reveals the basis aspects about company.
7
Example - Decode the CIN

CIN of Infosys Limited is L85110KA1981PLC013115

The first character – L (reveals listing status, L for listed and U for unlisted, for
instance Infosys is Listed one)

The next five digits – 85110

The next two letters – KA (reveals the Indian state where the company is registered,
for instance KA is for Karnataka)

The next four digits – 1981 (reveals the year of incorporation of a company)
The next three characters – PLC (reveals the company classification - PLC for public,
PTC for private, FTC for foreign, and GOI for government)

The last six digits – 013115 (reveals registration number with concerned ROC)
MAINTENANCE OF COPIES OF ALL DOCUMENTS AND INFORMATION
The company shall maintain and preserve copies of all the documents and
information as originally filed at its registered office, till its dissolution under this
Act.
FURNISHING OF FALSE OR INCORRECT INFORMATION OR SUPPRESSION
OF MATERIAL FACT AT THE TIME OF INCORPORATION (I.E. DURING
INCORPORATION PROCESS)
If any person furnishes any false or incorrect particulars of any information or
suppresses any material information, of which he is aware in any of the documents
filed with the Registrar in relation to the registration of a company, he shall be
liable for action for fraud under section 447.

7
This Example is only for understanding of the students.

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Note: Provisions of section 447 explained in detail in book chapter 3; Prospectus

and Allotment of securities.

COMPANY ALREADY INCORPORATED BY FURNISHING ANY FALSE OR

INCORRECT INFORMATION OR REPRESENTATION OR BY SUPPRESSING ANY
MATERIAL FACT (i.e. POST INCORPORATION)

Where, at any time after the incorporation of a company, it is proved that the company
has been got incorporated by

a. furnishing any false or incorrect information or representation or

b. by suppressing any material fact or information in any of the documents or

declaration filed or made for incorporating such company, or

c. by any fraudulent action,

Then, the promoters, the persons named as the first directors of the company and the
persons making declaration under this section shall each be liable for action for fraud
under section 447.

ORDER OF THE TRIBUNAL

Where a company has been got incorporated by

a. furnishing false or incorrect information or representation, or

b. by suppressing any material fact or information in any of the documents or

declaration filed or made for incorporating such company or

c. by any fraudulent action,

Then, the tribunal (NCLT) on being satisfied that the situation so warrants, in
response to an application made to it, may pass order as it may deem fit including;

a. regulation of the management of the company including changes, if any, in

its memorandum and articles, in public interest or in the interest of the
company and its members and creditors; or

b. direct that liability of the members shall be unlimited; or

c. direct removal of the name of the company from the register of companies; or

d. winding up of the company; or

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Provided that before making any such order:

a. the company shall be given a reasonable opportunity of being heard in the

matter; and
b. the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any
liability
Tribunal means the National Company Law Tribunal (NCLT) constituted on 1st June,
2016 under section 408 of the Companies Act, 2013. The NCLT is a quasi- judicial
body in India that adjudicates issues relating to companies in India.
Example - The Certificate of incorporation is not the conclusive proof with respect
to the legality of the objects of the company mentioned in the objects clause of
the memorandum of association. As such, if a company has been registered whose
objects are illegal, the incorporation does not validate the illegal objects. In such a
case, the only remedy available is to wind up the company.

5. FORMATION OF COMPANIES WITH

CHARITABLE OBJECTS, ETC. [SECTION 8]
The underlying purpose of formation of company is not always making profit
through operating economic activities, it may have charitable or social objects.
To illustrate, Prem Foundation (CIN U85191MH2014NPL253514) and Azim Lalji
Foundation (CIN U93980KA2001NPL028740). Students are advised to take note
that 5th data section of both the CIN comprises of ‘NPL’, which signify Not-for-Profit
License Company.
Such companies are licensed by Central Government* under section 8 of the
Companies Act, 2013, relevant provisions of section 8 and applicable rules thereto
are described below.

Note: The power of *Central Government under section 8 delegated to:

(i) ROCs 8 to the extent and for purpose of:
● sub-section (1);

8
S.O. 1353(E), dated 21st May, 2014

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● clause (i) to sub-section (4), except for alteration of memorandum in

case of conversion into another kind of company; and
● sub-section (5)
(ii) Regional Directors 9 to the extent and for purpose of:
● clause (i) to sub-section (4), for alteration of memorandum in case of
conversion into another kind of company; and
● sub-section (6)

WHO CAN ISSUE AND GET THE LICENSE UNDER SECTION 8(1)?
As per section 8, the Central Government (ROC in its behalf) may grant such a
licence if it is proved to the satisfaction that a person or an association of persons
proposed to be registered under this Act as a limited company
a. has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any
such other object;
b. intends to apply its profits (if any) or other income in promoting its objects;
and
c. intends to prohibit payment of any dividend to its members.

Note: The use of the word ‘person’ appears to allow even a single person to form
a company for the objects specified. However, as discussed earlier also (under
heading ‘OPC’ of this chapter) that rule 3(5) of the Companies (Incorporation) Rules,
2014 prohibit the OPC to be incorporated or converted into a company under
section 8. Likewise, as per section 2(85), a small company cannot be incorporated
or converted into a section 8 company. A firm may be a member of the company
registered under section 8.

Despite, members liability is limited, the words ‘Limited’ or ‘Private Limited’ shall
not be added to its name. But on registration, the company shall enjoy same
privileges and obligations as of a limited company.

Licence issued may on such conditions as Central Government (ROC) deems fit.

9
S.O. 4090(E), dated 19th December 2016.

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REGISTRATION OF COMPANY USING LICENSE

After granting licence, an application shall be made to registrar under section 8(1)
itself for registration of company in the manner specified in rule 19 of the
Companies (Incorporation) Rules 2014.
Application for registration
A person or an association of persons desirous of incorporating a company with
limited liability under section 8(1), shall make an application to registrar in Form
SPICe+ (Simplified Proforma for Incorporating company Electronically Plus: INC-
32) along with the fee as provided in the Companies (Registration offices and fees)
Rules, 2014.
Supporting document along with Application
The application furnished as specified above shall be accompanied by the following
documents:
a. The memorandum and articles of association of the proposed company;
b. the declaration by an Advocate, a Chartered Accountant, Cost Accountant or
Company Secretary in practice, that the memorandum and articles of
association have been drawn up in conformity with the provisions of section
8 and rules made thereunder and that all the requirements of the Act and the
rules made thereunder relating to registration of the company under section
8 and matters incidental or supplemental thereto have been complied with;
c. An estimate of the future annual income and expenditure of the company for
next three years, specifying the sources of the income and the objects of the
expenditure;
d. the declaration by each of the persons making the application.
ALTERATION OF MEMORANDUM AND ARTICLES REQUIRES PRIOR
PERMISSION OF GOVERNMENT
A company registered under this section requires prior permission from:
a. Central Government (power delegated to regional directors) for alteration
of its memorandum and
b. Central Government (power delegated to ROCs) for alteration of its articles.

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CONVERSION INTO ANY OTHER KIND OF COMPANY

A company registered under this section may convert itself into company of any
other kind only after complying with such conditions as may be prescribed in rule
21 and 22 of the Companies (Incorporation) Rule 2014 as described below:
a. A company shall pass a special resolution at a general meeting for approving
such conversion
b. An explanatory statement to notice of such general meeting must set-out
the details on reason of such conversion.
c. The company shall file an application in Form No. INC-18 with the Regional
Director with the fee along with a certified true copy of the special resolution
and a copy of the Notice convening the meeting including the explanatory
statement for approval for conversion.
Also attach the proof of serving of the notice served by registered post or
hand delivery, to:

♦ the Chief Commissioner of Income Tax having jurisdiction over the

company,

♦ Income Tax Officer who has jurisdiction over the company,

♦ the Charity Commissioner,

♦ the Chief Secretary of the State in which the registered office of the
company is situated,

♦ any organisation or Department of the Central Government or State

Government or other authority under whose jurisdiction the company
has been operating.

Note: If any of these authorities wish to make any representation to Regional

Director, it shall do so within sixty days of the receipt of the notice, after
giving an opportunity to the Company.

d. An intimation alongwith copy of the application with annexures as filed in

Form no. INC- 18 with the Regional Director shall also go to the Registrar
through MCA system.

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e. The company shall, within a week from the date of submitting the application
to the Regional Director, publish a notice at its own expense, and a copy of
the notice, as published, shall be sent forthwith to the Regional Director and
the said notice shall be in Form No. INC-19 and 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 newspaper having a wide circulation
in that district; and
♦ on the website of the company, if any, and as may be notified or
directed by the Central Government.
f. The company should have filed all its financial statements and Annual
Returns upto the financial year preceding the submission of the application
to the Regional Director and all other returns required to be filed under the
Act up to the date of submitting the application to the Regional Director

Note: In the event the application is made after the expiry of three months
from the date of preceding financial year to which the financial statement
has been filed, a statement of the financial position duly certified by
chartered accountant made up to a date not preceding thirty days of filing
the application shall be attached.

g. On receipt of the application, and on being satisfied, the Regional Director

shall issue an order approving the conversion of the company into a
company of any other kind subject to such terms and conditions as may be
imposed in the facts and circumstances of each case.
h. Before imposing the conditions or rejecting the application, the company
shall be given a reasonable opportunity of being heard by the Regional
Director
i. On receipt of the approval of the Regional Director, the company shall
convene a general meeting of its members to pass a special resolution for
amending its memorandum of association and articles of association and
the Company shall thereafter file these with the Registrar (with declaration
to adhere conditions if any, imposed by Regional Director)

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j. On receipt of the documents referred above, the Registrar shall register the
documents and issue the fresh Certificate of Incorporation.

REVOCATION OF LICENSE

a. The Central Government (power delegated to regional director) may by order

revoke the licence of the company where:

♦ the company contravenes any of the requirements or the conditions of

this sections subject to which a licence is issued, or

♦ the affairs of the company are conducted fraudulently, or in violation of

the objects of the company or prejudicial to public interest,

Note: On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’

against the company’s name in the register.

Before such revocation a written notice must be served on such company and
opportunity to be heard in the matter shall be given.

b. Where a licence is revoked and the Central Government is satisfied, that it is

essential in the public interest; then after giving a reasonable opportunity of
being heard; by order it may direct that

♦ Company be wound up under this Act. Excess assets on the winding

up or dissolution, after the satisfaction of its debts and liabilities, may
be transferred to:

 Another company registered under this section and having

similar objects, subject to such conditions as the Tribunal may
impose, or

 May be sold and proceeds thereof credited to the Insolvency

and Bankruptcy Fund formed under section 224 of the
Insolvency and Bankruptcy Code, 2016.

♦ Company be amalgamated with another company registered under

this section and having similar objects. The Central Government
empowered with overriding effects to provide the said
amalgamation to form single entity with such constitution, properties,

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 2.26 CORPORATE AND OTHER LAWS

powers, rights, interest, authorities and privileges and with such

liabilities, duties and obligations as may be specified in the order.

PENALTY/ PUNISHMENT IN CONTRAVENTION

Penalty for offences under section 8 are summarised below;

Offence Penalty

Company makes any default company shall, be punishable with fine varying
in complying with any of the from ten lakh rupees to one crore rupees
requirements laid down in
directors and every officer of the company who is
this section
in default shall be punishable with fine varying
from twenty-five thousand rupees to twenty-five
lakh rupees

Where the affairs of the every officer in default shall be liable for action
company were conducted under section 447
fraudulently

FIGURE- SUMMARY OF SUB-SECTION 6 TO 11 OF SECTION 8

Contravention

Licence revoked Punishment

Expression Amalgamate with Company with 10

Ltd. or Pvt. Winding up lakh to 1 crore
Section 8 company
Ltd. Added to Surplus Assets
with simlar
name transfer to:
objectives. Director or Officer
with 25 thousand to
25 lacs
Section 8 company (Fraud u/s 447)
Insolvency &
with simlar
Bankruptcy Fund
objectives.

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Additional reading

Relaxations available to a Section 8 Company include:

♦ Can call its general meeting by giving a clear 14 days’ notice instead of 21
days.

♦ Requirement of minimum number of directors, independent directors etc.

does not apply.

♦ Need not constitute Nomination and Remuneration Committee and

Shareholders Relationship Committee.

6. EFFECT OF REGISTRATION [SECTION 9]

Section 9 of the Act provides for the effect of registration of a company, it states:

From the date of incorporation specified in the certificate of incorporation, the

subscribers to the memorandum and all other persons, who may become members
of such company, shall be a body corporate by the name as contained in the
memorandum

Thereafter such body corporate, by the said name, shall be capable of:

a. Exercising all the functions of an incorporated company under this Act and

b. Having perpetual succession

c. Power to acquire, hold and dispose of property, both movable and

immovable, tangible and intangible,

d. To contract and to sue and be sued.

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SUMMARY OF SECTION 9

Subscribers to the memorandum

and
All other persons,
who may from time to time, become members of the company

Registration (Certificate of Incorporation Granted)

From the date of incorporation

specified in the certificate of incorporation,
beceome body corporate, by the name specified in memorandum

Under said name

Exercising all the Power to

To contract Having
functions of an acquire, hold
and to sue perpetual
incorporated and dispose of
and be sued. succession
company property

movable and tangible and

immovable intangible

7. MEMORANDUM OF ASSOCIATION – MOA

[SECTION 4]
Memorandum of association (MOA) is the fundamental document for the formation
of the company, hence considered as its charter or constitution. Memorandum
defines the relationship of the company with outsiders because it enables all those
who deals with the company to know what its powers are and what activities it can
engage in. The memorandum shall contains the following clauses:
a. Name Clause

b. Situation Clause (also called registered office clause)

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c. Objects Clause

d. Liability Clause
e. Capital Clause (applicable, if company is formed with share capital)
f. Association Clause or Subscription Clause (specifically drafted in case of OPC)

g. Nomination Clause (applicable, in case of OPC)

Section 4 of the Act along with relevant rules from the Companies (Incorporation)
Rules 2014, provides for the requirements with respect to memorandum.

NAME CLAUSE [SECTION 4 (1) (a) READ WITH SUB-SECTION 2 TO 5]

The name of the company with the last word “Limited” in the case of a public limited
company, or “Private Limited” in the case of a private limited company.

The above clause is not applicable in case of section 8 companies.

In case of Specified IFSC Public Company 10 & IFSC Private Company 11, name shall
have the suffix, “International Financial Service Company” or “IFSC”.

Application for reserving name for proposed company [sub-section 4]

A person may make an application in SPICe+ (Simplified Proforma for Incorporating
Company Electronically Plus: INC-32) accompanied by fee, as provided in the
Companies (Registration Offices and Fees) Rules, 2014, to the Registrar for
reservation of a name set out in the application as name of the proposed company.

Resubmission shall be allowed within 15 days, for rectification of defect, if any.

Application for reserving the name for the changing name of existing
company [sub-section 4]
A person may make an application, using web service RUN (Reserve Unique Name)
along with fee as provided in the Companies (Registration Offices and Fees) Rules,
2014, to the Registrar for the reservation of a name set out in the application as
the name to which the company proposes to change its name. Resubmission shall
be allowed within 15 days, for rectification of defect, if any.

10
GSR 08 (E) dated 04.01.2017
11
GSR 09 (E) dated 04.01.2017

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Restriction regarding names and use of words & expressions therein [sub-
section 2 and 3]
Sub-section 2 states that the name mentioned in the memorandum shall not be:
a. Identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or
b. Such, use of which by the company will constitute an offence under any law
for the time being in force; or
c. Such, use of which by the company is undesirable in the opinion of the
Central Government (this power of Central Government has been delegated to
ROC) 12
Further, sub-section 3 provides, unless the previous approval of the Central
Government has been obtained; a company shall not be registered with that
name;
d. Which contains any word or expression that is likely to give the impression
that the company is in any way connected with, or having the patronage
of, the Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any State
Government under any law for the time being in force; or
e. Which includes words or expressions namely Board; Commission; Authority;
Undertaking; National; Union; Central; Federal; Republic; President;
Rashtrapati; Small Scale Industries; Khadi and Village Industries Corporation;
Financial Corporation and the like; Municipal;; Development Authority; Prime
Minister or Chief Minister; Minister; Nation; Forest corporation; Development
Scheme; Statute or Statutory; Court or Judiciary; Governor; Bureau; and the
use of word Scheme with the name of Government (s), State, India, Bharat or
any Government authority or in any manner resembling with the schemes
launched by Central, State or local Governments and authorities.

A name is said to ‘resemble’ when difference is only and only of

a. Plural or singular form of words in one or both names (Green Technology Ltd.
is same as Greens Technology Ltd. and Greens Technologies Ltd.)

12
S.O. 1353(E), dated 21st May, 2014.

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b. Type and case of letters, spacing between letters, and punctuation marks used
in one or both names (ABC Ltd. is same as A.B.C. Ltd. and A B C Ltd.)
c. Use of different tenses in one or both names (Ascend Solutions Ltd. is same
as Ascended Solutions Ltd. and Ascending Solutions Ltd.)
d. Slight variation in the spelling of the two names including a grammatical
variation thereof (Disc Solutions Ltd. is same as Disk Solutions Ltd. but it is
not same as Disco Solutions Ltd)
e. Use of different phonetic spellings including use of misspelled words of an
expression (Bee Kay Ltd is same as BK Ltd, Be Kay Ltd., B Kay Ltd., Bee K Ltd.,
B.K. Ltd. and Beee Kay Ltd)
f. Complete translation or transliteration, and not part thereof, of an existing
name, in Hindi or in English (National Electricity Corporation Ltd. is same as
Rashtriya Vidyut Nigam Ltd.)
g. Use of host name such as ‘www’ or a domain extension such as .net’. org’,
‘dot’ or ‘com’ in one or both names (Ultra Solutions Ltd. is same as
Ultrasolutions.com Ltd. But Supreme Ultra Solutions Ltd. is not the same as
Ultrasolutions.com Ltd.)
h. The order of words in the names (Ravi Builders and Contractors Ltd. is same
as Ravi Contractors and Builders Ltd.)
i. Use of the definite or indefinite article in one or both names (Congenial Tours
Ltd. is same as A Congenial Tours Ltd. and The Congenial Tours Ltd. But Isha
Industries Limited is not the same as Anisha Industries Limited.)
j. Addition of the name of a place to an existing name, which does not contain
the name of any place; (If Salvage Technologies Ltd. is an existing name, it is
same as Salvage Technologies Delhi Ltd. But Retro Pharmaceuticals Ranchi
Ltd. is not the same as Retro Pharmaceuticals Chennai Ltd.)
k. addition, deletion, or modification of numerals or expressions denoting
numerals in an existing name, unless the numeral represents any brand
(Thunder Services Ltd is same as Thunder 11 Services Ltd and One Thunder
Services Ltd.)
Students may also refer to 23 instances specified in rule 8A of the Companies
(Incorporation) Rules 2014 that tantamount to “undesirable names”.

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Reservation of name [sub-section 5]

Upon receipt of an application the Registrar may, on the basis of information and
documents furnished along with the application, reserve the name for a period of
twenty days from the date of approval or such other period.
Provided that in case of an application for reservation of name or for change of
its name by an existing company, the Registrar may reserve the name for a period
of sixty days from the date of approval.

1. While allotting names, the Registrar of Companies concerned should exercise

due care to ensure that the names are not in contravention of the provisions
of the Emblems and Names (Prevention of Improper Use) Act, 1950. It is
necessary that Registrars are fully familiar with the provisions of the said Act. 13
2. An application for extension of reservation of name under rule 9A of the
Companies (Incorporation) Rules 2014 can be made before expiry of 20 days.
a. For another 20 days (total of 40 days) with fee of ` 1000, which may be further
extend by another 20 day (total of 60 days) with fee of ` 2000.
Or
b. For another 40 days (total of 60 days) with fee of 3000.

Cancellation of reserved name [sub-section 5]

Where after reservation of name, it is found that name was applied by furnishing
wrong or incorrect information, then
a. if the company has not been incorporated, the reserved name shall be
cancelled and the person who has made the application shall be liable to a
penalty which may extend to one lakh rupees;
b. if the company has been incorporated, the Registrar may, after giving the
company an opportunity of being heard;
♦ Either direct the company to change its name within a period of 3
months, after passing an ordinary resolution;
♦ Take action for striking off the name of the company from the register
of companies; or
♦ Make a petition for winding up of the company.

13
General Circular No. 29/2014, dated 11th July, 2014

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Example: Mr. Anil Desai, has applied for reservation of company name with a prefix
“Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark in his
name. Later on, it is found that the said prefix is not registered with Mr. Anil Desai,
however, he has formed company by giving incorrect documents/ information
while applying the name of the company. In such case, the Registrar shall take
action as per the provisions of the Act after giving opportunity of being heard.

SITUATION CLAUSE - SECTION 4(1)(b)

Section 4(1)(b) requires, the memorandum of a company shall mention the name of
state, where registered office is proposed to be situated.
The situation (place) of registered office is important from perspective of:

a. Establishing the domicile of company for the purpose of determining

jurisdictions in context to compliance (ROC, RD etc.), judicial aspects (bench
of NCLT, high court etc.), fiscal aspects (taxation), and for many other
purposes.
b. Place at which the company’s statutory books must normally be kept (in case
of public company, general meeting also required to be conducted at
registered office or in the city where it is situated).
c. Act as the address to which notices and other communications can be sent.
A company shall, within thirty days of its incorporation and at all times thereafter,
have a registered office capable of receiving and acknowledging all
communications and notices as may be addressed to it.

OBJECT CLAUSE & DOCTRINE OF ULTRA VIRES

Section 4(1)(c), requires the memorandum of a company shall state the objects for
which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.

Specified IFSC Public Company & IFSC Private company shall state its objects to
do financial services activities as permitted under the Special Economic Zones
Act, 2005 read with SEZ Rules, 2006 and any matter considered necessary in
furtherance thereof in accordance with license to operate, from International
Financial Services Centre located in an approved multi services Special Economic
Zone, granted by the RBI, SEBI, or IRDA.

