MODULE 2

SHARE and SHARE CAPITAL

SHARE
A share is a member's interest in a company. It is a bundle of rights and obligations, and is
considered movable property.

CAPITAL
Capital means the money raised by the company by issuing various securities, shares,
debentures, deposits etc. Broadly, capital consists of two components namely share capital and
debt capital.

SHARE CAPITAL
Also known as shareholders' capital, equity capital, or contributed capital, share capital is the
money that shareholders contribute to a company. It's a long-term source of capital that helps a
company operate, grow, and pay debts.

KINDS OF SHARE CAPITAL

1) Authorised or Registered Capital:
The sum stated in the memorandum of association of the company & which is the maximum
share capital of the company.
2) Issued Capital:
That part of nominal capital which is issued to the public for subscription and allotment.
3) Subscribed Capital:
Such part of the capital which is for the time being subscribed by the members of the
company.
4) Called-up Capital:
That part of the capital which has been called up for payment.
5) Paid-up Share Capital:
That part of the capital of the company which has been paid by shareholders.
6) Preference & Equity Share Capital:

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 Preference share capital is case of a company limited by shares means that part of the issued
capital, which carries a preferential right with respect to payment of dividend and residual
claim.

MEMBER and SHAREHOLDER

Definition of a Member
Section 2 (55) of the Companies Act, 2013 defines a member in the following words :
1. The subscribers to the Memorandum of a company shall be deemed to have agreed to become
members of the company, and on its registration, shall be entered as members in its register of
members.
2. Every other person who agrees in writing to become a member of the company and whose
name is entered in its register of members shall be a member of the company.
In Herdilia Unimers Ltd. v. Renu Jain [1995], it was held that the moment the shares were
allotted and share certificate signed and the name entered in the register of members, the allottee
became the shareholder, irrespective of the allottee receiving the shares or not.
3. Every person holding shares of the company and whose name is entered as beneficial owner in
the records of a depository.

On this basis, two pre-requisites for a person to become a member of a company are:
i) the agreement in writing to take shares of the company; and
ii) the registration of his name in its register of members.

Besides, a person may also become a member of a company through the depository system.
Thus, a person can agree to take shares of a company either as the subscriber at the initial stage
of its formation or in any of the following manner :
a) by subscribing to its further or new shares;
b) on transfer of its shares from an existing member;
c) on acquisition or purchase of its shares (for example, take-over bid, renunciation of rights
shares by an existing member); and
d) on acquisition of its shares by devolution (for example, transmission of shares to legal heirs of
a deceased member, on insolvency, upon merger/ amalgamation through Tribunal’s order);
e) on conversion of convertible debentures or loans pursuant to the terms of issue of such
debenture or loan agreement respectively.

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The fundamental difference between the subscribers who agree to take shares at the time of
formation of the company and persons who agree to take shares later is that the former become
members immediately on incorporation of the company, that is, they automatically become
members. The latter, though having agreed to take shares, become members only after their
names are entered in the register of members of the company.

DISTINCTION between MEMBER and SHAREHOLDER

In normal usage the two terms ‘member’ and ‘shareholder’ are used synonymously. But, legally,
there is a difference between the two. A shareholder is a person who holds or owns the shares in
a company, whereas a member is one whose name is recorded in the Register of Members. In
some cases, a person may be a member but not a shareholder, or he may be a shareholder but not
a member. Following are the main points of difference:
i) A company limited by guarantee having no share capital will have only members but no
shareholders.
ii) When a person transfers his shares, he ceases to be a holder of those shares but continues to
be the member of the company until his name is replaced by the name of the transferee.
iii) the legal representatives of a deceased member become shareholders immediately on the
death of the member but they do not become members until their names are entered in the
Register of Members.
iv) A person whose shares are forfeited or who has surrendered his shares to the company may
be held liable as a member to contribute to the assets of the company, if winding-up commences
within twelve months of his ceasing to be a member, though he is no longer the shareholder of
the company.
In Kedarnath Agarwal v. Jay Engineering Works Ltd. it was held that a member may be a
shareholder, but a shareholder may not be a member.
From the above discussion, it should be clear to you that person holding shares of a company are
shareholders, while members are persons who constitute the company as a corporate entity and
whose names are entered in the Register of Members.