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 2.34 CORPORATE AND OTHER LAWS

A company can’t depart away to do anything beyond or outside its objects stated
in memorandum and if any act done beyond that will be ultra vires and void, same
can’t be ratified even by the assent of the whole body of shareholders.

Note: Acts ultra-vires to the authority of the directors may be ratified by the
company.14 Articles provide for regulations inside scope established by MOA, hence
acts beyond (ultra-vires) the articles, can be ratified by the shareholders provided
the relevant provisions are not beyond the memorandum. To illustrate; One of the
director is authorised to issue cheque of ` 10000, but he issued for ` 12000; company
can ratify so.

It is worth noting here that Memorandum of company can be altered to widen the scope
of objects, but such alteration shall have prospective effect only; not the retrospective,
hence an act once ultra-vires remain so ever.
A company may do anything which is incidental to and consequential upon the
objects specified and such act will not be an ultra vires act. 15 To illustrate for trade
one have rent or own a building, issue invoices, make and receive payments.
Essence of the Doctrine of Ultra Vires
The Doctrine of Ultra Vires is meant to protect shareholders and the creditors of the
company or anyone who deals with the company.
Enunciation of Doctrine of Ultra Vires
The doctrine of ultra vires was first enunciated by the House of Lords in a classic case,
Ashbury Railway Carriage and Iron Co. Ltd. v. Riche. 16
The memorandum of the company in the said case defined its objects thus: “The
objects for which the company is established are to make and sell, or lend or hire,
railway plants to carry on the business of mechanical engineers and general
contractors…….”
The company entered into a contract with M/s. Riche, a firm of railway contractors to
finance the construction of a railway line in Belgium. On subsequent repudiation of
this contract by the company on the ground of its being ultra vires, Riche brought a
case for damages on the ground of breach of contract, as according to him the words

14
Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)
15
Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473
16
(1878) L.R. 7 H.L. 653

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 INCORPORATION OF COMPANY & MATTERS 2.35
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“general contractors” in the objects clause gave power to the company to enter into
such a contract and, therefore, it was within the powers of the company. More so
because the contract was ratified by a majority of shareholders.
The House of Lords held that the contract was ultra vires the company and,
therefore, null and void. The term “general contractor” was interpreted to indicate
as the making generally of such contracts as are connected with the business of
mechanical engineers. The Court held that if every shareholder of the company had
been in the room and had said, “That is a contract which we desire to make, which
we authorise the directors to make”, still it would be ultra vires. The shareholders
cannot ratify such a contract, as the contract was ultra vires the objects clause,
which by Act of Parliament, they were prohibited from doing.
Effects of Doctrine of Ultra Vires
The key effect will be as under:
a. Whenever an ultra vires act has been or is about to be undertaken, any
member of the company can get an injunction to restrain it from proceeding
with it. 17
b. Neither party (even outsider) can sue for enforcement or specific performance
of such agreement. Reason explained under heading Constructive Notice
LIABILITY CLAUSE
Section 4(1)(d) requires, the memorandum of a company shall state:
a. In the case of a company limited by shares the liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
b. In the case of a company limited by guarantee, the amount up to which
each member undertakes to contribute:
♦ to the assets of the company in the event of its being wound-up while
he is a member or within one year after he ceases to be a member, for
payment of the debts and liabilities of the company or of such debts and
liabilities as may have been contracted before he ceases to be a member,
as the case may be; and
♦ to the costs, charges and expenses of winding-up and
for adjustment of the rights of the contributories among themselves

17
Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473

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 2.36 CORPORATE AND OTHER LAWS

Note: Those shareholders who are members of the company at the time of its
winding-up are included in list 'A'. They are primarily liable for making payment to
the company at the time of its winding-up. While list 'B' consists of those persons
who were the members of the company during the 12 months preceding the date
of winding-up. B list contributories are liable to contribute if the amount realised
from the contributories of list ‘A’ is not sufficient to discharge the liabilities of the
company.

Example - Modern Furniture limited, a company limited by shares having share

capital divided into shares with face value of ` 10 each, out of which ` 8 is called
up. Mr. Singh who is having 200 share paid all ` 8 on each of share he hold, while
Ms. Sarla owning 100 shares paid ` 10 (Rupee 2 in advance); whereas Mr. Sanju
owning 250 shares paid ` 6 per share (` 2 in arrear per share). Liability of Mr. Singh,
Ms. Sarla, and Mr. Sanju shall be maximum upto ` 400, Nil, and ` 1000 only;
respectively.
CAPITAL CLAUSE
Section 4 (1) (e) (i) requires, in the case of a company having a share capital, the
memorandum of a company shall state;
a. The amount of share capital with which the company is to be registered
(usually termed as authorised or nominal capital); and
b. The division thereof into shares of a fixed amount (i.e. face value and number
of shares); and
c. The number of shares which the subscribers to the memorandum agree to
subscribe which shall not be less than one share.
SUBSCRIPTION CLAUSE
Section 4 (1) (e) (ii) requires, the memorandum of a company shall state, the number
of shares each subscriber to the memorandum intends to take, indicated opposite
his name, in the case of a company having a share capital.
NOMINATION CLAUSE (ONLY IN CASE OF ONE PERSON COMPANY)
Section 4 (1) (f), requires, the memorandum of a company shall state the name of the
person (nominee) who, in the event of death of the subscriber, shall become the
member of the company, in the case of One Person Company.
Note: This provision is corresponding to first proviso to section 3 (1) already
discussed earlier in this chapter.

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FORMS AND SCHEDULE RELATED TO MEMORANDM [SUB-SECTION 6]

The memorandum of a company shall be in respective forms specified in Tables A,
B, C, D and E in Schedule I to the Act, as the case shown in figure;
Forms of MOA

Table A
Memorandum of
association of a
company limited
by shares
Table E Table B
Memorandum of Memorandum of
association of an association of a
unlimited company limited
company and by guarantee
having share and not having a
capital Forms of MOA share capital

Table D Table C
Memorandum of Memorandum of
association of an association of a
unlimited company limited
company and by guarantee
not having share and having a
capital share capital

1. As per section 399 18 of the Act, a memorandum is a public document.

Consequently, every person entering into a contract with the company is presumed
to have the knowledge of the conditions contained therein.
2. As per section 4 (7), any provision in the memorandum or articles, in the case
of a company limited by guarantee and not having a share capital, shall not give
any person a right to participate in the divisible profits of the company otherwise
than as a member. If the contrary is done, it shall be void.

18
Section 399 of the Act, does not form part of the syllabus at the Intermediate syllabus.

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 2.38 CORPORATE AND OTHER LAWS

8. ARTICLES OF ASSOCIATION – AOA [SECTION 5]

Actually, articles of association of a company contains internal rules and regulations
of the company. It is complementary to Memorandum and together give effect as
charter of the company. Article establish a contract between the company and the
members and between the members inter se. This contract governs the ordinary
rights and obligations incidental to membership in the company 19
Section 5 of the Companies Act, 2013 and rule 10 and 11 of the Companies
(Incorporation) Rules, 2014 seeks to provide the contents and model of articles of
association. The provisions are state below;
CONTENTS AND MATTERS TO BE INCLUDED [SUB-SECTION 1 AND 2]
The articles of a company shall contain;
a. The regulations for management of the company.
b. Such matters as may be prescribed (rules 11 of the Companies (Incorporation)
Rules, 2014 refers to the matters specified in the model forms given under
schedule I to the Act).
However, a company may also include such additional matters in its articles as may
be considered necessary for its management.
PROVISION FOR ENTRENCHMENT [SUB-SECTION 3 TO 5]

Entrenchment is the chronic or deep-rooted fact of an attitude, habit, or belief that

is firmly established or accustomed, therefore it become difficult or unlikely to
change. To illustrate – Men don’t cry
Entrenchment may be possible for processes, as well as procedures in both way; that
processes are so well established, it become difficult to change them or make process
of change so rigid that process become well established.
Students, here we are studying the word entrenchment with sense of making
the process of alteration in articles more difficult, in order to enhance the
protection.

Usually an article of association may be altered by passing special resolution but

entrenchment makes it more difficult to change the articles, in manner specified ahead;

19
Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422

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 INCORPORATION OF COMPANY & MATTERS 2.39
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Article may contain provisions for entrenchment [Sub-section 3]

The articles may provide that specified provisions contained in it may be altered
only if conditions that are more restrictive and harder than those applicable in the
case of a special resolution, are met or complied with.

Manner of inclusion of the entrenchment provision [Sub-section 4]

The provisions for entrenchment shall only be made either:
a. On formation of a company, or
b. By an amendment in the articles agreed to
♦ By all the members of the company in the case of a private company
and

♦ By a special resolution in the case of a public company.

Summary of Section 5(4)

At Formation

Timing of
Entrenchment Private Co. - All members
After came in
existance
Public Co. - Special Resolution

Notice to the registrar of the entrenchment provision [Sub-section 5 read with

Rule 10 of the Companies (Incorporation) Rules, 2014]
The company shall give notice to the Registrar of entrenchment provisions included
in article
a. In the SPICe+(Simplified Proforma for Incorporating company Electronically
Plus: INC-32), along with the fee as provided in the Companies (Registration
offices and fees) Rules, 2014 at the time of incorporation of the company, and

b. In case of existing companies, in Form No. MGT-14 within thirty days from
the date of entrenchment of the articles, along with the fee as provided in the
Companies (Registration offices and fees) Rules, 2014.

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 2.40 CORPORATE AND OTHER LAWS

Summary of Section 5(5) and Rule 10

At Formation - In the SPICe+

Notice of
Entrenchment After came in existence - Form No. MGT-14
within thirty days

MODEL FORMS OF ARTICLES [SUB-SECTION 6 TO 8]

Sub-section 6 provides that the articles of a company shall be in respective forms
specified in Tables, F, G, H, I and J in Schedule I to the Act as specified in figure.
Such forms are called model forms.
Further, sub-section 7 provides leeway to company, in adopting all or any of the
regulations contained in the model articles applicable to such company.
Forms of AOA

Table F
Articles of
association of a
company limited
by shares
Table J Table G
Articles of Articles of
association of an association of a
unlimited company limited
company and not by guarantee and
having share Model forms of having a share
capital AOA capital

Table I Table H
Articles of Articles of
association of an association of a
unlimited company limited
company and by guarantee and
having share not having a
capital share capital

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Students are advised to take note:

Sub-section 8 provides that in case of any company, which is registered after the
commencement of this Act, in so far as the registered articles of such company do
not exclude or modify the regulations contained in the model articles applicable to
such company, those regulations shall, so far as applicable, be the regulations of
that company in the same manner and to the extent as if they were contained in
the duly registered articles of the company – Either exclude or modify expressly
or else it applies what stated in model applicable to company.
Sub-section 9 restricts the scope of section to the articles either registered or
amended under this Act - Hence no provision of this section (section 5) shall be
applicable to articles registered under previous company law; provided not
amended under this Act.

Illustration – Question & Answer

Question – Highlight differences between the MOA and AOA

Answer - The key differences between the MOA and AOA includes;

1. Content - The memorandum contains the fundamental conditions as basis of

incorporation. It lays down the parameters that define relation of company with
outsiders. The Articles contain internal regulations of the company; hence regulate
the relationship between company and the members and members inter se.

2. Supremacy - Memorandum cannot include any clause that is contrary to the

provisions of the law, whereas the articles shall be subordinate to both the law and
memorandum. Therefore, in case on conflict among the two, the MOA shall
prevail.

3. Scope -Memorandum lays down the scope beyond which the activities of the
company cannot go. An act done by a company beyond the scope of the
memorandum are ultra vires and void. They cannot be ratified even by all the
shareholders. Articles provide for regulations inside scope established by MOA,
hence acts beyond the articles can be ratified by the shareholders provided the
relevant provisions are not beyond the memorandum.

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 2.42 CORPORATE AND OTHER LAWS

9. DOCTRINE OF CONSTRUCTIVE NOTICE AND

DOCTRINE OF INDOOR MANAGEMENT
Both the doctrines carries the counter effect to each other, doctrine of constructive
notice put onus on outsider to be aware of what is stated in MOA and AOA; whereas
doctrine of indoor management protects such outsider from internal irregularities.
DOCTRINE OF CONSTRUCTIVE NOTICE
Essence of Doctrine of Constructive Notice

All those who are dealing with company deemed to be aware of what is stated in
its MOA and AOA, in its true perspective, because both this documents are public
documents.

Section 399* provides that the Memorandum and Articles when registered with
Registrar of Companies ‘become public documents’ and then they can be inspected
by any one by electronic means on payment of the prescribed fee.
Further, Section 17 provides that a company shall on payment of the prescribed
fee send a copy of each of the following documents to a member within seven days
of the request being made by him
a. Memorandum;
b. Articles;
c. Every agreement and every resolution referred to in sub-section (1) of section
117, if and so far as they have not been embodied in the memorandum and
articles.
Any failure will make the company as well as every officer in default liable to a fine
of one thousand rupee for each day during which default continues or one lakh
rupee whichever is less.

*Section 399 is not part of syllabus, but essential to develop understanding.

Enunciation of Doctrine of Constructive Notice

The doctrine of constructive notice is based on the rule laid down in Ernest v Nicholls. 20
It was held for the first time that any person who is dealing with the company is deemed

20
(1857) 6 HL Cas 401

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 INCORPORATION OF COMPANY & MATTERS 2.43
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to be familiar with the contents of all the public documents of the company. The
memorandum and the articles of association of every company are registered with the
Registrar of Companies. The office of the Registrar is a public office. Hence, the
memorandum and the articles of association become public documents. It is therefore
the duty of person dealing with a company to inspect its public documents and make
sure that his contract is in conformity with their provisions.
As observed by Lord Hatherley whether a person actually reads them or not, he is to be
in the same position as if he had read them.
Effect of Doctrine of Constructive Notice
Every person (dealing with company) shall be presumed to know the contents of the
documents and understood them in their true perspective.
Absence of notice of MOA and AOA cannot be an excuse to claim relief for
outsiders. 21 Even if the party dealing with the company does not have actual notice
of the contents of these documents, it is presumed that he has an implied
(constructive) notice of them.
Example - One of the articles of a Modern Furniture Limited provides that a cheque
below ` 1 lakh may be signed by single director but if above ` 1 lakh shall be signed
by at-least two directors. Similar instructions issued to bank with which MFL have
account, as well. M/s Sagwan Wood Works, a vendor accepts a cheque of
` 2.20 lakh, signed only by single director. Considering Doctrine of Constructive
Notice, the M/s Sagwan Wood Works (payee) has no right to claim, when cheque
will be returned without payment by bank.
Criticism of Doctrine of Constructive Notice
The ‘Doctrine of Constructive Notice’ is an unreal doctrine. People know a company
through its officers and not through its documents. Since it does not take notice of
the realities of business life, hence caused inconvenient for business transaction.
To illustrate, where the directors or other officers of the company were
empowered under the articles to exercise certain powers subject only to certain
prior approvals or sanctions of the shareholders, it is difficult for an outsider to
ascertain whether necessary sanctions and approvals have been obtained before a
certain officer exercises his powers or not.

21
Kotla Venkataswamy v. Chinta Ramamurthy. AIR (1934) Mad 579

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 2.44 CORPORATE AND OTHER LAWS

Therefore, to mitigate such a situation, those dealing with the company can assume
that if the directors or other officers are entering into those transactions, they
would have obtained the necessary sanctions. This is known as the ‘Doctrine of
Indoor Management’ or Turquand’s Rule, and act as an exception to the
constructive notice.

The Europe Communities Act, 1972 has abrogated this doctrine through effect of
its section 9. Even in India also the Calcutta High Court 22 enforced a security which
was not signed in accordance with the company’s articles.

DOCTRINE OF INDOOR MANAGEMENT

Essence of Doctrine of Indoor Management

The people who are dealing with company are entitled to presume that internal
proceedings and requirements has been duly met.

Enunciation of Doctrine of Indoor Management

The Doctrine of Indoor Management was first laid down in the case of Royal British
Bank v. Turquand 23

The directors of a company were authorised by the articles to borrow on bonds

such sums of money as should from time to time, by a resolution of the company
in general meeting, be authorised to be borrowed. The directors gave a bond to
Turquand without the authority of any such resolution. The question arose whether
the company was liable on the bond. Held, the company was liable on the bond, as
Turquand was entitled to assume that the resolution of the company in general
meeting had been passed.

Rationale of Doctrine of Indoor Management

What happens internally in a company is not a matter of public knowledge. An

outsider can only presume the intentions of a company, but not know the
information he/she is not privy to.

If not for the doctrine, the company could escape creditors by denying the authority
of officials to act on its behalf.

22
Charnock Collieries Co Ltd v. Bholanath Dhar. ILR (1912) 39 Cal 810.
23
(1856) 6 E & B 327

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Exceptions to Doctrine of Indoor Management

Relief on the ground of ‘indoor management’ cannot be claimed by an outsider

dealing with the company in the following circumstances;

a. Knowledge of irregularity - In case this ‘outsider’ has actual knowledge of

irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.

b. Negligence: If with a minimum of effort, the irregularities within a company

could be discovered, the benefit of the rule of indoor management would not
apply. The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.

c. Forgery: The rule does not apply where a person relies upon a document that
turns out to be forged since nothing can validate forgery. A company can
never be held bound for forgeries committed by its officers.

d. Where the question is in regard to the very existence of an agency.

e. Where a pre-condition is required to be fulfilled before company itself can

exercise a particular power. In other words, the act done is not merely ultra
vires the directors/officers but ultra vires the company itself.
Illustration

The doctrine of indoor management is considered to be ______ to the doctrine of

constructive notice.

a. Exception

b. Extension

c. Alternative

d. Not related

Answer – a. Exception

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 2.46 CORPORATE AND OTHER LAWS

10. ACT TO OVERRIDE MEMORANDUM,

ARTICLES, ETC. [SECTION 6]
The provisions of this Act shall have overriding effect to the provisions contained in;
a. Memorandum of company; or
b. Articles of company; or
c. Any agreement executed by it; or
d. Any resolution passed by the company in general meeting or by its Board of
Directors
Whether the same be registered, executed or passed, as the case may be, before
or after the commencement of this Act
Any provision contained in the memorandum, articles, agreement or resolution, to
the extent in conflict to the provisions of the Act; shall be void.
Example - Section 123 declares that no dividend shall be paid by a company except
out of profits. The force of this section cannot be undone by any provision in the
articles of association, because the articles cannot sanction something which is
forbidden by the Act. Even still it attempts then shall be void.

Note: This section starts with saving clause i.e. “Save as otherwise ….”, means if any
other section of the Act says that provisions contained in the memorandum,
articles, agreement or resolution is superior then we will treat it accordingly.

Example - Section 47 of the Act deals with voting power of members. A notification
dated 5th June, 2015 says that section 47 is applicable to a private company subject
to its Article of Association (AOA). Now if AOA of a private company says that
section 47 is not applicable to it then, in this case AOA will become superior and
section 47 of the Act will not be applicable.

11. EFFECT OF MEMORANDUM AND ARTICLES

[SECTION 10]
Sub-section 1 to Section 10 aims to impart contractual force to the Memorandum
and Articles. It provides, when the memorandum and articles got registered; it shall
bind the

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a. Members to the company;

b. Company to the members;
c. Members to the members;
To observe all the provisions of the memorandum and of the articles, as signatory
thereof.
Example (Member to the Company)
The articles of association of the Steel Bros & Co Ltd contained clauses to the effect
that on the bankruptcy of a member his shares would be sold to a person and at a
price fixed by the directors. Borland, a shareholder, was adjudicated bankrupt. His
trustee in bankruptcy claimed that he (Borland) was not bound by these provisions
and should be at liberty to sell the shares at their true value. But it was held that
contracts contained in the articles of association is one of the original incidents of
the shares. Shares having been purchased on those terms and conditions, it is
impossible to say that those terms and conditions are not to be observed. 24
Example (Company to the Member)
The articles of the Odessa Waterworks Co provided that "the directors may, with
the sanction of the company at general meeting, declare a dividend to be paid to
the members". Instead of paying the dividend in cash to the shareholders a
resolution was passed to give them debenture bonds. In an action by Mr. Wood, a
member to restrain the directors from acting on the resolution, it was held that
"The question is whether that which is proposed to be done in the present case is
in accordance with the articles of association of the company. Those articles provide
that the directors may, with the sanction of a general meeting, declare a dividend
to be paid to shareholders. Prima facie that means to be paid in cash. The debenture
bonds proposed to be issued are not a payment in cash." 25

Example (Member to the Member)

Mr. Rayfield was a shareholder in a company. Clause 11 of the articles of company

required him to inform the directors of his intention to transfer his shares in the
company and which provided that the directors will take the said shares equally
between them at a fair value. In accordance with this provision the Mr. Rayfield so

24
Borland's Trustee v Steel Bros & Co Ltd (1901) 1 Ch 279
25
Wood v Odessa Waterworks Co (1889) 42Ch D 636

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 2.48 CORPORATE AND OTHER LAWS

notified the directors (who are members as well), who contended that they were
not bound to take and pay for the shares. They said, articles could not impose such
obligation upon them in their capacity as directors. Their argument was set aside
by the court by treating those directors as members. Accordingly, the directors
(being members) were compelled to take the Mr. Rayfield’s shares at a fair value. 26

Students are advised to take Note;

1. Articles bind the members to the company and the company to the members.
But neither of them is bound to an outsider to give effect to the articles. "No Article
can constitute a contract between the company and a third person."

Example - The articles of association of a company, La Trinidad contained a clause

to the effect that Browne should be a director and should not be removable till
after 1888. He was, however, removed earlier and had brought an action to restrain
the company from excluding him. It was held that there was no contract between
Browne and the company. No outsider can enforce articles against the Company
even if they purport to give him certain rights. 27

2. Further sub-section 2 to section 10 provides, all monies payable by any member

to the company under the memorandum or articles shall be a debt due from him
to the company.