WHO CAN BECOME A MEMBER?

The Company’s Act does not specifically lay down as to who can be a member of a company. It
also does not prescribe any disqualification for any person which would debar him from
becoming a member of a company. The Act simply provides that any person who agrees in
writing to become a member of a company can become a member. You know that a contract to
purchase shares in a company is like any other contract. Therefore, only such persons can
become members of a company who are competent to contract. However, as regards competency
of a member, the provisions of the Indian Contract Act shall apply.

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This means that minors, persons of unsound mind and those who have been disqualified by
law from contracting cannot become members of a company.

Let us now discuss the position of a few special types of members:

i) Minor: According to Section 11 of the Indian Contract Act, a minor is incompetent to
contract, therefore, he cannot become a member of the company. In Palaniappa vs. Official
Liquidator, Pasupati Bank Ltd., an application was made by a father as guardian of his minor
daughter describing her as minor. The company went into liquidation. It was held that the
allotment was void and neither the minor nor her guardian could be held liable as contributories.
But, if in ignorance of the fact of minority, a minor is allotted shares, the company can repudiate
the allotment and remove his name from the Register of Members. The minor may also rescind
the allotment any time during his minority. In either case, the company has to refund all moneys
received from minor in respect of the shares allotted to him. If neither party repudiates allotment,
the name of the minor shall continue to appear on the Register of Members, but in that event a
minor incurs no personal liability.
After the minor attains majority, he can still repudiate his liability even if he had received
dividends during his minority (Sadiq Ali v. Jai Kishori). But, he cannot repudiate the same if he
had received dividends after attaining majority and intentionally permitted the company to
believe him to be a shareholder (Fazalbhoy v. The Credit Bank of India Ltd.). Thus, it is in the
interest of the companies to allot only fully paid shares to the minor because otherwise he will
not be liable for the unpaid amount of shares.
There is nothing in the Act to bar a minor from becoming a transferee of fully paid shares. In
Miss Nandita Jain v. Bennel Coleman and Company Ltd., the Company Law Board held that the
contract entered into by a minor for registration of transfer of fully paid shares through the
natural guardian was a valid and binding contract. In such a case the entry in the Register of
Members will be made as follows: “A (a minor) through ................................... guardian”.
If shares are transferred to a minor, the transferor will continue to remain liable for all future
calls on such shares even if he was ignorant of the minority of the transferee. If the company is
aware of the minority of the transferee at the time of transfer, it can refuse to register the transfer
in favour of a minor unless the shares are fully paid.

ii) Company: A company, being a legal person, is competent to contract.

Therefore, a company may become a member of another company if it is authorised by its
memorandum or articles of association. However, a subsidiary company cannot become a
member of its holding company (Section 19).

iii) Partnership firm: A partnership firm is not a legal person. Therefore, it cannot buy shares in
its own name. A firm may hold shares in the names of individual partners who may be entered as
joint holders in the Register of Members. However, it can become member of a non-profit
making company licensed under Section 8 of the Act. A limited liability partnership created

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under Limited Liability Partnership Act, 2008 is a separate legal entity and, therefore, may
become a member of a company.

iv) Hindu Undivided Family (HUF): A HUF can have shares in a company in the name of its
Karta. Thus, the Karta will be a member of the company as his name alone will be entered in the
register of members.

v) Insolvent: If any member is declared insolvent, he remains a member of the company till his
name appears on company’s Register of Members. He is entitled to vote in respect of shares held
by him, but the dividend on shares will be paid to Official Assignee or Official Receiver.

vi) Foreigners: A foreigner may become a shareholder with the general or special permission of
the Reserve Bank of India under the Foreign Exchange Management Act, 1999. But if he
becomes an alien enemy, his rights as a member shall be suspended.

vii) Joint Holders: The shares of a company may also be held jointly by two or more persons. In
a public company, even joint shareholders are counted as separate members but in a private
company, joint holders are treated as a single member for purposes of Section 2(68) of the Act.
The joint holders of shares may get themselves registered in any order they like. The company
may pay dividend to the person whose name is first written in the register of members. Similarly,
a notice served by the company on the joint holder named first in the register of members will be
deemed to have been served properly on all of them. You should, however, remember that joint
holders are jointly and severally liable for payment of calls. The transfer of shares by the joint
holders will be effective only if it is made by all of them jointly.

viii) Public Office: A public office like income tax department, sales tax department etc. cannot
be a member of a company. It cannot register shares in its own name. A registered trade union or
a registered society can hold shares in its own name.

ix) President and Governor: Shares in a government company can be held in the name of the
President of India or Governor of a State.