Example - A company can recover calls in arrear from a member as forcefully as it

is recovering loan due.

12. ALTERATION OF MEMORANDUM [SECTION 13]

PROCEDURE OF ALTERATION OF MEMORANDUM

Alteration includes the making of additions, omissions and substitutions. Section

13 of the Act along with Rules 29 to 32 of the Companies (Incorporation) Rules,
2014 provides the provisions that deals with the alteration of the memorandum,
detailed below;

26
Rayfield v Hands (1958) 2 WLR 851
27
Browne v La Trinidad (1887)37 Ch D 1

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Alteration by special resolution [Sub-section 1]

Company may alter the provisions of its memorandum with the approval of the
members by a special resolution. Further, as per section 13(6) (a) company shall file
with the Registrar, such special resolution.
Name change of the company [Sub-section 2 and 3]
As per sub-section 1, any change in the name of a company shall be effected only
with the approval of the Central Government (power delegated to ROC by Central
Government) 28 in writing in Form No. INC-24 along with fee.
However, no such approval shall be necessary where the change in the name of the
company is only the addition/deletion of the word “Private”, on the conversion of
any one class of companies to another class in accordance with the provisions of
the Act.

The change of name shall not be allowed to a company which has not filed annual
returns or financial statements due for filing with the Registrar or which has failed
to pay or repay matured deposits or debentures or interest thereon. Once the
necessary documents filled or payment or repayment made then change shall be
allowed.

As per clause (b) to sub-section 6 to section 13, the approval from the Central
Government, shall be filed with registrar by the company. Practically importance of
provision is demeaned as power of central government is already delegated to
ROC.
Further, as per sub-section 2, on any change in the name of a company, the
Registrar shall enter the new name in the register of companies in place of the
old name and issue a fresh certificate of incorporation in the Form No. INC-25
with the new name and the change in the name shall be complete and effective
only on the issue of such a certificate.
Example – Tata Sky Limited changed its Name to Tata Play Limited (CIN
U92120MH2001PLC130365).

Industrial Insight
On August 24, 1910, a company was registered in India under the name Imperial
Tobacco Company of India Limited. As the Company's ownership progressively

28
Notification S.O. 1353(E), dated 21st May, 2014

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 2.50 CORPORATE AND OTHER LAWS

Indianised, the name of the Company was changed to India Tobacco Company
Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the ITC's multi-
business portfolio encompassing a wide range of businesses, the full stops in the
Company's name were removed effective September 18, 2001. The Company now
stands rechristened 'ITC Limited,' where 'ITC' is today no longer an acronym or an
initialised form.

Students are advised to that note that:

Even If a company has to rectify its name under section 16, then also, nothing shall
prevent such company from subsequently changing its name in accordance with the
provisions of section 13.

RECTIFICATION OF NAME OF COMPANY [SECTION 16]

Where Central Government (power of Central Government under this section
conferred (delegated) upon Regional Directors by section 458 of the Act) 29 is of
opinion that name (original or revised/new) of company is identical with or too nearly
resembles to the name by which a company in existence;
a. On its own or
b. On an application by a proprietor of already registered trade mark under the
Trade Marks Act, 1999.
Then it may direct the company to change its name;

The company shall change its name or new name, as the case may be, within a period
of three months from the issue of such direction, after adopting an ordinary
resolution for the purpose.
Note - Application by a proprietor of registered trade mark shall be made within three
years of incorporation or registration or change of name of the company
Further, the company, after changing its name or obtains a new name shall give notice
of the change to the Registrar along with the order of the Central Government
(Regional Directors) within a period of fifteen days from the date of such change.
Registrar on receipt of notice shall carry out necessary changes in the certificate of
incorporation and the memorandum.

29
S.O. 4090(E), dated 19th December, 2016

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If a company is in default in complying with any direction given under sub-section

(1), the Central Government shall allot a new name to the company in such manner
as may be prescribed and the Registrar shall enter the new name in the register of
companies in place of the old name and issue a fresh certificate of incorporation
with the new name, which the company shall use thereafter:

Provided that nothing in this sub-section shall prevent a company from

subsequently changing its name in accordance with the provisions of section 13.

Change in the registered office [Sub-section 4, 5, and 7]

Application (sub-section 4]
The alteration of the memorandum relating to the place of the registered office
from one State to another shall not have any effect unless it is approved by the
Central Government (power delegated to Regional Director by Central
Government) 30 on an application in Form No. INC-23 along with the fee and shall
be accompanied by the following documents, namely;
a. Copy of Memorandum of Association, with proposed alterations;
b. Copy of the minutes of the general meeting at which the resolution
authorising such alteration was passed, giving details of the number of votes
cast in favour or against the resolution;

c. Copy of Board Resolution or Power of Attorney or the executed vakalatnama,

as the case may be.
d. List of creditors and debenture holders
e. Acknowledgment of service of a copy of the application with complete
annexures to the Registrar and Chief Secretary of the State Government or
Union territory where the registered office is situated at the time of filing the
application.
Advertisement in Newspapers
The Company not more than thirty days before the date of filing the above
application, shall advertise in the Form No. INC-26 in the vernacular newspaper in
the principal vernacular language in the district and in English language in an

30
Notification S.O. 4090(E), dated 19th December, 2016

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English newspaper with wide circulation in the state in which the registered office
of the company is situated.
Dispose of the application by central government [sub-section 5]
The Central Government (power delegated to Regional Director by Central
Government) shall dispose of the application of change of place of the registered
office within a period of 60 days. Before passing of order, Central Government may
satisfy itself that-
a. the alteration has the consent of the creditors, debenture-holders and other
persons concerned with the company, or
b. the sufficient provision has been made by the company either for the due
discharge of all its debts and obligations, or
c. adequate security has been provided for such discharge.
Filing of the certified copy of the order with the registrar [sub-section 7]
Where an alteration of the memorandum results in the transfer of the registered
office of a company from one State to another, a certified copy of the order of the
Central Government approving the alteration shall be filed by the company with
the Registrar of each of the States in Form No. INC-28 along with the fee within
thirty days from the date of receipt of certified copy of the order, who shall register
the same.
Issue of fresh certificate of incorporation [sub-section 7]
The Registrar of the State where the registered office is being shifted to, shall issue
a fresh certificate of incorporation indicating the alteration.

Change in the object of the company [Sub-section 8 and 9]

Who can make change in object clause & How? [Sub-section 8]
Where the company has raised money from public through prospectus and has any
un-utilised amount out of the money so raised, can change the objects for which the
money so raised is to be applied only after passing a special resolution through
postal ballot and the notice in respect of the resolution for altering the objects shall
contain the following particulars, namely;
a. Total money received;
b. Total money utilized for the objects stated in the prospectus;

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c. Un-utilized amount out of the money so raised through prospectus,

d. Particulars of the proposed alteration or change in the objects;

e. Justification for the alteration or change in the objects;
f. Amount proposed to be utilised for the new objects;

g. Estimated financial impact of the proposed alteration on the earnings and cash
flow of the company;
h. Other relevant information which is necessary for the members to take an
informed decision on the proposed resolution;
i. Place from where any interested person may obtain a copy of the notice of
resolution to be passed.

Advertisement [Sub-section 8]
The advertisement giving details of each resolution to be passed for change in
objects, simultaneously to the dispatch of postal ballot notices to shareholders; shall
be:
a. Published in 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 and
b. Hosted on the website of the company, if any.
Dissenting shareholders to change of object [Sub-section 8]
The dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with regulations to be
specified by the Securities and Exchange Board of India.
Registrar to certify the registration on alteration of the objects [sub-section 9]
The Registrar shall register any alteration of the memorandum with respect to the
objects of the company and certify the registration within a period of 30 days from the
date of filing of the special resolution under clause (a) to sub-section 6 of this section.
Sub-section 10 provides that alteration made under this section (section 13) shall
have effect only after it has been registered in accordance with provisions of
section.
Sub-section 11 states any alteration of the memorandum, in the case of a company

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limited by guarantee and not having a share capital, intending to give any person
a right to participate in the divisible profits of the company otherwise than as a
member, shall be void. This provision is confirming and extending provision to
Section 4(7).

13. ALTERATION OF ARTICLES [SECTION 14]

Section 14 of the Companies Act, 2013, vests companies with power to alter its
articles. A company cannot divest itself of these powers 31. Matters as to which the
memorandum is silent can be dealt with by the alteration of article. The law with
respect to alteration of articles is as follows:
ALTERATION BY SPECIAL RESOLUTION [SUB-SECTION 1]
A company may alter its articles by a special resolution, subject to the provisions
of this Act and the conditions contained in its memorandum. Alteration of articles
include alterations having the effect of conversion of a private company into a
public company or vice-versa,
Any alteration having the effect of conversion of a public company into a private
company shall not be valid unless it is approved by an order of the Central
Government on an application made within sixty days from the date of passing of
special resolution, be filed with Regional Director in e-Form No. RD-1 along with
the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014
and shall be accompanied by the following documents, namely:
a. Draft copy of Memorandum of Association and Articles of Association, with
proposed alterations;
b. Copy of the minutes of the general meeting at which the special resolution
authorising such alteration was passed together with details of votes cast in
favour and or against with names of dissenters;

c. Copy of Board resolution or Power of Attorney dated not earlier than thirty
days, as the case may be, authorising to file application for such conversion;
d. Declaration by a key managerial personnel regarding the compliance under
difference section of the Act and rules made there under;

31
Andrews v. Gas Meter Co. (1897) 1 Ch. 161

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In case of a private company, where post alteration the articles no longer include
the restrictions and limitations which are required to be included in the articles of
a private company under this Act, then such company shall cease to be a private
company, from the date of such alteration.

FILING OF ALTERATION WITH THE REGISTRAR [SUB-SECTION 2]

Every alteration of the articles and a copy of the order of the Central Government
approving the alteration, shall be filed with the Registrar, together with a printed
copy of the altered articles, within a period of fifteen days in Form No. INC 27
along with fee, who (Registrar) shall register the same.
Sub-section 3 provides that alteration made under sub-section 1 and registered
under sub-section 2 subject to provision of this, shall be valid and have effect as if
it were originally contained in the Articles.

14. ALTERATION OF MEMORANDUM OR

ARTICLES TO BE NOTED IN EVERY COPY
[SECTION 15]
Section 15 of the Act requires that every alteration made in memorandum and
articles of a company shall be noted in every copy. Be it issued in electronic form
or otherwise. [MOA and AOA considered to be public document under section 399.]
If a company makes any default in complying with the stated provisions, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every copy of the articles issued without such alteration.

15. REGISTERED OFFICE OF COMPANY [SECTION 12]

A company is considered to be a separate legal entity from the members. Once a
company gets incorporated, it is required to maintain a registered office. This is a
physical office where the corporation will receive service of legal documents from
ROC or in case of a lawsuit, etc.

This address cannot be a P.O. Box but must be a physical location where someone
is present, to receive service of legal documents during normal business hours. It

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could be different from a Head Office or Corporate office.

Section 12 of the Companies Act, 2013 seeks to provide for the registered office of
the companies for the communication and serving of necessary documents,
notices, letters etc. The domicile and the nationality of a company is determined by
the place of its registered officer. This is also important for determining the
jurisdiction of the court.

REGISTERED OFFICE & VERIFICATION THEREOF [SUB-SECTION 1 & 2]

As per sub-section 1, a company shall, within thirty days of its incorporation and
at all times thereafter, have a registered office capable of receiving and
acknowledging all communications and notices as may be addressed to it.
Further, sub-section 2 requires the company shall furnish to the Registrar verification
of its registered office within a period of thirty days of its incorporation.

With the respected specified IFSC public & IFSC private companies, they shall have its
registered office at the IFSC located in the approved multiservice SEZ set up under the
SEZ Act, 2005 read with SEZ Rules, 2006. 32
In case of specified IFSC public & IFSC private company word “thirty days” will be
read as “sixty days”. 33

LABELING OF COMPANY [SUB-SECTION 3]

Every company shall:
a. Paint or affix its name, and the address of its registered office, and keep
the same painted or affixed, on the outside of every office or place in which
its business is carried on, in a conspicuous position, in legible letters, and if
the characters employed are not those of the language/s in general use in
that locality, then also in the characters of that language/s.
b. Have its name engraved in legible characters on its seal, if any;
c. Get its name, address of its registered office and the Corporate Identity
Number along with telephone number, fax number, if any, e-mail and website
addresses, if any, printed in all its business letters, billheads, letter papers and
in all its notices and other official publications; and

32
G.S.R. 08 (E) dated 4th January, 2017
33
ibid

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d. Have its name printed on hundies, promissory notes, bills of exchange and
such other documents as may be prescribed:
Note:
Where a company has changed its name(s) during the last two years, it shall
paint or affix or print, both or all such names in case of point a as well as c above.

In case of One person company, the words ‘‘One Person Company’’ shall be
mentioned in brackets below the name of such company, wherever its name is
printed, affixed or engraved.

NOTICE OF CHANGE & VERIFICATION TO REGISTRAR [SUB-SECTION 4]

Notice of every change of the situation of the registered office after the date of
incorporation of the company, verified in the Form No. INC-22, along with fee as
prescribed shall be given to the Registrar within 30 days of the change, who shall
record the same.

In case of specified IFSC public & IFSC private company word “thirty days” will be read
as “sixty days”. 34

APPROVAL/CONFIRMATION OF CHANGE [SUB-SETION 5]

Change by passing of special resolution

The registered office of the company shall be changed only by passing of special
resolution by a company, outside the local limits of any city, town or village where
such office is situated or where it may be situated later by virtue of a special
resolution passed by the company.

Change of registered office outside the jurisdiction of registrar

Where a company changes the place of its registered office from the jurisdiction of
one Registrar to the jurisdiction of another Registrar within the same State, there
such change is to be confirmed by the Regional Director on an application made
by the company. Application shall be made in Form No. INC-23 along with fee.

34
G.S.R. 08 (E) dated 4th January, 2017

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 2.58 CORPORATE AND OTHER LAWS

In case of specified IFSC public & IFSC private company Board resolution will sufficient,
provided that such Company shall not change the place of its registered office to any
other place outside the said International Financial Services Centre. 35

COMMUNICATION AND FILING OF CONFIRMATION [SUB-SECTION 6]

The confirmation of change of registered office from jurisdiction of one registrar

to another registrar within the same state, shall be:

a. Communicated within 30 days from the date of receipt of application by

the Regional Director to the company, and

b. The company shall file the confirmation with the Registrar within a period
of 60 days of the date of confirmation who shall register the same, and

c. Certify the registration within a period of thirty days from the date of filing
of such confirmation.

The certificate so issued by Registrar shall be conclusive evidence that all the
requirements of this Act with respect to change of registered office have been
complied with and the change shall take effect from the date of the certificate.
If the Registrar has reasonable cause to believe that the company is not carrying
on any business or operations, he may cause a physical verification of the registered
office of the company in such manner as may be prescribed and if any default is
found to be made in complying with the requirements of sub-section (1), he may
without prejudice to the provisions contained in this section regarding the
penalties, initiate action for the removal of the name of the company from the
register of companies under Chapter XVIII.

PENALTIES IN CASE OF DEFAULTS [SUB-SECTION 8]

If any default is made in complying with the requirements of this section, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every day during which the default continues but not
exceeding one lakh rupees.

35
G.S.R. 08 (E) dated 4th January, 2017

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Summary of Provisions applicable in case of change of place of registered

office

Change in Place of Registered office

Within a state Within a State From One State

(from one (From one to Another
Within a city city to ROC to (Change in
another) another) Situation Clause)

Board Special Special Special

Resolution Resolution Resolution resolution

Notice to Permission Approval of

Notice to of
ROC ROC Central
(30 days) Regional Government
(30 days) Director

30/60/30 60/30
RD/Co./ROC CG/CO.

Conclusive Fresh Certificate

Evidence of Incorporation

16. COMMENCEMENT OF BUSINESS ETC.

[SECTION 10A]
CONDITIONS FOR COMMENCEMENT OF BUSINESS
A company incorporated
a. After the commencement of the Companies (Amendment) Ordinance, 2019
and
b. Having a share capital
Shall commence any business or exercise any borrowing powers only if;
a. The company has filed with the Registrar a verification of its registered
office as provided in sub-section (2) of section 12, and

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b. A declaration is filed with the Registrar, by a director, within a period of 180

days of the date of incorporation of the company, in Form No. INC- 20A, duly
verified by a Company Secretary or a Chartered Accountant or a Cost
Accountant, in practice, along with prescribed fee; that every subscriber to
the memorandum has paid the value of the shares agreed to be taken by
him on the date of making of such declaration

Note:
1. Section 12(2) i.e. Verification of registered office with registrar, discussed earlier
heading i.e. 15 in this chapter.
2. In the case of a company pursuing objects requiring registration or approval from
any sectoral regulators such as the Reserve Bank of India, Securities and Exchange
Board of India, etc., the registration or approval, as the case may be from such
regulator shall also be obtained and attached with the declaration.

OUTCOME WHERE CONDITIONS ARE NOT SATISFIED

Penalty
If any default is made in complying with the requirements of this section, the
penalty shall be:

Liable Quantum of penalty

Company Fifty thousand rupee
Every
officer who One thousand rupees for each day during which such default
is in continues but not exceeding an amount of one lakh rupees.
default
Declaration not filled by director within 180 days
Where no declaration has been filed by directors within a period of 180 days of the
date of incorporation with the Registrar and the Registrar has reasonable cause to
believe that the company is not carrying on any business or operations, he may
initiate action for the removal of the name of the company from the register of
companies under Chapter XVIII.
Note: Action by Registrar for removal of name can be take place simultaneously
with levy of penalty.

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17. CONVERSION OF COMPANIES ALREADY

REGISTERED [SECTION 18]
Section 18 of the Act, empower a company to convert itself into some other class
of company by altering its memorandum and articles of association.
Following is the law with respect to the conversion of the companies already
registered.
BY ALTERATION OF MEMORANDUM AND ARTICLES
A company of any class registered under this Act may convert itself as a company
of other class under this Act by alteration of memorandum and articles of the
company in accordance with the provisions of this Chapter.
FILE AN APPLICATION TO THE REGISTRAR
Wherever conversion to be done under section 18, Registrar on basis of an
application filled with it by company, shall after satisfying himself that the
provisions applicable for registration of companies have been complied with,
a. Close the former registration of the company; and
b. After registering the required documents, issue a certificate of incorporation in
the same manner as its first registration.
Students may also refer to: Rule 6, 7, 7A, and 20 to 22 of the Companies
(Incorporation) Rules, 2014 and 37 and 38 of the Companies (Incorporation) Rules,
2016 & Form Nos. INC-5 & INC-6 under the Companies (Incorporation) Rules, 2014
and INC-27 under the Companies (Incorporation) Rules, 2016.
NO EFFECT ON THE DEBTS, LIABILITIES ETC. INCURRED BEFORE
CONVERSION
The registration of a company under this section shall not affect any debts,
liabilities, obligations or contracts incurred or entered into, by or on behalf of the
company before conversion and such debts, liabilities, obligations and contracts
may be enforced in the manner as if such registration had not been done.

To put in more simple way, the company remains the same entity as it was before
in respect of its debts and liabilities, obligations or contracts.

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18. SUBSIDIARY COMPANY NOT TO HOLD

SHARES IN ITS HOLDING COMPANY
[SECTION 19]
As per section 19 of the Act, a subsidiary company is not allowed to hold shares of
its holding company. The prohibition also extends up to the nominees of the
subsidiary company.
Consequently, any allotment or transfer of shares in a holding company to its
subsidiary shall be void. If the holding company is a guarantee or unlimited
company, not having a share capital the above restriction will apply on holding the
interest, whatever be the form of interest.
The prohibition does not apply to the following cases:
a. Where the subsidiary is concerned as a legal representative of a deceased
member of the holding company; or
b. Where the subsidiary holds such shares as a trustee; or
c. Where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.

Note:
a. Right to vote at a meeting of the holding company only in respect of the
shares held by it as a legal representative or as a trustee
b. The prohibition does not apply to the case of a subsidiary company which
already had shares in its holding company at the commencement of the Act
c. A subsidiary can buy shares in its holding company where it is a part of a
scheme of amalgamation sanctioned by the court/tribunal. 36

Example - RPIP Ltd. has invested 51% in the shares of SSP Pvt. Ltd. on 31st March
2023. SSP Pvt. Ltd. have been holding 2% equity of RPIP Ltd. since 2013. SSP Pvt.
Ltd. cannot increase its equity beyond that 2% on or after 31st March 2023.
However, it could continue to hold or reduce its initial 2% stake.

36
Himachal Telematics Ltd v Himachal Futuristic Communications Ltd, (1996) 37 DRJ 476

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19. SERVICE OF DOCUMENTS [SECTION 20]

Section 20 of the Companies Act, 2013 read with Rule 35 (Service of Documents) of
Companies (Incorporation) Rules, 2014, provides the mode in which documents may
be served on the company, on the members and also on the registrars. Law with
respect to the service of documents is as follows-

SERVING OF DOCUMENT TO COMPANY OR AN OFFICER THEREOF

A document may be served on a company or an officer thereof by sending it to the
company or the officer at the registered office of the company by-

a. registered post, or
b. speed post, or
c. courier service, or
d. leaving it at its registered office, or
e. means of such electronic or other mode as may be prescribed
However, where securities are held with a depository, the records of the beneficial
ownership may be served by such depository on the company by means of
electronic or other mode.
SERVING OF DOCUMENT TO REGISTRAR OR MEMBERS
Save as provided in this Act or the rules made thereunder for filing of documents
with the Registrar in electronic mode, a document may be served on Registrar or
any member by sending it to him by:
a. Post, or
b. registered post, or
c. speed post, or
d. courier, or
e. by delivering at his office or address, or
f. by such electronic or other mode as may be prescribed.
However, a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company in
its annual general meeting.

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For the purposes of this section, the term “courier” means a person or agency which
delivers the document and provides proof of its delivery.

The term “electronic transmission” means a communication that creates a record

that is capable of retention, retrieval (recovery) and review, and which may
thereafter be rendered into clearly legible tangible form. It may be made by

♦ Facsimile telecommunication (fax) or electronic mail (email), which the

company or the officer has provided from time to time for sending
communications,

♦ Posting of an electronic message board or network that the Registrar or the

member has designated for those communications, and which transmission
shall be validly delivered upon the posting, or

♦ Other means of electronic communication, in respect of which the company

or the officer has put in place reasonable systems to verify that the sender is
the person purporting to send the transmission.

Further sub-section 2 provides, in case of delivery by post, such service shall be

deemed to have been effected:
a. In the case of a notice of a meeting, at the expiration of 48 hours after the
letter containing the same is posted; and
b. In any other case, at the time at which the letter would be delivered in the
ordinary course of post.

Section 20 (2) shall apply to a Nidhi Company, subject to the modification; that
a. The document may be served only on members who hold shares of more
than ` 1,000 in face value or more than 1% of the total paid-up share capital;
whichever is less.

b. For other shareholders, document may be served by a public notice in

newspaper circulated in the district where the Registered Office of the Nidhi
is situated; and publication of the same on the notice board of the Nidhi.

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Example – Modern Furniture sent the notice of general meeting through postal
mail 48 hours after the post of letter containing such notice, shall be deemed to be
served. Hence, requirement of 21 clear days’ notice under section 101 of the Act, if
seen in this context, Modern Furniture Limited should have posted the letter
containing notice 23 days prior to meeting day (48 hours of post-delivery+21 clear
days).

20. AUTHENTICATION OF DOCUMENTS,

PROCEEDINGS AND CONTRACTS [SECTION 21]
As per section 21 of the Act:
a. A document or proceeding requiring authentication by a company or
b. Contracts made by or on behalf of a company
May be signed by:
a. Any key managerial personnel 37, or
b. An officer or employee of the company duly authorized by the Board in this
behalf.

In the case of specified IFSC public company and IFSC private company, for the
word “An officer” read as “An officer or any other person”. 38

21. EXECUTION OF BILLS OF EXCHANGE, ETC.

[SECTION 22]
Sub-section 1 provides, a bill of exchange, hundi or promissory note shall be
deemed to have been made, accepted, drawn or endorsed on behalf of a
company if made, accepted, drawn, or endorsed in the name of, or on behalf of
or on account of, the company by any person acting under its authority.
Authority can be either express or implied.

37
Who all are included in key managerial person under section 2 (51) already discussed in
chapter 1 of this module
38
G.S.R. 08 (E) dated 4th January, 2017

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Formal deeds can be executed only through a power of attorney. Therefore sub-
section 2 and 3 together provides;
a. A company may, by writing under
 Its common seal, if any,

 Where in case a company does not have a common seal, then

authorized by 2 directors or by a director and the Company Secretary,
wherever the company has appointed a Company Secretary.
b. Authorize any person,
c. Either generally or in respect of any specified matters,
d. As its attorney to execute other deeds on its behalf
e. In any place either in or outside India.
f. Deed signed by such an attorney on behalf of the company and under his
seal shall bind the company.

Summary of sub-section 2

Co. having
common seal

Yes No

*In writing authorise any person Authorisation

(generally or in respect of any shall be made
specified matters) as attorney by:

In India, or 2 directors, or Where the Co. has a

Company Secretary

outside India.
A director
alongwith
Company Secretary

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Note: It can be observed from above that a company may or may not have a
common seal. If company decides to have a common seal then it has to affix the
same for specified matters, execution of deeds on behalf of the company.
The seal is a method of making a physical impression upon the documents of the
company, of its name, etc.
Section 22 comes into play when a person wants to enforce obligations against a
company arising out of a contract and the company denies the contract or disputes
its liability. The section cannot be used where the proceeding is by the company.

SUMMARY
♦ Once an association becomes incorporated it acquires a legal status, it
becomes a legal entity in its own right, separate from the individual
members. It will have perpetual succession i.e. not affected by the death,
insanity, or insolvency of an individual member.

♦ Earlier, the certificate of incorporation considered as conclusive proof, but

as per the Companies Act, 2013, certificate of Incorporation is not conclusive
proof of everything prior to incorporation being in order.

♦ CIN is a 21 alpha-numeric digit based unique identification number,

comprising data sections/elements that reveals the basis aspects about
company

♦ The memorandum of association (MOA) is the document that sets up the

company and the articles of association (AOA) set out how the company is
run, governed and owned. These documents can be altered.

♦ As per Doctrine of Ultra Vires, acts outside the powers conferred under MOA
are ultra-vires. Such acts and resulting agreements are void.

♦ Doctrine of Constructive Notice put onus on those who delas with company
to be aware of what is stated in MOA and AOA, while Doctrine of Indoor
Management protects outsider as an exception to earlier specified doctrine.

♦ A company of any class may convert itself as a company of other class by

alteration of its MOA and AOA.

♦ Certain relaxations are provided in case of specified IFSC companies

working in or from International Financial Services Centre, regarding
provisions contained in chapter II of the Act.

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TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. Entrenchment enhance the protection. Modern Furniture Limited, an existing
private company willing to insert the provisions for entrenchment; it

(a) Can amend the article by passing an ordinary resolution

(b) Can amend the article by passing a special resolution
(c) Can amend the article agreed by all the members
(d) Can’t amend article to made the provisions for entrenchment
2. Today, it’s July 2024. Mr. Nilanjan Chattopadhyay a 24 years old Indian youngster,
who returned back to India in January month of 2024 after completing his
education in bio-nutrient and willing to form an OPC; but not sure about the
requirements or pre-conditions regarding eligibility. He read some articles on
provisions related to OPC and concluded:
(i) OPC can be formed by Indian Citizen only
(ii) He can’t form OPC because in immediate previous year he was not resident
in India

(a) Both the conclusions are valid

(b) None of the conclusion is valid
(c) First conclusion is invalid
(d) Second conclusion is invalid
3. In case of an application for reservation of name or for change of its name by an
existing company, the Registrar may reserve the name for a period of …………….
from the date of approval
(a) 90 days
(b) 60 days
(c) 30 days
(d) 20 days

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4. Modern Furniture incorporated on 30th June 2022, its directors filled a declaration
under section 10A (1)(a) regarding receipt of payment i.e. value of share (against
share subscribed by subscriber) to registrar on 18th April 2023. The company and
its officers (officers who are in default) shall be charged with penalty of:

(a) ` 1,11,000 and ` 1,11,000 respectively

(b) ` 50,000 and ` 1,11,000 respectively

(c) ` 1,11,000 and ` 50,000 respectively

(d) ` 50,000 and ` 1,00,000 respectively

5. I.T.C limited changed its name to ITC Limited. Company and officers thereat made
default by failing to make alteration in every issued copy of memorandums and
articles. In this context you are required to pick incorrect statements out of
followings
(i) Alternation shall be made to every copy of MOA/AOA because these are
considered as public document.
(ii) Alternation shall be made to every copy be it in electronic form or otherwise.
(iii) Penalty shall be rupees one thousand for every copy of the articles issued
without such alteration.
(a) (ii) only
(b) (iii) only
(c) (ii) and (iii) only
(d) None of (i), (ii) and (iii)

Descriptive Questions
1. Yadav dairy products Private limited has registered its articles along with
memorandum at the time of registration of company in December, 2019. Now
directors of the company are of the view that provisions of articles regarding
forfeiture of shares should not be changed except by a resolution of 90% majority.
While as per section 14 of the Companies Act, 2013 articles may be changed by
passing a special resolution only. One of the directors said that they cannot make
a provision against the Companies Act. You are required to advise the company
on this matter.

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2. A group of individuals intend to form a club namely 'Budding Pilots Flying Club'
as limited liability company to impart class room teaching and aircraft flight
training to trainee pilots. It was decided to form a limited liability company for
charitable purpose under Section 8 of the Companies Act, 2013 for a period of
ten years and thereafter the club will be dissolved and the surplus of assets over
the liabilities, if any, will be distributed amongst the members as a usual
procedure allowed under the Companies Act.

Examine the feasibility of the proposal and advise the promoters considering
the provisions of the Companies Act, 2013.
3. Alfa school started imparting education on 1st April, 2010, with the sole
objective of providing education to children of weaker society either free of cost
or at a very nominal fee depending upon the financial condition of their
parents. However, on 30th March 2024, it came to the knowledge of the Central
Government that the said school was operating by violating the objects of its
objective clause due to which it was granted the status of a section 8 company
under the Companies Act, 2013. Describe what powers can be exercised by the
Central Government against the Alfa School, in such a case?
4. XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For
better administrative conveniences the company wants to shift its registered
office from Mumbai to Pune (within the State of Maharashtra, but from Mumbai
ROC to Pune ROC). What formalities the company has to comply with under
the provisions of the Companies Act, 2013 for shifting its registered office as
stated above? Explain.
5. Anushka security equipments limited is a manufacturer of CCTV cameras. It has
raised ` 100 crore through public issue of its equity shares for starting one more
unit of CCTV camera manufacturing. It has utilized 10 crore rupees and then it
realized that its existing business has no potential for expansion because
government has reduced customs duty on import of CCTV camera. Hence imported
cameras from China are cheaper than its own manufacturing. Now it wants to
utilize remaining amount in mobile app development business by adding a new
object in its memorandum of association.
Does the Companies Act allow such change of object? If not, then what advise
will you give to company. If yes, then give steps to be followed.

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6. The object clause of the Memorandum of Vivek Industries Limited., empowers

it to carry on real-estate business and any other business that is allied to it.
Due to a downward trend in real-estate business, the management of the
company has decided to take up the business of Food processing activity. The
company wants to alter its Memorandum, so as to include the Food Processing
Business in its objects clause. Examine whether the company can make such
change as per the provisions of the Companies Act, 2013?
7. The persons (not being members) dealing with the company are always
protected by the doctrine of indoor management. Explain. Also, explain when
doctrine of Constructive Notice will apply.
8. Manglu and friends got registered a company in the name of Taxmann advisory
private limited. Taxmann is a registered trademark. After 5 years when the
owner of trademark came to know about the same, it filed an application with
relevant authority. Can the company be compelled to change its name by the
owner of trademark? Can the owner of registered trademark request the
company and then company changes its name at its discretion?
9. Explain in the light of the provisions of the Companies Act, 2013, the
circumstances under which a subsidiary company can become a member of its
holding company.
10. Shri Laxmi Electricals Ltd. (S) is a company in which Hanuman power suppliers
Limited (H) is holding 60% of its paid up share capital. One of the shareholder
of H made a charitable trust and donated his 10% shares in H and ` 50 crore
to the trust. He appoint S as the trustee. All the assets of the trust are held in
the name of S. Can a subsidiary hold shares in its holding company in this way?
11. Explain the provisions of the Companies Act, 2013 relating to the ‘Service of
Documents’ on a company and the members of the company.
12. Parag Constructions Limited is a leading infrastructure company. One of the directors
of the company Mr. Parag has been signing all construction contracts on behalf of
company for many years. All the parties who ever deal with the company know Mr.
Parag very well. Company has got a very important construction contract from a
renowned software company. Parag constructions will do construction for this site in
partnership with a local contractor Firozbhai. Mr. Parag signed partnership deed with
Firozbhai on behalf of company because he has an implied authority. Later in a
dispute company denied to accept liability as a partner. Can the company deny its
liability as a partner?

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ANSWERS
Answer to MCQ based Questions
1. (c) Can amend the article agreed by all the members

2. (d) Second conclusion is invalid

3. (b) 60 days
4. (d) ` 50,000 and ` 1,00,000 respectively
5. (d) None of (i), (ii) and (iii)

Answer to Descriptive Questions

1. As per section 5 of the Companies Act, 2013 the article may contain provisions
for entrenchment to the effect that specified provisions of the articles may be
altered only if more restrictive conditions than a special resolution, are met.
The provisions for entrenchment shall only be made either on formation of a
company, or by an amendment in the articles agreed to by all the members
of the company in the case of a private company and by a special resolution
in the case of a public company.
Where the articles contain provisions for entrenchment, whether made on
formation or by amendment, the company shall give notice to the Registrar
of such provisions in prescribed manner.
In the present case, Yadav dairy products Private Limited is a private company
and wants to protect provisions of articles regarding forfeiture of shares. It
means it wants to make entrenchment of articles, which is allowed. But the
company will have to pass a resolution taking permission of all the members
and it should also give notice to ROC regarding entrenchment of articles.

2. According to section 8(1) of the Companies Act, 2013, where it is proved to

the satisfaction of the Central Government that a person or an association of
persons proposed to be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or any such other object;

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(b) intends to apply its profits, if any, or other income in promoting its
objects; and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or
association of persons to be registered as a limited liability company.
In the instant case, the decision of the group of individuals to form a limited
liability company for charitable purpose under section 8 for a period of ten
years and thereafter to dissolve the club and to distribute the surplus of assets
over the liabilities, if any, amongst the members will not hold good, since
there is a restriction as pointed out in point (b) above regarding application
of its profits or other income only in promoting its objects.
Further, there is restriction in the application of the surplus assets of such a
company in the event of winding up or dissolution of the company as
provided in sub-section (9) of Section 8 of the Companies Act, 2013.
Therefore, the proposal is not feasible.
3. Section 8 of the Companies Act, 2013 deals with the formation of companies
which are formed to promote the charitable objects of commerce, art, science,
education, sports etc. Such company intends to apply its profit in promoting
its objects. Section 8 companies are registered by the Registrar only when a
license is issued by the Central Government to them. Since, Alfa School was
a Section 8 company and it had started violating the objects of its objective
clause, hence in such a situation the following powers can be exercised by
the Central Government:
(i) The Central Government may by order revoke the licence of the
company where the company contravenes any of the requirements or
the conditions of this sections subject to which a licence is issued or
where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public interest,
and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’
against the company’s name in the register. But before such revocation,
the Central Government must give it a written notice of its intention to
revoke the licence and opportunity to be heard in the matter.

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(ii) Where a licence is revoked, the Central Government may, by order, if it

is satisfied that it is essential in the public interest, direct that the
company be wound up under this Act or amalgamated with another
company registered under this section. However, no such order shall be
made unless the company is given a reasonable opportunity of being
heard.
(iii) Where a licence is revoked and where the Central Government is
satisfied that it is essential in the public interest that the company
registered under this section should be amalgamated with another
company registered under this section and having similar objects, then,
notwithstanding anything to the contrary contained in this Act, the
Central Government may, by order, provide for such amalgamation to
form a single company with such constitution, properties, powers,
rights, interest, authorities and privileges and with such liabilities, duties
and obligations as may be specified in the order.
4. The Companies Act, 2013 under section 13 provides for the process of altering
the Memorandum of a company. Since the location or Registered Office clause
in the Memorandum only names the state in which its registered office is
situated, a change in address from Mumbai to Pune, does not result in the
alteration of the Memorandum and hence the provisions of section 13 (and its
sub sections) do not apply in this case.
However, under section 12 (5) of the Act which deals with the registered office
of company, the change in registered office from one town or city to another
in the same state, must be approved by a special resolution of the company.
Further, registered office is shifted from one ROC to another, therefore
company will have to seek approval of Regional director.
5. According to section 13 of the Companies Act, 2013 a company, which has
raised money from public through prospectus and still has any unutilised
amount out of the money so raised, shall not change its objects for which it
raised the money through prospectus unless a special resolution is passed by
the company and—
(i) the details in respect of such resolution shall also be published in 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

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situated and shall also be placed on the website of the company, if any,
indicating therein the justification for such change;
(ii) the dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with SEBI
regulations.
Company will have to file copy of special resolution with ROC and he will
certify the registration within a period of thirty days. Alteration will be
effective only after this certificate by ROC.
Looking at the above provision we can say that company can add the object
of mobile app development in its memorandum and divert public money into
that business. But for that it will have to comply with above requirements.
6. Alteration of Objects Clause of Memorandum
The Companies Act, 2013 has made alteration of the memorandum simpler
and more flexible. Under section 13(1) of the Act, a company may, by a special
resolution after complying with the procedure specified in this section, alter
the provisions of its Memorandum.
In the case of alteration to the objects clause, section 13(6) requires the filing
of the Special Resolution by the company with the Registrar. Section 13 (9)
states that the Registrar shall register any alteration to the Memorandum with
respect to the objects of the company and certify the registration within a
period of thirty days from the date of filing of the special resolution by the
company.

Section 13 (10) further stipulates that no alteration in the Memorandum shall

take effect unless it has been registered with the Registrar as above.
Hence, the Companies Act, 2013 permits any alteration to the objects clause
with ease. Vivek Industries Limited can make the required changes in the
object clause of its Memorandum of Association.
7. Doctrine of Indoor Management

According to this doctrine, persons dealing with the company need not
inquire whether internal proceedings relating to the contract are followed
correctly, once they are satisfied that the transaction is in accordance with
the memorandum and articles of association.

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Stakeholders need not enquire whether the necessary meeting was convened
and held properly or whether necessary resolution was passed properly. They
are entitled to take it for granted that the company had gone through all
these proceedings in a regular manner.
The doctrine helps to protect external members from the company and states
that the people are entitled to presume that internal proceedings are as per
documents submitted with the Registrar of Companies.

The doctrine of indoor management is opposite to the doctrine of

constructive notice. Whereas the doctrine of constructive notice protects a
company against outsiders, the doctrine of indoor management protects
outsiders against the actions of a company.
This doctrine also is a safeguard against the possibility of abusing the
doctrine of constructive notice.
Exceptions to Doctrine of Indoor Management (Applicability of doctrine
of constructive notice)
(i) Knowledge of irregularity: In case an ‘outsider’ has actual knowledge
of irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.

(ii) Negligence: If with a minimum of effort, the irregularities within a

company could be discovered, the benefit of the rule of indoor
management would not apply.

The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.
(iii) Forgery: The rule does not apply where a person relies upon a
document that turns out to be forged since nothing can validate
forgery. A company can never be held bound for forgeries committed
by its officers.
8. According to section 16 of the Companies Act, 2013 if a company is registered
by a name which,—

♦ in the opinion of the Central Government, is identical with the name by

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which a company had been previously registered, it may direct the

company to change its name. Then the company shall by passing an
ordinary resolution change its name within 3 months.

♦ is identical with a registered trade mark and owner of that trade mark apply
to the Central Government within three years of incorporation of
registration of the company, it may direct the company to change its name.
Then the company shall change its name by passing an ordinary resolution
within 6 months.
Company shall give notice to ROC along with the order of Central
Government within 15 days of change. In case of default company and
defaulting officer are punishable.
In the given case, owner of registered trade-mark is filing objection after 5
years of registration of company with a wrong name. While it should have filed
the same within 3 years. Therefore, the company cannot be compelled to
change its name.
As per section 13, company can anytime change its name by passing a special
resolution and taking approval of Central Government. Therefore, if owner of
registered trademark request the company for change of its name and the
company accepts the same then it can change its name voluntarily by
following the provisions of section 13.
9. In accordance with the provisions of Section 19 of the Companies Act, 2013,
a subsidiary company cannot either by itself or through its nominees hold
any shares in its holding company and no holding company shall allot or
transfer its shares to any subsidiary companies. Any such allotment or transfer
of shares in a company to its subsidiary is void. The section however does not
apply where:
(1) the subsidiary company holds shares in its holding company as the legal
representative of a deceased member of the holding company,

(2) the subsidiary company holds such shares as a trustee, or

(3) the subsidiary company was a shareholder in the holding company even
before it became its subsidiary.

10. According to section 19 of the Companies Act, 2013 a company shall not hold
any shares in its holding company either by itself or through its nominees.

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Also, holding company shall not allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.
Following are the exceptions to the above rule;

(a) Where the subsidiary company holds such shares as the legal
representative of a deceased member of the holding company; or
(b) Where the subsidiary company holds such shares as a trustee; or
(c) Where the subsidiary company is a shareholder even before it became
a subsidiary company of the holding company, but in this case, it will
not have a right to vote in the meeting of holding company.

In the given case, one of the shareholders of holding company has transferred
his shares in the holding company to a trust where the shares will be held by
subsidiary company. It means now subsidiary will hold shares in the holding
company. But it will hold shares in the capacity of a trustee. Therefore, we can
conclude that in the given situation S can hold shares in H.
11. Under section 20 of the Companies Act, 2013 a document may be served on
a company or an officer thereof by sending it to the company or the officer
at the registered office of the company by registered post or by speed post
or by courier service or by leaving it at its registered office or by means of
such electronic or other mode as may be prescribed. However, in case where
securities are held with a depository, the records of the beneficial ownership
may be served by such depository on the company by means of electronic or
other mode.
Under section 20 (2), save as provided in the Act or the rule thereunder for
filing of documents with the registrar in electronic mode, a document may be
served on Registrar or any member by sending it to him by post or by
registered post or by speed post or by courier or by delivering at his office or
address, or by such electronic or other mode as may be prescribed. However,
a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company
in its annual general meeting.
12. As per section 22 of the Companies Act, 2013 a company may authorise any
person as its attorney to execute deeds on its behalf in any place either in or

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outside India. But common seal should be affixed on his authority letter or
the authority letter should be signed by two directors of the company or it
should be signed by one director and secretary. This authority may be either
general for any deeds or it may be for any specific deed.
A deed signed by such an attorney on behalf of the company and under his
seal shall bind the company as if it were made under its common seal.
In the present case company has not neither given any written authority not
affixed common seal of the authority letter.
It means that Mr. Parag is not legally entitled to execute deeds on behalf of
the company. Therefore, deeds executed by him are not binding on the
company. Therefore, company can deny its liability as a partner.