MODES of BECOMING MEMBER

A person may become a member in a company in any of the following ways:
1) By subscribing to the memorandum: A signatory to the memorandum automatically
becomes a member of the company on its incorporation.
Neither application nor allotment of shares is necessary to constitute them members of the
company. Even if his name is not entered in the register of members, he will still be treated as a
member of the company.
2) By application and allotment of shares: A person who agrees in writing to become the
member of the company and whose name is entered in the Register of Members is also a member
of the company. An application for shares is an offer to take shares and allotment is the

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acceptance of that offer. The rules regarding offer and acceptance (Law of Contract) are
applicable. Thus, if a person applies for shares subject to certain conditions, the allotment by the
company must be made according to those conditions; otherwise the allottee shall not be bound
to accept the shares.
3) By transfer of shares: You know that the shares of a public company are freely transferable.
Thus, a person may buy shares in the open market and get those shares registered in his name.
On the registration of transfer of shares, transferee becomes the member of the company.
4) By transmission of shares: A person may become a member by operation of law i.e.
transmission. On the death of a member, his nominee/legal representatives have the right to get
the shares of the deceased member registered in his/their names. No instrument of transfer is
necessary in this case.
5) By estoppels/holding out: This arises when a person holds himself out as a member or
knowingly allows his name to remain on the register when he has actually parted with his shares.
In the event of winding-up, he will be liable, like other genuine members as a contributory (Hans
Raj v. Asthana). But in view of the rule laid down in Section 2(55) of the Companies Act that the
person must agree in writing to be a member, a person cannot be treated as a member of a
company simply because his name is entered in the register of members. Thus, he enjoys no
rights of a member though he may be held liable as a member. However, he may escape liability
by applying to Tribunal for rectification of register of members under section 59.

TERMINATION OF MEMBERSHIP
You learnt that a person becomes a member of a company when his name appears in the Register
of Members. Accordingly, a person ceases to be a member of a company when his name is
removed from the Register of Members.
A person may cease to be a member in any one of the following ways:
1) Transfer of Shares: When he transfers his shares to another person and the transfer is duly
registered by the company, the name of the transferor is removed from the Register of Members.

2) Transmission of Shares: On the death of a member, his shares get transmitted to his
nominee/legal representatives.

3) Forfeiture of Shares: Shares may be forfeited for non-payment of calls and other reasons
contained in the articles. The membership terminates on share forfeiture.

4) Surrender of Shares: When a member validly surrenders his shares to the company, he
ceases to be a member.

5) Insolvency of Member: When a member is declared insolvent, his shares vest in the Official
Receiver or Official Assignee. The Assignee or Receiver may sell these shares and when the
transferee’s name is entered in the Register of Members, insolvent member cases to be a
member.

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6) Winding up of Company: Membership terminates on the winding-up of the company, but he
continues to be liable as a contributory.

7) Repudiation of Contract: If he repudiates the contract to take shares on the ground of

misrepresentation or mistake in the prospectus or on the ground of irregular allotment.

8) Enforcement of Lien: When the company has a lien on the shares and the shares are sold by
the company to enforce this lien or if the shares are sold in the execution of a decree of the court,
the membership terminates.

9) Redemption of Shares: If a member is holding redeemable preference shares, then on their

redemption his membership terminates.

10) Tribunal’s Order: When the Tribunal passes an order for the purchase of shares of a
member under Section 242 of the Companies Act, his membership terminates.