© The Institute of Chartered Accountants of India

CHAPTER 3
PROSPECTUS
AND ALLOTMENT
OF SECURITIES

LEARNING OUTCOMES

At the end of this chapter, you will be able to:

♦ Define prospectus
♦ Understand various types of prospectus
♦ Explain the procedure for issue of prospectus and other
related concepts
♦ Know about the criminal and civil liability for mis- statements
in prospectus and punishment for fraudulently inducing
persons to invest money
♦ Understand the procedure for allotment of securities by
companies
♦ Know the procedure of private placement of securities

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 3.2 CORPORATE AND OTHER LAWS

♦
CHAPTER OVERVIEW

This chapter explains the provisions of Chapter III of the Companies Act, 2013
(hereinafter also referred to as “the Act” or “this Act”), consisting of sections 23 to
42 dealing with the prospectus and allotment of securities. Due to the inherent
differences between the nature of public and private companies in addition to
restrictions on the later, Chapter III of the Act contained the provisions for issue of
securities under two distinct headings (parts):

Part I - Public offer (Section 23-41)

Part II - Private placement (Section 42).

The provisions contained in Part I and part II are supplemented by the Companies
(Prospectus and Allotment of Securities) Rules, 2014.

Following diagram depicts the arrangement of relevant sections:

Issue of Prospectus and related

matters [Sec. 23, 26, 29, 31, 32,
25, 28, 27 & 40]

Allotment of securities [Sec. 39]

Prospectus and Allotment of
securities [Sec. 23-42]

Penalties [Sec. 34, 35, 36, 37 &

447*]
In a Public In a Private
company company
Private Placement [Sec. 42]

* Section 447 contains provisions relating to ‘punishment for fraud’.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.3

1. INTRODUCTION
Chapter III Consists of sections 23 to 42 as well as the Companies
(Prospectus and Allotment of Securities) Rules, 2014.

One of the advantages that a company has over other forms of business is its ability
to raise capital, either from the public at large or from a set of identified persons.
When the capital is raised from the public at large, it is done through a ‘Public
Offer’ and when it is raised from a selected group of identified persons it is carried
out through a ‘Private Placement’ of securities. Where the capital is raised from
the public at large through ‘Public Offer’, an advertisement shall be issued in
accordance with applicable provisions to protect the prospective investors from
fraud. Securities are allotted against those applications that are received in full and
in accordance with the advertisement issued. Such securities may be listed on an
appropriate segment of a recognised stock exchange.
This chapter will explain the provisions relating to raising of capital i.e. issue of
prospectus, allotment of securities, and other matters incidental thereto.

2. PUBLIC OFFER AND PRIVATE PLACEMENT

[SECTION 23]
As per Section 23 (1), a public company may issue securities:
a. To public through prospectus (herein referred to as “public offer”) by
complying with the provisions specified in Section 23 to Section 41 of the Act;
or
b. Through private placement by complying with the provisions specified in
section 42 of the Act; or
c. Through a rights issue or a bonus issue in accordance with the provisions of
the Act and in case of a listed company or a company which intends to get
its securities listed also with the provisions of the Securities and Exchange
Board of India Act, 1992 and the rules and regulations made thereunder.

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 3.4 CORPORATE AND OTHER LAWS

Public offer includes initial public offer (IPO) or further public offer (FPO) of
securities to the public by a company, or an offer for sale of securities (OFS) to the
public by an existing shareholder, through issue of a prospectus.
Students are advised to note; that Further Public Offer also known as Fellow-on
Public Offer, whereas OFS is sometimes called deemed Public Offer.

As per Section 23(2), a private company may issue securities:

a. By way of rights issue or bonus issue in accordance with the provisions of the
Act; or
b. Through private placement by complying with the provisions specified in
section 42 of the Act.
Summary of modes (for issue of securities)

Mode of Issue Public Company Private Company

Public Offer (including IPO, FPO or OFS) Yes No
Private Placement Yes Yes
Rights issue / Bonus Issue Yes Yes
Compliance with SEBI rules & Yes* No
regulations
*For a listed company or a company proposed to be listed.
Various modes of issue of securities available to a public company or a private
company are depicted in the following diagram for better understanding:

Issue of
securities

Public Private
Company Company

Prospectus/ Private Bonus Private

Right Issue
Public Offer Placement Issue Placement

IPO
Right Issue
FPO
Bonus
OFS Issue

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.5

Security is a wider term, not restricted to equity, preference, or debenture.

Meaning of Securities
As per section 2 (81), the term ‘securities’ means the securities as defined in clause
(h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The definition
given thereunder provides, “Securities” include:
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
(ia) Derivative;
(ib) Units or any other instrument issued by any collective investment scheme to
the investors in such schemes;
(ic) Security receipt as defined in clause (zg) of section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.
(id) Units or any other such instrument issued to the investors under any mutual
fund scheme.
Explanation - For the removal of doubts, it is hereby declared that
“Securities” shall not include any unit linked insurance policy or scrips or any
such instrument or unit, by whatever name called, which provides a combined
benefit risk on the life of the persons and investment by such persons and
issued by an insurer referred to in clause (9) of section 2 of the Insurance Act,
1938.
(ie) Any certificate or instrument (by whatever name called), issued to an investor
by any issuer being a special purpose distinct entity which possesses any debt
or receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be;
(ii) Government securities;
(iia) Such other instruments as may be declared by the Central Government to be
securities; and
(iii) Rights or interests in securities.

To bring ease to doing business for corporates, sub-section 3 and 4 to section 23

of the Act were inserted.
Prior to the above amendments, Indian companies could access the overseas equity

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 3.6 CORPORATE AND OTHER LAWS

markets only through depository receipts (e.g. American Depository Receipts

(ADRs) or Global Depository Receipts (GDRs) or by listing their debt securities (such
as, foreign currency convertible bonds, masala bonds, etc.) on foreign markets.
Since more and more businesses are going global & capital raised from across the
border is cost effective, hence section 23(3) was inserted to open ways of overseas
direct listing for notified class of public companies by allowing them to issue
notified securities for the purpose of listing on permitted stock exchanges in
permissible foreign jurisdictions or such other jurisdictions as may be prescribed.

Note: How overseas direct listing is different from ADRs/GRDs?

In a direct listing, a domestic company can enlist itself with the stock exchanges of
other countries without an intermediary. Unlike American Depositary Receipts
(ADRs) and Global Depositary Receipts (GDRs), the Indian company can directly
offer their shares in foreign markets instead of giving them to a foreign depository
bank. Direct listing excludes intermediaries, decreases the overall transaction cost,
and increases transparency.

Section 23(4) of the Act empowers the Central Government to exempt any class
or classes of public companies from complying with the provisions of Chapter III
(Prospectus and Allotment of Securities), Chapter IV (Share Capital and
Debentures), section 89 (Declaration in respect of a beneficial interest in any share),
section 90 (Register of significant beneficial owners in a company) or section 127
(Punishment for failure to distribute dividends) of the Act, by issuing notification.
Extract of section 23(3) and 23(4)
“(3) Such class of public companies may issue such class of securities for the purposes
of listing on permitted stock exchanges in permissible foreign jurisdictions or such
other jurisdictions, as may be prescribed.
(4) The Central Government may, by notification, exempt any class or classes of public
companies referred to in sub-section (3) from any of the provisions of this Chapter,
Chapter IV, section 89, section 90 or section 127 and a copy of every such notification
shall, as soon as may be after it is issued, be laid before both Houses of Parliament.”
Illustration (MCQ)
Which of following shall be considered as securities for purpose of section 23 of the
Act;
(i) Unit linked insurance policy

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.7

(ii) Actionable claim regarding mortgaged debt

(iii) Securities issued by National Asset Reconstruction Ltd.

Options
(a) (iii) only

(b) Both (i) and (iii) only

(c) Both (ii) and (iii) only
(d) None of the (i), (ii), and (iii)

Answer – (c) (Refer section 2(h) of the Securities Contracts (Regulation) Act, 1956)

3. REGULATION OF ISSUE AND TRANSFER OF

SECURITIES ETC. [SECTION 24]
Securities and Exchange Board of India is empower to administer those provisions
under chapter III and IV of the Act, which pertains to issue & transfer of securities
and non-payment of dividend; by listed companies or those companies which
intend to get their securities listed on any recognised stock exchange in India, by
making regulations in this behalf.

Additional Reading
Being capital market regulator, the power is conferred upon Securities and
Exchange Board of India under section 11, 11A, 11B and 11D of the Securities and
Exchange Board of India Act 1992.

All other matters (including matters relating to prospectus, return of allotment,

redemption of preference shares) specifically provided in this Act, shall be administered
by the Central Government, Tribunal or the Registrar, as the case may be.
Illustration (True/False)

Statement – The powers to administer the matters pertaining to redemption of preference

share by listed company vested with the Securities and Exchange Board of India.
Answer – False (Refer Section 24(1)(a)

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4. PROSPECTUS
Meaning
As per the definition given in section 2 (70) of the Act, Prospectus means any
document described or issued as a prospectus, and includes a red herring
prospectus referred to in section 32, or shelf prospectus referred to in section 31,
or any notice, circular, advertisement or other document inviting offers from
the public for the subscription or purchase of any securities of a body corporate.
The definition of prospectus has two limbs (means part and includes part) with four
elements in totality, these four constituents can be appreciated though diagram
presented below:

Prospectus

means includes

Any document Any notice, circular,

Shelf Red herring
described or advertisement or other
prospectus prospectus
issued as a document inviting
(section 31) (section 32)
prospectus offers from the public

Out of four constituents of prospectus definition, first three are quite clear; but the
fourth one i.e. document inviting offer from the public (considered as deemed
prospectus or prospectus by implication) need to be decoded further that too in
context to section 25 and landmark judicial pronouncements (elaborated later).
Other elements are also explained/elaborated at relevant place in this chapter.

DEEMED PROSPECTUS [SECTION 25] - THE DOCUMENTS CONTAINING

OFFER OF SECURITIES FOR SALE
Deemed Prospectus
Sub-section 1 provides, where a company allots or agrees to allot any of its
securities with a view that those securities (all or any part thereof) being offered
for sale to the public, any document by which the offer is made; shall deemed to
be a prospectus (issued by the company) for all purposes.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.9

All the enactments and rules of law containing provisions pertaining to prospectus,
matters to be stated, liability for misstatement shall apply to such deemed
prospectus; subject to section 25(3) and 25(4).

The purpose of deeming provision is to protect gullible investors from various

fraudulent practices.

Presumption of view (intent to offer securities for sale to public) under sub-
section 1
As per sub-section 2, the allotment is presumed to have been made with a view
of offering them to the public where either of following conditions fulfilled:
a. Securities are offered to the public within six months of allotment, or
b. Where the full consideration has not been received by the company at the
date of offer to the public.
It means, in case if any of above two conditions met; then issuing document shall
deemed to be Prospectus under sub-section 1.

Sub-section 1 and 2 to section 25 are not exhaustive in nature, there may be certain
other situations when issuing document may construe as deemed prospectus.
SEBI v Kunnamkulam Paper Mills Ltd 9
Where a rights issue is made to existing members with a right to renounce in favour
of others, if the number of such others exceeds fifty, it also becomes a deemed
prospectus.

Requirements in case of Deemed Prospectus

Matters to be stated additionally
As per Sub-section 3, following matters need to be stated (in the deemed
prospectus i.e. the document through which offer of securities to public is made
under sub-section 1) in addition to those required under section 26;
a. A statement of the net amount received or to be received as consideration
for the securities to which the offer relates.
b. The time and place at which the underlying contract for allotment may be
inspected.

9
(2013)178 Comp Cas 371 (Ker)

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 3.10 CORPORATE AND OTHER LAWS

c. The persons making the offer were named in the prospectus as directors
of the company.
Signing of deemed prospectus (on behalf of company)
Further, as per Sub-section 4, it is sufficient, if the document (deemed prospectus
i.e. through which offer of securities to public is made under sub-section 1) on
behalf of the company is signed by its two directors.
Illustration (True/False)
Statement – The matters specified under section 25(3) need to be stated in substitution
of matters stated under section 26.
Answer – False [Section 25(3) provides three matters that need to be stated in addition
to matters required to be stated in prospectus under section 26.]

Additional Reading – For better understanding only

Since the provisions of the Act relating to prospectus and the penal provisions are
attracted only when the prospectus (including deemed prospectus) has been
issued. "Issued" means issued to the public.
Hence In context of ‘Invitation to Public’ ‘Inviting offer from the Public’ or ‘Offer of
securities for sale to Public’ two valid questions arise here:
1. What constitute as ‘Public’? Does only ‘Public at large’ constitute as Public?
The term public is not restricted to the public at large. It includes any section of the
public, it is immaterial howsoever such section is selected.
Public connotes persons not personally known to the promoter as distinguished
from his own friends, relatives, connections and acquaintances.
Re, South of England Natural Gas and Petroleum Co. Ltd 10
Facts – 3000 copies of a document which was offered for subscription of shares in
a company and which was headed “For Private Circulation only,” circulated to the
members of certain number of gas companies only.
Legal Question – Was this a prospectus? Should it contain the particulars required
by the Act?
Decision – It was decided that though the offer was only to limited class, it was not
less than an offer to the public in any sense, because those persons from limited

10
(1911) 1 Ch. 573 | 104 LT 378

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.11

class were nonetheless the public. Hence, the distribution of a document entitled,
“For Private Circulation only” offering the company shares was an offer to the public
and their document was a prospectus. Therefore, it must contain the particulars
required by the Act.
2. Whether a single private communication tantamount to issue; can it be
construe to a prospectus to attract the provisions of the Act?
The term "issue" is not satisfied by a single private communication. There must
be some measure of publicity, however modest. A private communication is not
thus open and does not construe to be a prospectus, hence not attracting the
provisions of the Act.

Nash v. Lynde 11
Facts – Nash applied for certain shares in a company on the basis of a document
sent to him by Lynde, the managing director of the company. The document was
marked ‘strictly private and confidential’. The document did not contain all the
material facts required by the Act to be disclosed. Nash filed a suit for
compensation for loss suffered by him by reason of the Omissions.

Decision – Suit was dismissed.

Viscount Summer’s landmark dictum in this case is worth to consider here as basis
of above answer. “The public in the definition is of course a general word, no
particular number are prescribed. Anything from two to infinity may serve, perhaps
even one if he is intended to be the first of a series of subscribers but made further
proceedings needless by himself subscribing the whole. The point is that the offer
is such as to be opened to anyone who brings his money and applies in due from,
whether the prospectus was addressed to him on behalf of the company or not. A
private communication is not thus open and does not construe to be a prospectus.”

Illustration (Q&A)
Company's prospectus was given to a solicitor of the company and he forwarded it
to one of his clients despite it was marked strictly private, who applied for share based
upon same. Later filed suit for damages. Will this communication amount to an issue
to the public and whether the provisions of the Act are attracted?

11
(1929) AC 158 | 140 LT 146 (HL)

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 3.12 CORPORATE AND OTHER LAWS

Answer - No, this did not amount to an issue to the public and accordingly the
provisions of the Act relating to liability for omissions, etc. not attracted here. (Refer
Nash v. Lynde 12)

MATTERS TO BE STATED IN PROSPECTUS [SECTION 26] – CONTENTS &

REQUIREMENTS AS TO PROSPECTUS
Requirements as regards to date, sign, and contents to be included [Sub-
section 1]
Prospectus shall be dated and signed and shall state such information and set
out such reports on financial information as may be specified by the Securities
and Exchange Board of India (SEBI) in consultation with the Central Government.
Proviso to sub-section 1 says the regulations made by SEBI in respect of such
financial information or reports on financial information shall apply until the SEBI
specifies the information and reports on financial information u/s 26(1).
A declaration shall be made affirming the compliance of the provisions of this Act
(the Companies Act 2013).
A statement shall also include to the effect that nothing in the prospectus is
contrary to the provisions of:
a. The Companies Act, 2013
b. Securities Contract (Regulation) Act, 1956
c. Securities and Exchange Board of India Act, 1992
d. Rules and Regulations made under above three statutes.

The provisions of Section 26(1) shall not apply [Sub-section 2]

a. If prospectus issued to existing members or debenture-holders of a

company;

b. If prospectus issued relating to shares or debentures which are in all respects

uniform with shares or debentures previously issued and for the time being
dealt in or quoted on a recognised stock exchange.

12
(1929) AC 158 | 140 LT 146 (HL)

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.13

Date of publication of prospectus [Explanation to Sub-section 3]

The date indicated in the prospectus shall be deemed to be the date of its
publication.

Filing of signed copy with Registrar [Sub-section 4]

A prospectus shall not be issued unless a signed copy of such prospectus has been
delivered to the Registrar for filing.

Such copy shall be signed by every person who is named as either director or
proposed director in such prospectus. Duly authorised attorney can sign in
representative capacity.

Example – Ms. Sarika, executive director of leading Fintech Company has to fly to
Davos to attend World Economic Forum meet.

While company secretary of the company intended to file a copy of prospectus with
registrar upcoming, Ms. Sarika authorised in writing, Mr. Gautam for signing of such
copy on her behalf.

Date of filing copy of prospectus with registrar is important in context of concept

of validity of prospectus for issue, discussed under section 26(8).

Conditions in regard to Experts’ statement [Sub-section 5]

A prospectus issued under section 26(1) shall not include a statement purporting
to be made by an expert, if any of following condition met:
a. If he is engaged or interested in the formation or promotion or management
of the company, or
b. If the expert has not given written consent to the issue of the prospectus, or
c. If he has withdrawn the consent before the delivery of a copy of the
prospectus to the Registrar for filing.

A statement to that effect (non-existence of conditions, if expert’s statement is

included) shall also be included in the prospectus.

Purpose of sub-section 5 is to ensure independence of expert to protect the

financial interest of prospective investor who may invest in company after relaying

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upon the statement of such expert.

Expert as per section 2(38) of the Act, includes an engineer, a valuer, a Chartered
Accountant, a Company Secretary, a Cost Accountant and any other person who
has the power or authority to issue a certificate in pursuance of any law for the time
being in force.

Disclosure on the face of prospectus [Sub-section 6]

Prospectus issued under sub-section (1) shall, on the face of it, state/specify:
a. That a copy has been delivered for filing to the Registrar under sub-section
(4);

b. Documents required by this section to be attached to the copy so delivered

or refer to statements included in the prospectus which specify these
documents.
Validity of Prospectus for issue [Sub-section 8] 17
A prospectus is considered to be valid for issue, only if 90 days has not been lapsed
from the date on which a copy thereof is delivered to the Registrar under section
25(4).

The date of issue is important for many reasons, one of them being the value of
securities keeps changing.
If 90 days have expired after filling of prospectus, it is better to send a fresh copy
of prospectus to registrar under section 26(4); to avoid the penalties imposed under
section 26(9).

Validity of Prospectus for issue [Sub-section 9]

If a prospectus is issued in contravention of the provisions of section 26 the

company and every person who is knowingly a party to the issue of such
prospectus shall be punishable with fine of ₹ 50,000 to ₹ 3,00,000.

Example - The Board of Directors of a Pharmaceutical Limited has allotted shares

to the public by issuing a prospectus that is not filed with the Registrar of
Companies.

17
Sub- section 7 has been Omitted by the Companies (Amendment) Act, 2019, w.e.f. 15-8-2019.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.15

In this regard, it is to be noted that a public company can issue securities to the
public only by issuing a prospectus, under section 23(1)(a) of the Act.

Further section 26(4) requires that no prospectus shall be issued unless, a duly
signed copy of the prospectus forwarded to Registrar for filing.

In the given case, the company has issued the prospectus in violation of the
provisions of section 26. Hence, company as well as the person who is knowingly a
party to this, will be punishable with penalty under section 26 (9) of the Act.

Illustration (True/False)

Statement – The copy of prospectus submitted with registrar for filling need to be duly
signed by majority of directors.

Answer – False

Under section 26(4) of the Act, the copy of prospectus submitted with registrar for filing
shall be signed by every person who is named as either director or proposed director in
such prospectus. Duly authorised attorney can sign in representative capacity.

VARIATION IN TERMS OF CONTRACT OR OBJECTS STATED IN PROSPECTUS

[SECTION 27]
Sub-section 1 provides, the terms of a contract referred to in the prospectus or
objects for which the prospectus has been issued can be varied, but only with
the authority of the company given by it in general meeting by way of special
resolution.
First proviso to sub-section 1 requires that prescribed details of the notice which has
to be given to the shareholders are to be published in newspapers (one in English
and one in vernacular language) circulating in the city where the registered office of
the company is situated indicating clearly the justification for such variation.

The second proviso to sub-section (1) also prescribes that such company is not to
use any amount raised by it through the prospectus for buying, trading or
otherwise dealing in equity shares of any other listed company.
Sub-section (2) provides that the dissenting shareholders (i.e. those who did not
agree to the variation) are to be given an exit offer by promoters or controlling
shareholders at such exit price and in such manner and conditions as may be
specified by SEBI by making regulations for this purpose.

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Example – Ind-swift pharma limited after issue of prospectus, willing to make

variation in object of issue of prospectus (due to change in industry brought by
covid-19 among other dynamics of pharma industry). What is your piece of advice
to Ind-swift pharma limited?

In given case, Ind-swift should authorise the changes through special resolution
passed at general meeting and copy of notice that is given to shareholder for such
variation shall be published in newspaper along with justification of variation.

If any shareholder shows dissent then exit option shall be provided in accordance
with guideline issued in this regards by SEBI.

Once funds are raised through a given prospectus, the principle of “doctrine of
ultra vires” (mutatis mutandis) comes into play i.e., the company has to use the
funds strictly in accordance with the prospectus.

But if in any case variation need to made, then such deviations are required to be
pre-approved by the investors and ‘recall option’ needs to be given to the
dissenting investors. Deviation regarding use of proceeds of issue for buying,
trading or otherwise dealing in equity shares of any other listed company is not
permitted in any case.

Procedural Aspects
Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Sub-rule 1, provides for Special Resolution to be passed through Postal Ballot
and Contents to be included in Notice.
Further sub-rule 2, provides the advertisement of the notice (for getting the
resolution passed) shall be in Form PAS-1 and such advertisement shall be
published simultaneously with dispatch of Postal Ballot Notices to Shareholders.
According to sub-rule 3, the notice shall also be placed on the website of the
company, if any.

Illustration (MCQ)
In case of variation in terms of contract or objects in prospectus, which of the
followings statement are not true:
(i) Ordinary resolution shall be passed at general meeting

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(ii) Notice given to shareholder shall also be published in two newspapers

(iii) Amount so raised can be invested only in equity share of prescribed class of
companies.
Options
(a) (i) only
(b) Both (i) and (ii) only
(c) Both (i) and (iii) only
(d) Both (ii) and (iii) only
Answer – (c)

OFFER OF SALE OF SHARES BY CERTAIN MEMBERS OF COMPANY [SECTION

28]
Sub-section 1 provides that, member or members of a company, in consultation
with board of directors, may offer whole or part of their holding of shares to
the public, in accordance with the provisions of the law for the time being in force.
Further sub-section 2 provides that the document by which the offer of sale to the
public is made shall be treated as prospectus issued by company. Hence, all
provisions apply accordingly.
At last sub-section 3 highlights the members' responsibility in the matter of sale
under sub-section 1. It provides, the members whether individual or bodies
corporate or both, whose shares are proposed to be offered to the public, shall
collectively to authorise the company to take all actions on their behalf for
carrying out the transaction. They also have to reimburse the company for all
expenses made by it on this matter.

Procedural Aspects
Rule 8 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
According to Rule 8 (1) the provisions of section 23 to 41 of this Act and rules made
thereunder shall be applicable to an offer of sale referred to in section 28 except
for the provisions relating to:
a. minimum subscription
b. minimum application value

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c. any statement to be made by the Board of directors in respect of the

utilization of money; and
d. information which cannot be compiled or gathered by the offer or, with
detailed justifications for not being able to comply with such provisions.
Further, Rule 8 (2) requires that the prospectus issued under section 28 shall
disclose the name of the person or persons or entity bearing the cost of making
the offer of sale along with reasons.

Illustration (Q&A)
In case of Super-Fix-it Limited, some of members of a company offer part of their holding
of shares to the public (in consultation with board of directors), wherein company took
all actions on their behalf for carrying out the transaction.
Company incur the expense of ` 3.2 lakh for carrying out such transactions, can company
recover the amount so incurred in full from such members?
Answer – Yes, members who offer whole or part of their holding of shares to the
public, in consultation with board of directors, shall authorise the company to take all
actions on their behalf for carrying out the transaction, and bound to reimburse the
company for all expenses made by it on this matter [Refer section 28(3)].

PUBLIC OFFER OF SECURITIES TO BE IN DEMATERIALISED FORM

[SECTION 29]
Sub-section 1 has overriding effect to any other provision of this Act. It provides
that every company making a public offer and such other class or classes of
companies as may be prescribed, have to issue their securities only in
dematerialised form by complying with the provisions of the Depositories Act, 1996
and regulations made under it.
Sub-section 1A (inserted in 2019), provides that in case of prescribed class/classes
of unlisted companies, the securities shall be held or transferred only in
dematerialised form by complying with the provisions of the Depositories Act, 1996
and regulations made under it.
Further sub-section 2 provides, any other company may;
a. Convert its securities into demateriaiised form;

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b. Issue its securities in physical form in accordance with the provisions of this
Act;
c. Issue its securities in dematerialised form in accordance with the provisions
of the Depositories Act, 1996 and the regulations made thereunder.

Rule 9 (Dematerialisation of securities) and 9A (Issue of securities in dematerialised

form by unlisted public companies; of Companies (Prospectus and Allotment of
Securities) Rules, 2014 is relevant for procedural aspects pertaining to Public Offer
of Securities to be in Dematerialised Form.

ADVERTISEMENT OF PROSPECTUS [SECTION 30]

Where an advertisement of any prospectus of a company is published in any
manner, it shall be necessary to specify therein the contents of its memorandum as
regards the following:
a. Objects,
b. Liability of members and the amount of share capital of the company,
c. Names of the signatories to the memorandum,
d. Number of shares subscribed for by the signatories, and
e. Capital structure of the company.

SHELF PROSPECTUS [SECTION 31]

Meaning of Shelf Prospectus [explanation to section 31]
The expression “shelf prospectus” means a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus.
Need of Shelf Prospectus

A company is required to issue a prospectus each time it accesses the capital

market. It leads to unnecessary repetition for a company which makes more than
one offer of securities in a year to mobile funds from the public. A way out is shelf
prospectus which remains valid (on the shelf) for a specified time period during
which offers for securities may be made by a company to the public without going
through the arduous exercise of issuing fresh prospectus every time.

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Filing of shelf prospectus with the Registrar [Sub-section 1]

Shelf prospectus may be filled with the Registrar at the stage of first offer of
securities, by class or classes of companies as the Securities and Exchange Board
of India may provide by regulations in this behalf.
It has to indicate a period not exceeding one year as the period of validity of such
shelf prospectus.
The period of validity is to commence from the date of opening of the first offer
of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued during the
period of validity of such prospectus, no further prospectus is required.
Filing of ‘Information Memorandum’ with the Shelf Prospectus [Sub-section 2]
A company filing a shelf prospectus shall be required to file an information
memorandum with the Registrar within the prescribed time, prior to the issue of a
second or subsequent offer of securities under the shelf prospectus containing;
a. All material facts relating to new charges created,
b. Changes in the financial position of the company as have occurred between
the first offer of securities or the previous offer of securities and the
succeeding offer of securities, and
c. Such other changes as may be prescribed,
Proviso to Sub-section 2, provides a safeguard (in case of changes) to
applicants who made payment in advance. It is provided that where a company
or any other person has received applications for the allotment of securities along
with advance payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants and if they
express a desire to withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen days thereof.

Procedural Aspects
Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
The information memorandum shall be prepared in Form PAS-2.
It shall be filed with the Registrar along with the fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within one month prior to the issue of
a second or subsequent offer of securities under the shelf prospectus.

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Information Memorandum together with Shelf Prospectus is deemed

Prospectus [Sub-section 3]
Where an information memorandum is filed, every time an offer of securities is
made under sub-section (2), such memorandum together with the shelf prospectus
shall be deemed to be a prospectus.
Illustration (MCQ)
An applicant who made application for allotment along with advance payment of
subscription, if he expresses a desire to withdraw his application after changes
reported in information memorandum came to his knowledge. The company;
Options

a. May refund the monies at discretion of Board of Directors

b. Shall refund the monies after deducting the administrative charges within
fifteen days
c. Shall refund all the monies received as subscription within fifteen days
d. Shall refund the monies after deducting the administrative charges within 30
days
Answer – c [Refer proviso to section 31(2). It is provided that where a company or
any other person has received applications for the allotment of securities along
with advance payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants and if they
express a desire to withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen days thereof].

RED HERRING PROSPECTUS [SECTION 32]

Meaning of Red Herring Prospectus (explanation to section 32)
The expression "red herring" means a prospectus which does not include
complete particulars of the quantum or price of the securities.
Need of Red Herring Prospectus
Developments taking place in the financial markets from time to time allow
innovative methods of raising funds so as to avail the most of favourable market
conditions. Timing the issue and book building of issue are facilitated by the

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concept of red herring prospectus whereby the price per security and number of
securities are left open to be decided post closure of the issue.
Timing of issue the Red Herring Prospectus [Sub-section 1]
A company proposing to make an offer of securities may issue a red herring
prospectus prior to the issue of a prospectus.
Filing of Red Herring Prospectus with the registrar [Sub-section 2]
A company proposing to issue a red herring prospectus shall file it with the
Registrar at least three days prior to the opening of the subscription list and the
offer.
Obligations under Red Herring Prospectus vis-à-vis Prospectus [Sub-section 3]

A red herring prospectus shall carry the same obligations as are applicable to a
prospectus and any variation between the red herring prospectus and a
prospectus shall be highlighted as variations in the prospectus.
Filing with Registrar and SEBI upon closing of Offer [Sub-section 4]
Upon the closing of the offer of securities under this section, the prospectus
stating therein the total capital raised, whether by way of debt or share capital,
and the closing price of the securities and any other details as are not included
in the red herring prospectus shall be filed with the Registrar and the Securities
and Exchange Board.

Book Building is actually a price discovery method. In this method, the company
doesn't fix up a particular price for the shares, but instead gives a price range.
An underwriter builds a book by accepting orders from fund managers, indicating
the number of shares they desire and the price they are willing to pay.

CONCEPT OF ABRIDGED PROSPECTUS - ISSUE OF APPLICATION FORMS FOR

SECURITIES [SECTION 33]
Meaning of Abridged Prospectus [Section 2(1)]

Abridged Prospectus means a memorandum containing such salient features of a

prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

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Need of Abridged Prospectus

In fact, ‘Abridged Prospectus’ is a summarized form of actual prospectus,

containing the salient features of a prospectus to cut the cost involved in the
publication of large number of prospectus which has to accompany the application
forms for shares or debentures in case of public offer.
Abridged Prospectus accompany the application form [Sub-section 1]
Section 33(1) provides that every application form for shares or debentures has to
be accompanied with the abridged prospectus.

Proviso to sub-section 1 provides exceptions, when the requirement of abridged

prospectus does not apply;

a. When application form is issued in connection with a bona fide invitation to

a person to enter into an underwriting agreement with respect to shares or
debentures:

b. In relation to shares or debentures which were not offered to the public; or

c. Where offer is made only to existing members of the company

Right to receive prospectus [Sub-section 2]

Sub-section 2 provides that a prospectus (full prospectus) is to be made available

to any person who request for it before the closing of the subscription list and the
offer.

Penalty [Sub-section 3]

A company who makes any default in complying with the provisions of section 33,
shall be liable to a penalty of fifty thousand rupees for each default.

5. MIS-STATEMENTS IN PROSPECTUS
A contract of shares in a company is a contract of Uberrimae fides (Latin), which
means ‘utmost good faith’. The legal doctrine of Uberrimae fides provides that all
parties to contract must deal in good faith, making a full declaration of all material
facts. The intending purchasers of shares are entitled to true and correct disclosures of
all the facts in the prospectus.

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 3.24 CORPORATE AND OTHER LAWS

Hence, a prospectus must make all statements with scrupulous accuracy and not state
facts which are not strictly correct. Neither any information which the law requires to
be disclosed to the public be concealed or omitted to be stated from the prospectus
nor should the information given be false and misleading.

Mis- statements in prospectus is a serious offence which attracts the provisions of

section 34 (criminal liability) and / or section 35 (civil liability) of the Act. In this section
we will learn about misleading prospectus, remedies for misrepresentation in the
prospectus.

WHAT CONSTRUE AS MIS-STATEMENT AND MISLEADING PROSPECTUS

A prospectus is said to be misleading, if it includes any mis- statement. In common
parlance, mis-statement is the act of stating anything that is false (or not accurate).
A statement become false statement, if it produces a wrong impression of actual
facts. It could either be due to commission or omission or both.
As per section 34, a statement included in a prospectus shall be deemed to be untrue:
a. if the statement is misleading in the form and context in which it is included: or
b. where any inclusion or omission of any matter is likely to mislead

Some of landmark judicial pronouncements - only for reference and better

understanding
Mislead through false Statement (prima-facie of facts) - Henderson v. Lacon 21
It was stated in the prospectus, ‘the directors and their friends have subscribed a
large portion of the capital and they now offer to the public the remaining shares.’
Whereas, in actually each of director had subscribed only 10 shares. It was held that
such a statement is misleading one.
Misled by hiding truth through superficial statement - Rex v. Kylsant 22
In the prospectus, it is stated that the company had regularly paid dividends, in
actual, company has been incurring substantial losses during all those years.
Company used to write back some of the past provisions to the credit of the profit
and loss account. It was held that the prospectus did not disclose the true picture
of the company.

21
C 16/276/H211 (1865 - Cause number: 1865 H211)
22
Harvard Law Review Vol. 45, No. 6 (Apr., 1932), pp. 1078-1083 (available at
https://doi.org/10.2307/1332145)

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.25

Misled through ambiguous statement - Smith v. Chadwick 23

The prospectus of a manufacturing company contain, ‘the present value of turnover
is £1million sterling per annum,’ the statement was true only if production capacity
is considered but untrue if it meant the present production level (capacity in
utilisation). It was held that, such a statement which director knew may bear
multiple meaning out of which any can be false to their knowledge, considered to
be furnishing of misleading statement.

EFFECT OF MISLEADING PROSPECTUS – REMEDIES OF MISREPRESENTATION

The fear of heavy liability and criminal sanctions have controlled the directors'
tendency of "using extravagant terms and flattering description".
But if the prospectus contains a misleading or false statement or omits to disclose a
material fact which amounts to misrepresentation, the aggrieved shareholder has the
remedies. The law allows the following remedies for misrepresentation:

Remedies for
Misrepresentation in
Prospectus

Against Against the Against the persons

the Company & authorised to issue
Company others prospectus

Civil Liability Criminal Damages

Rescission Damages
(Compensation) Liability for Deceit

Remedy of Rescission, Damages and Deceit are not specified under this Act, they
are available under the Indian Contract Act 1872 read with relevant provisions of
Specific Relief Act 1963. Whereas Criminal and Civil Liability is provided under
section 34 and 35 respectively of this Act.
Since remedies specified above are alternative courses, hence all of these remedies
are not available simultaneously, whereas appropriate combination of these can be
claimed.

23
HL 18 Feb 1884

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 3.26 CORPORATE AND OTHER LAWS

To illustrate, claim for compensation under section 35 (civil liability) of this Act
(being special statute where jurisdictional power is vested in NCLT) shall not be
moved simultaneously with claim for Damages (under general provisions).

RIGHT OF RESCISSION
When to seek rescission?
A person who has purchased shares from the company on the basis of the prospectus
containing untrue and misleading statement of material facts is entitled to apply to
the court for the rescission of the contract, under the relevant provisions of the Indian
Contract Act 1872.

Effect of rescission
The agreement to take up shares is voidable at the option of the subscriber to the
shares, it will remain valid unless he actually rescinds it.
If the court accepts his application for the repudiation of the contract, company will
remove his name from the register of members and return his money with interest and
other incidental cost.
Entitlement to compensation for any damages which he sustained through the non-
fulfilment of the contract arises under section 75 of the Indian Contract Act 1872.
Exceptions – When right of rescission is not available?
a. Right to rescind allotment of shares will not be available to the subsequent
purchasers of shares from the market.
b. A subscriber to the Memorandum of Association cannot also seek any relief, as
the company cannot be considered to be in existence at the time when he
appended his signatures to the Memorandum of Association. He cannot be said
to have been influenced by any statement in the prospectus.
Illustration (Q&A)
All the statements contained in a prospectus issued by a company were literally true.
It was also stated in the prospectus that the company had paid dividends for a
number of years but there was no disclosure regarding the fact that the dividends
were paid out of realised capital profits and not out of trading profits. An allottee of
shares wants to avoid the contract on the ground that the prospectus was false in
material particulars.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.27

Answer – The non-disclosure of the fact that dividends were paid out of capital
profits is a concealment of material fact as a company is normally required to
distribute dividend only from trading or revenue profits and under exceptional
circumstances it can pay dividend out of capital profits. Hence, a material
misrepresentation has been made.
Accordingly, in the given case the allottee can avoid the contract of allotment of shares.

RIGHT OF ACTION FOR DAMAGES

When to evoke?

In the cases where mis- statement amounts to fraud, aggrieved investor also gets a
right of action for damages against the company. This right is available even after the
company has gone into liquidation.

Pre-requisite to claim for damages

a. Misrepresentation (fraudulent) was there in the prospectus and it is of material

fact

b. Person is intended to act upon it

c. Person suffered the damages as consequences of acting upon such fraudulent

misrepresentation.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS [SECTION 35]

Offence under section 35

Loss or damage to subscriber of securities, as a consequence of acting on basis of

inclusion or omission of any matter in the prospectus; which is misleading the
subscriber/s.

Who shall be held liable?

a. Company; and

b. Every person who is/has;

i. A director of the company at the time of the issue of the prospectus;

ii. Authorised himself to be named and is named in the prospectus as a

director of the company, or has agreed to become such director, either
immediately or after an interval of time;

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 3.28 CORPORATE AND OTHER LAWS

iii. A promoter of the compa;.ny;

iv. Authorised the issue of the prospectus; and

v. An expert referred to in sub-section (5) of section 26,

Liability for an offence under section 35

A person found guilty under section 35, in addition to any punishment under
section 36, a company and every other person shall also be liable to pay
compensation to every person who has sustained loss or damage.

Exception to liability for guilty/offence under section 35 [Sub-section 2]

Sub-section 2, provides the instances when a person shall not be held guilty under
section 35 of this Act, if he proves:

a. He withdrew his consent to be a director of company and prospectus issued

without his consent and authority.

b. He has given reasonable public notice to effect, that prospectus was issued
without his knowledge and consent.

c. He made the statement on the authority of an expert whom he believed to

be competent and that the expert had given his consent and had not
withdrawn it.

d. He had reasonable ground for believing the statement to be true and that
he did believe it to be true up to the time of allotment.

e. The statement was a correct copy of some extract from an official document
and that he had in fact believed.

Personal Liability when intend to defraud [Sub-section 3]

Every person referred under sub-section 1 shall be personally responsible,

without any limitation of liability;

− For all or any of the losses or damages that may have been incurred by any
person who subscribed to the securities on the basis of such prospectus;

Where it is proved that a prospectus has been issued with intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent
purpose.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.29

Illustration (Q&A)

A prospectus issued by a company contained certain mis-statements. On becoming

aware of the fact regarding mis-statements in the prospectus, one of the experts
Anilesh who had earlier given his consent, forthwith gave a reasonable public notice
stating that the prospectus was issued without his knowledge and consent. Is it
possible for Anilesh to escape liability for mis-statement in the prospectus?
Answer – Section 35 (2) of the Companies Act, 2013 states that no person shall be
liable under Sub-section (1) if he proves that the prospectus was issued without his
knowledge or consent, and that on becoming aware of its issue, he forthwith gave
a reasonable public notice that it was issued without his knowledge or consent.

The case of Anilesh is covered under the above exception provided by Sub-section
(2) and therefore, he will escape liability for mis-statement in the prospectus.
CRIMINAL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS
[SECTION 34]
Offence under section 34?
Where a prospectus is issued, circulated or distributed that includes;
a. Any statement which is untrue or misleading in form or context in which it is
included or
b. Where any inclusion or omission of any matter is likely to mislead.
Who shall be held liable?
Every person who authorises the issue of such prospectus
Liability for an offence under section 34
Such persons found guilty under section 34 shall be liable for punishment under
section 447 of this Act.
Exception to liability for guilty/offence under section 34 [Proviso to section
34]
Proviso to section 34 provides the instances when a person shall not be held guilty
under section 34 of this Act, if he proves that:

a. Such mis-statement or omission was immaterial, or

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 3.30 CORPORATE AND OTHER LAWS

b. He had reasonable grounds to believe, and did up to the time of issue of the
prospectus believe, that the statement was true or the inclusion or omission
was necessary.

Note
a. Loss from mis-statement is not essential, to held a person guilty under section
34.
b. Liability for offence under section 34, is strict liability, hence it is immaterial
where the omission is intentional or unintentional, in both case person will
be held guilty under section 34 and liable for punishment under section 447
of this Act.

Summary of section 34 and 35.

Liability for Mistatement

Criminal Liability Civil Liabilty

Company, director, proposed director, promoter,

Every person who authorised for issue of prospectus
Expert, one who authorised for issue of prospectus

Punishable u/s 447 Pay compensation to Investors

Defenses Defenses

Believed on Issued without his

Immaterial Reasonable Withdrew its consent
consent u/s knowledge, Public
ground to believe to be a director
26(5) Notice

Illustration (Q&A)
An allottee of shares in a company brought action against a director in respect of
false statements made in the prospectus. The director contended that the statements
were prepared by the promoters and he simply relied on them. Is the director liable
under the circumstances?
Answer – Yes, the Director shall be held liable for the false statements made in the
prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas section
34 imposes a criminal punishment on every person who authorises the issue of such
prospectus, section 35 more particularly includes a director of the company in the
imposition of liability for such mis-statements.
Certain situations when a director will not incur any liability for mis-statements in
a prospectus are covered under exceptions provided by Section 35 (2) but no such

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.31

exception specifies that relying on the statements prepared by the promoters of

the company is a valid ground for a director to escape liability for mis-statement.
DAMAGES FOR DECEIT
When remedy of damages for deceit is available?
Persons responsible for the issue of prospectus can also be held liable in an action
for deceit, under general law as provided by section 19 of the Indian Contract Act,
1872.
This remedy shall be available even where the remedy by way of rescission as
against the company is lost either through latches or negligence or even if the
company goes into liquidation.
Prerequisite to claim damages for deceit is available
a. There was a fraudulent mis-statement related to some existing material facts.
b. He is original allottee and had seen the prospectus.
c. He has been actually deceived.

Peek v. Gurney
Gurney issued a fraudulent prospectus on behalf of a company. No shares were
purchased by Peek at that time. Several months afterwards, Peek purchased 2,000
shares of the company from the stock exchange. He brought an action against the
directors for deceit (on the basis of prospectus). Court held, the directors were not
liable as the shares were not purchased on the basis of prospectus.

6. PUNISHMENT FOR FRAUDULENTLY

INDUCING PERSONS TO INVEST MONEY
[SECTION 36]
Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any
material facts, to induce another person to enter into, or to offer to enter into:
a. any agreement for, or with a view to, acquiring, disposing of, subscribing for,
or underwriting securities; or

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 3.32 CORPORATE AND OTHER LAWS

b. any agreement, the purpose or the pretended purpose of which is to secure

a profit to any of the parties from the yield of securities or by reference to
fluctuations in the value of securities; or
c. any agreement for, or with a view to obtaining credit facilities from any bank
or financial institution,
shall be liable for action under section 447.
Example – A huge sums of money were collected under a document described as
"project overview" by NRIs but shares not allotted in the proposed joint venture
company instead the money was diverted to some off-shore companies controlled
by the accused persons. Prima-facie offence under section 36 made-out.

7. ACTION BY AFFECTED PERSONS [SECTION 37]

A suit may be filed or any other action may be taken under section 34 or section
35 or section 36 by:
a. Any person,
b. Group of persons or
c. Any association of persons
If affected by any misleading statement or the inclusion or omission of any
matter in the prospectus.
Illustration
M applies for equity shares of a company on the basis of a prospectus which contains
mis–statement. The shares are allotted to him, who afterwards transfers them to N.
Whether N can bring an action for a rescission on the ground of mis-statement under
section 37 of the Companies Act, 2013?
Answer – No. N cannot bring an action for rescission of the contract for buying
shares from M on the ground of mis-statement made in the prospectus. Section 37
of the Companies Act, 2013 does not become applicable in such a situation.
It is noteworthy that according to Section 37, a suit may be filed or any other action
may be taken under section 34 or section 35 or section 36 only by any person,
group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus. Therefore,
only M is eligible to file a suit.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.33

Section 37 has paved way for class action

Class action suit is for a group of people filing a suit against a defendant who has
caused common harm to the entire group or class. This is not like a common
litigation method where one defendant files a case against another defendant while
both the parties are available in court. In the case of class action suit, the class or
the group of people filing the case need not be present in the court and can be
represented by one petitioner. The benefit of these type of suits is that if several
people have been injured by one defendant, each of the injured person need not
to file a case separately but all the people can file one single case together against
the defendant.

8. PUNISHMENT FOR PERSONATION FOR

ACQUISITION, ETC., OF SECURITIES
[SECTION 38]
The purpose of the section is to prevent allotment of shares in fictitious names.
Sub-section 1 provides, any person shall be liable for punishment under section
447, if:
a. He makes or abets the making of an application in a fictitious name to a company
for acquiring, or subscribing for, its securities; or
b. He makes or abets the making of multiple applications in different names or
different combinations of his name or surname for acquiring or subscribing for
its securities; or
c. otherwise induces, directly or indirectly a company to allot or register any
transfer of any securities to him or to any other person in a fictitious name.
Sub-section 2, provides that every company which issues a prospectus is required
to reproduce prominently the provisions of the sub- section (1) in the prospectus
and every form of application for securities.

Note:
A person who gets shares allotted in a fictitious name becomes liable as a
shareholder. Thus, where a person carried on business under an assumed name and
took shares in that name, his trustee in bankruptcy of the said person, could not
avoid liability.

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 3.34 CORPORATE AND OTHER LAWS

Sub-section 3 provides, where a person has been convicted under the section, the
court may order disgorgement of any gain made by such person. The order may
also include seizure and disposal of securities which may be found in his possession.
The amount received through disgorgement or disposal of securities under sub-
section (3), is to be credited to the Investor Education and Protection Fund. [Sub
section (4)]

9. PUNISHMENT FOR FRAUD [SECTION 447]

Amount and Fine Imprisonment
nature of fraud Minimum Maximum Minimum Maximum
Fraud involving less
than 10 lakh rupees
or 1% of turnover, Up to ` 50 Up to 5
- or/and -
whichever is lower lakh years
(public interest not
involved)
Fraud involving at
least 10 lakh rupees
Equal to 3 times of
or 1% of turnover,
amount amount of and 6 Months 10 Years
whichever is lower
of fraud fraud
(public interest not
involved)
Fraud in question Equal to 3 times of
involves public amount amount of and 3 Years 10 Years
interest of fraud fraud

Section 447 provides three explanations, read as:

(i) “fraud” in relation to affairs of a company or any body corporate, includes
any act, omission, concealment of any fact or abuse of position committed by
any person or any other person with the connivance in any manner, with
intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person, whether
or not there is any wrongful gain or wrongful loss.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.35

(ii) “wrongful gain” means the gain by unlawful means of property to which
the person gaining is not legally entitled.
(iii) “wrongful loss” means the loss by unlawful means of property to which the
person losing is legally entitled.

Fraud, in relation to affairs of a company or body coprate

Includes
Committed by With intent to
Any act, Whether or
Any person Deceive, not there is
Omission,
or Gain undue any
Concealment advantage,
of the facts, Any other Wrongful gain
person with the or or
and/or
connivance in Injure the
Abuse of Wrongful loss;
any manner; interests;
position;

of the company or
its shareholders or
its creditors or
any other person,

Illustration
Mr. Raju one of prospective investor under section 37 of this Act, sue the persons who
authorise the issue of prospectus for the fraudulent misstatements they made in the
prospectus. Mr. Raju also filed a complaint under section 420 of the IPC, 1860 and
section 447 of this Act.
Mr. Angad one of the authorised persons, plead that Mr. Raju did not took any share,
hence he has not borne any sort of loss, therefore he cannot seek the remedies, for
what he is asking for and they are not punishable under section 447, because fraud
is not committed against Mr. Raju. Whether the persons who authorised the issue of
prospectus punishable under section 447?

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 3.36 CORPORATE AND OTHER LAWS

Answer

In this case, the persons who authorised the issue of prospectus shall be punishable
under section 447 for the fraudulent misstatement, despite the fact that Mr. Raju
had not borne any loss. Because wrongful gain or loss is not essential constituent
of fraud under section 447.

10. ALLOTMENT OF SECURITIES BY COMPANY

[SECTION 39]
MEANING OF ALLOTMENT
Offers for shares are made on application forms supplied by the company. When
an application is accepted, it is an allotment
Hence, in general sense 'allotment' is neither more nor less than the acceptance by
the company of the offer to take shares.

In technical context, it is an appropriation out of the previously unappropriated

capital of a company.

Note
Where forfeited shares are re-issued, it is not the same thing as an allotment.

A valid allotment has to comply with the requirements of the Act and principles of
the law of contract relating to acceptance of offers.
Section 39 of the Act and the Companies (Prospectus and Allotment of Securities)
Rules, 2014 contains provisions in respect of allotment of securities when there is a
public offer.

MINIMUM SUBSCRIPTION IS A MUST [SUB-SECTION 1]

The first requisite of a valid allotment is that of minimum subscription.

Hence, when shares are offered to the public, the amount of minimum subscription
has to be stated in the prospectus.
No shares can be allotted unless:

a. At least so much amount (which is stated as minimum subscription) has been

subscribed and

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.37

b. The sums payable on application for the amount so stated have been paid to
and received by the company by cheque or other instrument from the
subscribers or investors at the time of making application.

Note:
As per the regulation 45(1) of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018 28, the minimum
subscription is 90% of the entire issue.
Any means by which money can be remitted may be used, but remittances must be
cleared and actual cash received by the company before proceeding to allotment.
An application for shares, if not accompanied by any such payment, does not
constitute a valid offer.

QUANTUM OF AMOUNT PAYABLE ON APPLICATION [SUB-SECTION 2]

The amount payable on application shall not be less than:
a. 5% of the nominal amount of the security or
b. Such other percentage or amount, as may be specified by the Securities and
Exchange Board by making regulations in this behalf.

Here, it is important to note that as per the regulation 47(4) of the 29Securities and
Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, the minimum sum payable on application per specified security
shall be at least twenty five percent of the issue price.
Further, proviso to regulation 47(4) provides that in case of an offer for sale,
the full issue price for each specified security shall be payable at the time of
application.

Example - If listed company offer the shares with nominal value of ` 10 then
application money shall be at least ` 2.5 and if nominal value is ` 100 then shall be
at least ` 25.

28
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 are not a part of
syllabus at Intermediate Level. However, it is necessary to build the understanding of the
students.
29
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 are not a part of
syllabus at Intermediate Level. However, it is necessary to build the understanding of the
students.

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 3.38 CORPORATE AND OTHER LAWS

CONSEQUENCES IF MINIMUM AMOUNT IS NOT SUBSCRIBED [SUB-SECTION

3]– RETURN OF APPLICATION MONEY
If the stated minimum amount has not been subscribed and the sum payable on
application is not received within a period of 30 days (or any other period as
prescribed by SEBI) from the date of issue of the prospectus, the amount received
from applicants shall be returned.
Time period for return of application money
As per rule 11(1) of the Companies (Prospectus and Allotment of Securities) Rules,
2014, such refund shall be made within a period of 15 days from the closure of
such issue.
Default in return of application money
As per rule 11(1) of the Companies (Prospectus and Allotment of Securities) Rules,
2014, in case of default in refund within that period, directors and other officers
responsible for default shall be jointly and severally liable to repay that money
with interest at the rate of 15% pa.
Source for return of application money
According to Rule 11 (2), the application money to be refunded shall be credited
only to the bank account from which the subscription was remitted.

Section 40(3) and Rule 11(2) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 are confirming provisions regarding return of application
money, in case where allotment is not done.

RETURN OF ALLOTMENT [SUB-SECTION 4]

Whenever a company having a share capital makes any allotment of securities, it
shall file with the Registrar a return of allotment in manner as prescribed in the
Companies (Prospectus and Allotment of Securities) Rules, 2014.
Time Limit for filing Return of Allotment
According to Rule 12 (1) of the Companies (Prospectus and Allotment of Securities)
Rules, 2014, the company shall file a return of allotment with Registrar in Form PAS-
3 within 30 days along with the fee as specified in the Companies (Registration
Offices and Fees) Rules, 2014.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.39

Attachments to Form PAS-3

According to Rule 12 (2) of the Companies (Prospectus and Allotment of Securities)
Rules, 2014, lists of following particulars (duly certified by the signatory of the Form
PAS-3 for completeness and correctness) shall accompany:
a. A list of allottees stating their names, address, occupation, if any, and

b. Number of securities allotted to each of the allottees.

Additional attachments to Form PAS-3 – In case share issued for consideration
other than cash.
Rule 12 (3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
provides, in the case of securities (not being bonus shares) allotted as fully or partly
paid up for consideration other than cash, then following documents shall also
be attached;
a. A copy of the contract, duly stamped, pursuant to which the securities have
been allotted
b. Any contract of sale if relating to a property or an asset, or a contract for
services or other consideration.
Further Rule 12 (4) states that where a contract referred above is not reduced to
writing, the company shall furnish complete particulars of the contract stamped
with the same stamp duty as would have been payable if the contract had been
reduced to writing and same shall deemed to be an instrument within the meaning
of the Indian Stamp Act, 1899.
Rule 12 (5), requires a report of a registered valuer in respect of valuation of the
consideration if either of rule 12(3) or 12(4) applicable.
Attachments to Form PAS-3 – In case share issued in pursuance of Section
62(1)(c)
Rule 12 (7) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
states that in case the shares have been issued in pursuance of clause (c) of sub-
section (1) of section 62 by a company other than a listed company whose equity
shares or convertible preference shares are listed on any recognised stock
exchange, there shall be attached to Form PAS-3, the valuation report of the
registered valuer.

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 3.40 CORPORATE AND OTHER LAWS

PUNISHMENT FOR DEFAULT [SUB-SECTION 5]

In case of any default under sub-section (3) or sub-section (4), the company and its
officer who is in default shall be liable to a penalty, for each default, of one
thousand rupees for each day during which such default continues or one lakh
rupees, whichever is less.
Illustration
After having received 80% of the minimum subscription as stated in the prospectus,
Raksha Detective Instruments Limited, before finalisation of the allotment, withdrew
50% of the said amount from the bank for the purchase of certain assets. Thereafter,
it started allotting the shares to the subscribers. Rashmi, one of the subscribers, was
allotted 1000 equity shares. She, however, refused to accept the allotment on the
ground that such allotment was violative of the provisions of the Companies Act,
2013.
Answer
According to the above example, Raksha Detective Instruments Limited has
received only 80% of the minimum subscription as stated in the prospectus. Since
minimum amount has not been received in full, the allotment is in contravention of
section 39 (1) of the Companies Act, 2013 which prohibits a company from making
any allotment of securities until it has received the amount of minimum
subscription stated in the prospectus. Further, under section 39 (3), such company
is required to refund the application money received (i.e. 80% of the minimum
subscription) to the applicants.
Therefore, in the present case, Rashmi is within her rights to refuse the allotment
of shares which has been illegally made by the company.

11. SECURITIES TO BE DEALT WITH IN STOCK

EXCHANGES [SECTION 40]
FILING OF AN APPLICATION WITH RECOGNISED STOCK EXCHANGE
[SUB-SECTION 1]
Before making public offer, every company shall make an application to one or
more recognised stock exchange or exchanges and obtain permission for the
securities to be dealt with in such stock exchange or exchanges.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.41

PROSPECTUS TO STATE NAME OF STOCK EXCHANGE [SUB-SECTION 2]

Name or names of the stock exchange in which the securities shall be dealt with,
must be stated in the prospectus.
MAINTAINING OF SEPARATE BANK ACCOUNT [SUB-SECTION 3]
All monies received on application from the public for subscription to the securities
shall be kept in a separate bank account in a scheduled bank and shall not be
utilised for any purpose other than:
a. For adjustment against allotment of securities where the securities have
been permitted to be dealt with in the stock exchange or stock exchanges
specified in the prospectus; or

b. For the repayment of monies within the time specified by the Securities
and Exchange Board, received from applicants in pursuance of the
prospectus, where the company is for any other reason unable to allot
securities.
Note: Section 40(3) and Rule 11(2) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 are confirming provisions regarding return of application
money; in case where allotment is not done.
Rule 11(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
is already discussed before in the chapter.
CONDITION PURPORTING TO WAIVE COMPLIANCE SHALL BE VOID
[SUB-SECTION 4]
Any condition purporting to require or bind any applicant for securities to waive
compliance with any of the requirements of this section shall be void.
DEFAULT IN COMPLYING WITH PROVISIONS [SUB-SECTION 5]

If a default is made in complying with the provisions of this section, the company
shall be punishable with a fine which shall not be less than five lakh rupees but
which may extend to fifty lakh rupees and every officer of the company who is in
default shall be punishable with fine which shall not be less than fifty thousand
rupees but which may extend to three lakh rupees.

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 3.42 CORPORATE AND OTHER LAWS

Penalty provisions provided under sub-section 5 can be summarized as:

Defaulter Minimum Fine Maximum Fine

Company 5,00,000 50,00,000
Defaulting Officer 50,000 3,00,000

PAYMENT OF COMMISSION [SUB-SECTION 6]

A company may pay commission to any person in connection with the subscription
to its securities subject to rule 13 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014.

Note- No commission shall be paid to any underwriter on securities, which are not
offered to the public for subscription.

Authorisation and Source

The payment of such commission shall be authorized in the company’s Articles of

Association. The commission may be paid out of:

a. proceeds of the issue, or

b. the profit of the company, or

c. both
Rate of commission

Security Rate
Should not exceed;
5% of the price at which the shares are issued
Shares
Or
Any less rate/amount authorised by articles
Should not exceed;
2.5% of the price at which the debentures are issued
Debentures
Or
Any less rate/amount authorised by articles

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.43

Hence students are advised to note;

Maximum rate of commission can be 5% and 2.5% in case of shares and debentures
respectively subject to rate authorised by article.

Example – Ind-swift Pharma Labs Limited issued the shares to raise capital. Article
of Ind-swift authorised payment of commission at rate of 2%. Since rate of
commission should not exceed 5% of the price at which the shares are issued or
any less rate/amount authorised by articles Hence, cap for payment of commission
under section 40(6) of the Act is 2%.
Disclosure of the particulars in prospectus regarding underwriting
The prospectus of the company shall disclose the following particulars:
a. the name of the underwriters;
b. the rate and amount of the commission payable to the underwriter; and
c. the number of securities which is to be underwritten or subscribed by the
underwriter absolutely or conditionally.

Copy of payment of commission to be delivered to Registrar

A copy of the contract for the payment of commission is delivered to the Registrar
at the time of delivery of the prospectus for filling.
Illustration Q&A
The Board of Directors of a company decide to pay 5% of the issue price of shares as
underwriting commission to the underwriters. However, the Articles of Association of
the company permit only 3% commission. The Board of Directors further decide to
pay the commission out of the proceeds of the share capital. Are the decisions taken
by the Board of Directors valid under the Companies Act, 2013?
Answer – Under Rule 13 of the Companies (Prospectus and Allotment of Securities)
Rules, 2014 the rate of commission paid or agreed to be paid shall not exceed, in
case of shares, five percent (5%) of the price at which the shares are issued or a rate
authorised by the articles, whichever is less.
The same rule allows the commission to be paid out of proceeds of the issue or the
profit of the company or both.

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 3.44 CORPORATE AND OTHER LAWS

Therefore, the decision of the Board of Directors to pay 5% commission to the

underwriters is invalid since the same cannot exceed the rate which is permitted by
the Articles. However, the decision to pay commission out of the proceeds of the
share issue is valid provided it is paid at the rate authorised by the Articles.

12. GLOBAL DEPOSITORY RECEIPT [SECTION 41]

A global depository receipt is a general name for a depository receipt where a
certificate issued by a depository bank, which purchases shares of foreign
companies, creates a security on a local exchange backed by those shares.

GDR as per section 2(44) of this Act means any instrument in the form of a
depository receipt, by whatever name called , created by a foreign depository
outside India & authorized by a company making an issue of such depository
receipts.

Section 41 provides, company may issue depository receipts in any foreign

country after passing a special resolution in its general meeting and subject to
such conditions as may be prescribed in the Companies (Issue of Global
Depository Receipts) Rules, 2014.
HOW GDR OPERATES?

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.45

MANNER AND FORM OF DEPOSITORY RECEIPTS

The depository receipts can be issued by way of public offering or private
placement or in any other manner prevalent in the concerned jurisdiction and may
be listed or traded on the listing or trading platform in the concerned jurisdiction.
The depository receipts may be issued against issue of new shares or may be
sponsored against shares held by shareholders of the company in accordance with
such conditions as the Central Government or Reserve Bank of India may prescribe
or specify from time to time.
The underlying shares shall be allotted in the name of the overseas depository bank
and against such shares, the depository receipts shall be issued by the overseas
depository bank.
VOTING RIGHT
A holder of depository receipts may become a member of the company and shall
be entitled to vote as such only on conversion of the depository receipts into
underlying shares after following the procedure provided in the Scheme and the
provisions of this Act.
Until the conversion of depository receipts, the overseas depository shall be
entitled to vote on behalf of the holders of depository receipts in accordance with
the provisions of the agreement entered into between the depository, holders of
depository receipts and the company in this regard.

13. PRIVATE PLACEMENT [SECTION 42]

Provisions relating to the ‘private placement’ are contained in Part II of Chapter III
of the Act, which consist of only one section i.e. section 42 – Issue of shares on
private placement basis.
A company may make private placement of securities subject to provisions of
section 42 of this Act in supplement with those stated under rule 14 of the
Companies (Prospectus and Allotment of securities) Rules, 2014.
MEANING OF PRIVATE PLACEMENT [EXPLANATION I TO SECTION 42(3)]
Private placement means any offer or invitation to subscribe or issue of securities
to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions
specified in section 42.

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OFFER TO BE MADE ONLY TO A SELECT GROUP OF PERSONS [SUB-SECTION 2]

A private placement shall be made only to a select group of not more than two
hundred (200) persons in a financial year, who have been identified by the Board,
after passing as special resolution in this regard.

Note:
1. These select group of persons is referred to as "identified persons"
2. While computing threshold limit of 200, following shall be excluded;
a. qualified institutional buyers and,
b. employees of the company being offered securities under a scheme of
employees stock option under section 62(1)(b)
3. As per Explanation II to sub-section 3, the term "qualified institutional
buyer" means the qualified institutional buyer as defined in the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
4. Section 42(2) originally contains ‘fifty (50) or such higher number as may
be prescribed’. Since Rule 14 (2) of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 (as amended through Companies
(Prospectus and Allotment of Securities) Second Amendment Rules, 2018)
prescribed ‘an offer or invitation to subscribe securities under private
placement shall not be made to persons more than two hundred (200) in
the aggregate in a financial year’, hence limit of identified persons under
section 42(2) shall be read as two hundred (200).

5. The aforesaid restrictions would be reckoned individually for each kind of

security that is equity share, preference share or debenture.
6. Non-banking financial companies (NBFCs) which are registered with the Reserve
Bank of India; and housing finance companies (HFCs) which are registered with
the National Housing Bank; if they are complying with any regulations made by
the Reserve Bank of India or the National Housing Bank in respect of offer or
invitation to be issued on private placement basis, then need not to comply with
rule 14(2) stated above.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.47

PRIVATE PLACEMENT SHALL BE DEEMED TO BE AN OFFER TO THE PUBLIC

[EXPLANATION III TO SECTION 42(3) READ WITH SUB-SECTION 11 TO
SECTION 42)]
As per explanation III to section 42(3), if a company, listed or unlisted, makes an
offer to allot or invites subscription, or allots, or enters into an agreement to allot,
securities to more than 200 identified persons, whether the payment for the
securities has been received or not or whether the company intends to list its
securities or not on any recognised stock exchange in or outside India, the same
shall be deemed to be an offer to the public and provisions contained in section 23
to 41 shall apply.

Further section 42(11) provides, in such case all the provisions of this Act and the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board
of India Act, 1992 shall be applicable.
Though penalty under sub-section 9 and 10 to section 42 of this Act, still can be
imposed.
MANNER OF ISSUING PRIVATE PLACEMENT OFFER AND APPLICATION [SUB-
SECTION 3]
A company making private placement shall issue private placement offer and
application to identified persons (whose names and addresses are recorded by
the company) in the form and manner prescribed below.

Note: Private placement offer and application shall not carry any right of
renunciation.

Resolution for the Private Placement Offers

Rule 14 (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
requires prior approval of the shareholders of the company, by a special resolution
for each of the private placement offers or invitations. The explanatory
statement annexed to the notice for shareholders' approval, must disclose the
following:
a. Particulars of the offer including date of passing of Board resolution;
b. Kinds of securities offered and the price at which security is being offered;
c. Basis or justification for the price (including premium, if any) at which the
offer or invitation is being made;

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 3.48 CORPORATE AND OTHER LAWS

d. Name and address of valuer who performed valuation;

e. Amount which the company intends to raise by way of such securities;
f. Material terms of raising such securities, proposed time schedule, purposes
or objects of offer, contribution being made by the promoters or directors
either as part of the offer or separately in furtherance of objects; principle
terms of assets charged as securities.

Students are advised to take note of certain exceptions above rule

Board resolution under section 179(3)(c) 30 shall be adequate in case of offer or
invitation for non-convertible debentures, where the proposed amount to be
raised does not exceed the limit as specified in section 180(1)(c). But if amount
is above the said limit, it shall be sufficient if the company passes a previous special
resolution only once in a year for all the offers or invitations for such debentures
during the year.
Even for issue of securities to QIBs, it shall be sufficient to pass a previous special
resolution only once in a year for all the offers or invitations for all the allotments
to such buyers during the year.

Filing of Resolution with Registrar

Copy of resolutions passed above shall be moved to registrar prior to issue of
private placement offer cum application letter.

Note: Vide Companies (Prospectus and Allotment of Securities) Amendment Rules,

2022 the principal rules of 2014 further amended to insert a proviso to Rule 14(1)
which deals with Private Placement.

The proviso states that when a company makes an offer or invitation to subscribe
to securities, no offer or invitation of any securities shall be made to a body
corporate incorporated in, or a national of, a country which shares a land border
with India, unless such body corporate or the national, as the case may be, have
obtained Government approval under the FEMA 31 Rules, 2019 and attached the
same with the private placement offer cum application letter.

30
Section 179(3) and section 180 of the Companies Act, 2013, does not form part of syllabus
at Intermediate level.
31
FEM (Non-debt Instruments) Rules, 2019

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This means that companies will now have to obtain government approval under
the FEMA Rules before inviting subscription to securities or offering securities to
any entity from a country that shares a land border with India i.e. China, Bhutan,
Nepal, Pakistan, Bangladesh, and Myanmar.

Applicable Application Form

Rule 14 (4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
provides a private placement offer cum application letter shall be;
a. Issued in form PAS-4
b. Serially numbered
c. Addressed specifically to the person to whom the offer is made
d. Sent either in writing or in electronic mode
e. Sent within thirty days of recording the name of such person pursuant to
section 42 (3).

Note:
1. No person other than the person so addressed in offer-cum-application
letter, allowed to apply through such application form.

2. Any application not conforming to this condition shall be treated as invalid.

Maintaining Complete Records

Rule 14(4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
requires the company to maintain a complete record of private placement offers in
Form PAS-5.
MANNER OF SUBSCRIBING TO THE PRIVATE PLACEMENT ISSUE
[SUB-SECTION 4]
Person who is identified and provided with private placement application cum
letter, if willing to subscribe securities in the private placement, then may apply in
through same letter along with subscription money.

Note:
1. Subscription money shall be paid either by cheque or demand draft or other
banking channel, but not by cash.

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 3.50 CORPORATE AND OTHER LAWS

2. Rule 14(5) of the Companies (Prospectus and Allotment of Securities) Rules,

2014, Payment shall be made from the bank account of the person
subscribing to such securities and the company shall keep the record of the
bank account from where such payment for subscription has been received.
3. First proviso to rule 14(5) stated above, provides that; in case of joint holders,
monies payable on subscription to securities shall be paid from the bank
account of the person whose name appears first in the application.
4. Company shall not utilise monies raised through private placement unless
allotment is made and the return of allotment is filed with the Registrar in
accordance with sub-section (8) of Section 42.

Illustration Q&A
Ruhi and her brother Sohit were offered jointly 1000 equity shares of ` 100 each by
Soumya Software Private Limited under the issue of shares on private placement
basis. Offer-cum-application letter addressed to both containing their names as “Ms.
Ruhi, Mr. Sohit”. From whose account the company is required to take subscription
money for 1000 equity shares?
Answer – According to the first Proviso of Rule 14(5) of the Companies (Prospectus
and Allotment of Securities) Rules, 2014, monies payable on subscription to
securities to be held by joint holders shall be paid from the bank account of the
person whose name appears first in the application. Since Ruhi’s name appears first
in the application, therefore the subscription of ` 1,00,000 shall be payable by her
from her account. It is obligatory for the company to ensure that the money is paid
from her bank account and not from the bank account of her brother Sohit.
LIMIT ON FRESH OFFER [SUB-SECTION 5]
No fresh offer or invitation under this section shall be made unless the allotments
with respect to any offer or invitation made earlier have been completed or that
offer or invitation has been withdrawn or abandoned by the company.
Proviso to sub-section 5 read as, subject to the maximum number of identified
persons (i.e. 200), a company may, at any time, make more than one issue of
securities to such class of identified persons as may be prescribed.

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TIME LIMIT FOR ALLOTMENT OF SECURITIES [SUB-SECTION 6]

A company making an offer or invitation under this section shall allot its securities
within sixty days from the date of receipt of the application money.
1. If company fails to make allotment within 60 days, then repayment of the
application money to the subscribers shall be made within fifteen days from
the expiry of sixty days
2. If the company further fails to repay the application money within the 60 days,
then it shall be liable to repay that money with interest at the rate of twelve
percent per annum from the expiry of the sixtieth day.

It is provided that the monies received on application under this section shall be
kept in a separate bank account in a scheduled bank and shall not be utilised for
any purpose other than:
a. For adjustment against allotment of securities; or
b. For the repayment of monies where the company is unable to allot securities.
PROHIBITION ON PUBLIC ADVERTISEMENT [SUB-SECTION 7]
No company shall release any public advertisements or utilise any media, marketing
or distribution channels or agents to inform the public at large about issue under
section 42.
FILING OF RETURN OF ALLOTMENT [SUB-SECTION 8]
Section 42(8) read with Rule 14 (6) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 provides, a return of allotment in form PAS-3 (along-with the
fee as provided in the Companies (Registration Offices and Fees) Rules, 2014) shall
be filed with the Registrar within fifteen days from the date of the allotment under
section 42, with a complete list of all the allottees containing;
a. the full name, address, Permanent Account Number and E-mail ID of such
security holder;
b. the class of security held;
c. the date of allotment of security;
d. the number of securities held, nominal value and amount paid on such
securities, and particulars of consideration received if the securities were
issued for consideration other than cash.

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DEFAULT IN FILING THE RETURN OF ALLOTMENT [SUB-SECTION 9]

For defaults in filing the return of allotment, the company, its promoters and
directors shall be liable to a penalty for each default of one thousand rupees for
each day during which such default continues but not exceeding twenty-five lakh
rupees.
Example – An allotment of security under private placement (section 42) was
completed on 9th November 2023. Return of allotment in Form PAS-3 filed on 28th
November 2023. Therefore, a penalty of ` 4000 shall be imposed on company, its
promoter and directors.
PUNISHMENT FOR CONTRAVENING THE PRIVATE PLACEMENT
PROVISIONS [SUB-SECTION 10]
For making offer or accepting money in contravention to section 42, liability will
be:
Liable Nature of Description
penalty
Promoters and Fine Amount raised through the private placement
Directors or
two crore rupees,
whichever is lower
Company Refund All monies along-with interest (as specified in
sub-section 6) to subscribers within a period
of thirty days of the order

SUMMARY
♦ Securities can be offered to public at large (public offer) or through private
placement. However, a private company is prohibited from resorting to public
offer.
♦ SEBI has power to deal with matters relating to listed or proposed to be listed
securities. Central Government (through MCA represented by Regional
Directors and ROCs) has power to deal with matters relating to unlisted
securities.
♦ Prospectus, deemed prospectus, abridged prospectus, red-herring
prospectus, shelf prospectus, information memorandum need to comply with

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the minimum information requirements as prescribed in the Companies Act,

2013 and the applicable Rules.
♦ Existing holders of securities could offload their stake through required
compliances for an offer for sale of securities to the public (OFS route).
♦ Fraudulent omission or commission in the prospectus attracts civil as well as
criminal liability.
♦ Issue of securities (shares, debentures or hybrid securities) through public
offer is to be made only in demat form by the companies which are not
exempted.
♦ Provision related to timelines, pre-requisites for allotment and listing
wherever applicable needs to strictly adhered to avoid any penal provision.
♦ Private placements have somewhat diluted disclosure requirements as public
exposure is not there.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. Modern Furniture Limited, issued a document containing offer of securities for sale
that is considered as deemed prospectus under section 25, which requires such
document must contains certain matters/disclosures in addition to those required
under section 26. Which of following are correct requirements;

i. A statement of the net amount received or to be received as consideration

for the securities to which the offer relates
ii. The persons making the offer were named in the prospectus as promoters of
the company.
iii. The time and place at which the underlying contract for allotment may be
inspected.

(a) i or ii only
(b) i or iii only
(c) ii or iii only
(d) All of i, ii and iii

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 3.54 CORPORATE AND OTHER LAWS

2. Section 40 of the Companies Act, 2013 requires every company shall make an
application to one or more recognised stock exchange or exchanges before making
public offer. Madhav Casting Limited filed an application to three exchanges for
the securities to be dealt with in such stock exchanges, it received permission from
couple of them and proceed with public issue. There will be:
(a) No penalty, as application has been filed
(b) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh
(c) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh and
every officer of the company who is in default ranging from ` 50 thousand
to ` 3 lakh
(d) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh and
every officer of the company who is in default ranging from ` 50 thousand
to ` 3 lakh and/or Imprisonment upto one year.
3. Rig exploration and refinery limited (RERL) decided to raise capital through issue
of a shelf prospectus. Company secretary explains the requirement to board that
RERL shall be required to file an information memorandum with the Registrar
within______________, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus.
(a) 15 days
(b) 21 days
(c) 30 days
(d) 1 month

4. Modern Furniture decided to raise capital by issue for which prospectus need to be
issued. The copy of prospectus submitted with registrar for filling need to be duly
signed by:

(a) Any two directors including managing directors

(b) Majority of directors
(c) Majority of directors including proposed directors

(d) Every director or proposed director

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Descriptive Questions
1. Explain various instances which make the allotment of securities as irregular
allotment under the Companies Act, 2013.

2. What is a Shelf-Prospectus? State the important provisions relating to the

issuance of Shelf-Prospectus under the provisions of the Companies Act, 2013
and the Companies (Prospectus and Allotment of securities) Rules, 2014.

3. The Board of Directors of Chandra Mechanical Toys Limited proposes to issue

a prospectus inviting offers from the public for subscribing to the equity shares
of the Company. State the reports which shall be included in the prospectus for
the purposes of providing financial information under the provisions of the
Companies Act, 2013.
4. Unique Builders Limited decides to pay 2.5 percent of the value of debentures
as underwriting commission to the underwriters but the Articles of the company
authorize only 2.0 percent underwriting commission on debentures. The
company further decides to pay the underwriting commission in the form of
flats. Examine the validity of the above arrangements under the provisions of
the Companies Act, 2013.
5. PQR Bakers Limited wants to raise funds for its upcoming project. Accordingly,
it has issued private placement offer letters for issuing equity shares to 55
persons, of which four are qualified institutional buyers and remaining are
individuals. Before the completion of allotment of equity shares under this offer
letter, company issued another private placement offer letter to another 155
persons in their individual names for issue of its debentures.
Being a public company is it possible for PQR Bakers Limited to issue securities
under a private placement offer? By doing so, whether the company is in
compliance with provisions relating to private placement or should these offers
be treated as public offers? What if the offer for debentures is given after
allotment of equity shares but within the same financial year?
6. How does the Companies Act, 2013 regulate and restrict the following matters
in respect of a company going for public issue of shares:

(i) Minimum Amount stated in the Prospectus; and

(ii) Application Money payable on shares.

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7. Examine the validity of the following statement with reference to the provisions
of the Companies Act, 2013.
The Articles of Association of X Limited contained a provision that the
underwriting commission may be paid up to 4% of the issue price of the shares.
However, the Board of Directors have decided to pay the underwriting
commission of 5% to Deal & Co., the underwriters."

ANSWERS
Answer to MCQ based Questions
1. (b) i or iii only

2. (c) Penalty on Madhav Casting Limited ranging from ` 5 lakh to

` 50 lakh and every officer of the company who is in default
ranging from ` 50 thousand to ` 3 lakh.

3. (d) 1 month
4. (d) Every director or proposed director

Answer to Descriptive Questions

1. Irregular allotment: The Companies Act, 2013 does not specifically provide
for the term “Irregular Allotment” of securities. Hence, we have to examine
the requirements of a proper issue of securities and consider the
consequences of non- fulfillment of those requirements.
In broad terms, an allotment of shares is deemed to be irregular when it has
been made by a company in violation of Sections 23, 26, 39 or 40. Irregular
allotment therefore arises in the following instances:
1. Where a company does not issue a prospectus in a public offer as
required by section 23; or

2. Where the prospectus issued by the company does not include any of
the matters required to be included therein under section 26 (1), or the
information given is misleading, faulty and incorrect; or
3. Where the prospectus has not been filed with the Registrar for filing
under section 26 (4); or

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4. The minimum subscription as specified in the prospectus has not been

received in terms of section 39; or
5. The minimum amount receivable on application is less than 25% of the
nominal value of the securities offered or lower than the amount
prescribed by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained from
one or more of the recognized stock exchanges under section 40 of the
Companies Act, 2013.
2. As per explanation to section 31, the expression “shelf prospectus” means
a prospectus in respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.
A company is required to issue a prospectus each time it accesses the capital
market. It leads to unnecessary repetition for a company which makes more
than one offer of securities in a year to mobile funds from the public. A way
out is shelf prospectus which remains valid (on the shelf) a specified time
period during which offers for securities may be made by a company to the
public without going through the arduous exercise of issuing fresh
prospectus every time.
1. Filing of shelf prospectus with the Registrar
Shelf prospectus may be filled with the Registrar at the stage of first
offer of securities, by class or classes of companies as the Securities and
Exchange Board may provide by regulations in this behalf.
It has to indicate a period not exceeding one year as the period of
validity of such shelf prospectus.
The period of validity is to commence from the date of opening of the
first offer of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued
during the period of validity of such prospectus, no further prospectus
is required.

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2. Filing of ‘Information Memorandum’ with the Shelf Prospectus

A company filing a shelf prospectus shall be required to file an

information memorandum with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus containing;
a. All material facts relating to new charges created,
b. Changes in the financial position of the company as have occurred
between the first offer of securities or the previous offer of
securities and the succeeding offer of securities, and
c. Such other changes as may be prescribed,

The information memorandum shall be prepared in Form PAS-2 and filed

with the Registrar along with the fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within one month prior to the
issue of a second or subsequent offer of securities under the shelf
prospectus.
3. Safeguard (in case of changes) to applicants who made payment in
advance.
It is provided that where a company or any other person has received
applications for the allotment of securities along with advance
payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants
and if they express a desire to withdraw their application, the company
or other person shall refund all the monies received as subscription
within fifteen days thereof.

4. Information Memorandum together with Shelf Prospectus is

deemed Prospectus
Where an information memorandum is filed, every time an offer of
securities is made under sub-section (2), such memorandum together
with the shelf prospectus shall be deemed to be a prospectus.
3. As per section 26(1) of the Companies Act, 2013, every prospectus issued by
or on behalf of a public company either with reference to its formation or
subsequently, or by or on behalf of any person who is or has been engaged

© The Institute of Chartered Accountants of India

 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.59

or interested in the formation of a public company, shall be dated and signed

and shall state such information and set out such reports on financial
information as may be specified by the Securities and Exchange Board in
consultation with the Central Government.
It is provided that until the Securities and Exchange Board specifies the
information and reports on financial information under this sub-section, the
regulations made by the Securities and Exchange Board under the Securities
and Exchange Board of India Act, 1992, in respect of such financial
information or reports on financial information shall apply.
According to clause (c) of Section 26 (1), the prospectus shall make a
declaration about the compliance of the provisions of the Companies Act,
2013 and a statement to the effect that nothing in the prospectus is contrary
to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956
and the Securities and Exchange Board of India Act, 1992 and the rules and
regulations made thereunder.
Accordingly, the Board of Directors of Chandra Mechanical Toys Limited
which proposes to issue the prospectus shall provide such reports on financial
information as may be specified by the Securities and Exchange Board in
consultation with the Central Government to comply with the above stated
provisions and make a declaration about such compliance.
4. Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its
securities, subject to a number of conditions which are prescribed under the
Companies (Prospectus and Allotment of Securities) Rules, 2014. In relation to
the case given, the conditions applicable under the above Rules are as under:
(a) The payment of such commission shall be authorized in the company’s
articles of association;
(b) The commission may be paid out of proceeds of the issue or the profit
of the company or both;
(c) The rate of commission in case of debentures, shall not exceed two and
a half per cent (2.5%) of the price at which the debentures are issued,
or as specified in the company’s articles, whichever is less.

Thus, the underwriting commission in case of debentures is limited to 2.5%.

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 3.60 CORPORATE AND OTHER LAWS

In view of the above, the decision of Unique Builders Limited to pay

underwriting commission exceeding 2% as prescribed in the Articles, is
invalid.

The company may pay the underwriting commission in the form of flats since
there is no prohibition on payment of underwriting commission in kind.
Further, in case of Booth v New Africander Gold Mining Co., it was held that
underwriting commission may be paid in cash or in kind or in lump sum or
by way of a percentage.

5. According to section 42 of the Companies Act, 2013 any private or public

company may make private placement through issue of a private placement
offer letter.

However, the offer shall be made to the persons not exceeding fifty or such
higher number as may be prescribed, in a financial year. For counting number
of persons, Qualified Institutional Buyers (QIBs) and employees of the
company being offered securities under a scheme of employees’ stock option
will not be considered.

Further, Rule 14 (2) of the Companies (Prospectus and Allotment of Securities)

Rules, 2014 prescribes maximum of 200 persons who can be offered securities
under the private placement in a financial year, though this limit should be
counted separately for each type of security.

It is to be noted that if a company makes an offer or invitation to more than

the prescribed number of persons, it shall be deemed to be an offer to the
public and accordingly, it shall be governed by the provisions relating to
prospectus.
Also, a company is not permitted to make fresh offer under this section if the
allotment with respect to any offer made earlier has not been completed or
otherwise, that offer has been withdrawn or abandoned by the company. This
provision is applicable even if the issue is of different kind of security.
Any offer or invitation not in compliance with the provisions of this section
shall be treated as a public offer and all provisions will apply accordingly.
In the given case PQR Bakers Limited, though a public company but the
private placement provisions allow even a public company to raise funds
through this route. The company has given offer to 55 persons out of which

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.61

4 are qualified institutional buyers and hence, the offer is given effectively to
only 51 persons which is well within the limit of 200 persons. From this point
of view, the company complies the private placement provisions.
However, as per the question, the company has given another private
placement offer of debentures before completing the allotment in respect of
first offer and therefore, the second offer does not comply with the provisions
of section 42. Hence, the offers given by the company will be treated as public
offer.
In case the company gives offer for debentures in the same financial year
after allotment of equity shares is complete then both the offers can well be
treated as private placement offers.
6. The Companies Act, 2013 by virtue of the provisions as contained in Section
39 (1) and (2) regulates and restricts the minimum amount stated in the
prospectus and the application money payable in a public issue of shares as
under:
Minimum amount stated in a prospectus
No Allotment shall be made of any securities of a company offered to the
public for subscription; unless; -
(i) the amount stated in the prospectus as the minimum amount has been
subscribed; and
(ii) the sums payable on application for such amount has been paid to and
received by the company.
Application money
Section 39 (2) provides that the amount payable on application on each
security shall not be less than 5% of the nominal amount of such security or
such amount as SEBI may prescribe by making any regulations in this
behalf.

Further section 39 (3) provides that if the stated minimum amount is not
received by the company within 30 days of the date of issue of the prospectus
or such time as prescribed by SEBI, the company will be required to refund
the application money received within such time and manner as may be
prescribed.

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 3.62 CORPORATE AND OTHER LAWS

Rule 11 (1) of the Companies (Prospectus and Allotment of Securities) Rules,

2014 mentions that if the stated minimum amount has not been subscribed
and the sum payable on application is not received within the period specified
therein, then the application money shall be repaid within a period of fifteen
days from the closure of the issue and if any such money is not so repaid
within such period, the directors of the company who are officers in default
shall jointly and severally be liable to repay that money with interest at the
rate of fifteen percent per annum.
In case of any default, the company and its officer who is in default shall be
liable to a penalty, for each default, of one thousand rupees for each day
during which such default continues or one lakh rupees, whichever is less.
7. Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its
securities, subject to the conditions prescribed under the Companies
(Prospectus and Allotment of Securities) Rules, 2014. Rule 13 states that the
rate of commission paid or agreed to be paid shall not exceed, in case of
shares, five percent (5%) of the price at which the shares are issued or a rate
authorised by the articles, whichever is less.
In the given problem, the Articles of X Ltd. have prescribed 4% underwriting
commission but the directors decided to pay 5% underwriting commission.
Therefore, the decision of the Board of Directors to pay 5% underwriting
commission to the underwriters (i.e. Deal & Co.), is invalid.

© The Institute of Chartered Accountants of India