RIGHTS OF MEMBERS
A number of rights have been conferred on the members by the Companies Act, 2013, some of
the important rights are as under:

i) Right to receive copies of Memorandum and Articles of Association on request and on

payment of the prescribed fee.

ii) Right to receive share certificate within the prescribed period of 3 months from the date of
allotment.

iii) Right to transfer his shares according to the provisions of the Companies Act and Articles of
Association.

iv) Right to have his name entered in the Register of Members.

v) Right of priority to have shares offered in case of increase of capital.

vi) Right to receive notice of meetings, to attend, to appoint a proxy and vote at the meeting.

vii) Right to participate in the appointment of directors, auditors, etc. at the annual general
meeting.

viii) Right to inspect register of members, register of debenture holders and copies of annual
returns.

ix) Right to apply to the Tribunal for rectification of register of members.

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x) Right to request to the Tribunal for calling an annual general meeting when the Board of
Directors fails to call such meeting or apply for an extraordinary meeting of the company,
whenever necessary.

xi) Right to receive copies of the financial statements and Director’s Report before the annual
general meeting.

xii) Right to receive proper notice of resolutions requiring special notice.

xiii) Right to have, on request, minutes of proceedings at a general meeting.

xiv) Right to apply to the Tribunal for ordering an investigation into the affairs of the company.

xv) Right to present petition to the Tribunal for relief in cases of oppression and
mismanagement.

xvi) Right to present petition to the Tribunal for the winding up the company.

xvii) Right to share in the surplus assets of the company on winding up.

xviii) In the case of a body corporate which is a member, the right to appoint a representative to
attend a general meeting on its behalf.

xix) The right to require the company to circulate resolution under section 111.

xx) Right to apply to the Tribunal under section 48 to have any variation of shareholders’ rights
set aside.

xxi) Right to participate in the removal of directors by passing an ordinary resolution.

From the above you must have noted that these rights are very valuable to keep the management
of the company on the right track. How far these rights are exercised effectively by members is a
different question.

LIABILITY OF MEMBERS
Liability of members of a company depends upon the nature of the company.
This is discussed accordingly as follows:

i) Unlimited company: Every member of such a company is liable for all debts contracted by
the company during the period when he was a member. However, a company being a separate
legal entity, no member/shareholder can be proceeded against directly by the claimants/creditors.
Their liability, unlike a partnership firm, is not joint and several.

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ii) Company limited by guarantee: Every member is liable to contribute to the extent of the
amount guaranteed by him which is given in the liability clause of the memorandum.

iii) Company limited by shares: The majority of the companies belong to this category. In the
case of such companies, the liability of a member is limited to the amount unpaid on the shares
held by him. If he has paid full amount on shares, his liability is nil.

You should remember that all money payable by any member of the company under the
memorandum or articles are a debt due from him to the company. If a shareholder dies and he
was holding partly paid-up shares, then his estate will be liable or the legal representatives will
be liable for the unpaid amount.

DISTRIBUTION OF PROFITS

DIVIDEND
The word "dividend" has origin from the Latin word “dividendum”. It means a thing to be
divided. Every investor is aware that dividend is nothing but profits earned by the company and
divided amongst the shareholders in proportion to the amount paid up shares held by them.
Simply stated it is a return on investment made by the shareholders.
Dividend is paid by a company to its shareholders on a particular date (book closure date) either
out of profits or out of reserves. A company may, if so authorised by its Articles of association,
pay dividends in proportion to the amount paid-up on each share. Declaration of dividend is
usually one of the items of the Agenda of every annual general meeting when directors
recommend dividend.

How do dividends work?

The working principle of dividend payment is simple. A company generates profit and distributes
dividends on a per-share basis to all shareholders of a common class. They make the payment
upon approval by the board of directors. On approval, they make payment on a date known as the
payable date. Here is a breakdown of the stems on how dividends work:
1. A company accumulates retained earnings or generates profits
2. The board of directors determines if it should be paid as dividends to shareholders and what
percent should be reinvested
3. On agreement, the board approves the payment
4. They put an announcement out concerning dividend payment and includes the payday and
value per share
5. The dividend is finally paid to shareholders.

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What are the types of dividends?
Companies can pay dividends in different forms to the shareholders. The available types of
dividends payment are:
Cash: this is pretty straightforward. They pay the dividend in form of money to the shareholders
of the company. Payment could be through electronic wiring, cheque, or cash.
Stock: instead of giving out cash, companies can choose to give out more shares to shareholders.
In this payment, they give stocks on a pro-rata basis (depending on the number of shares you
already own).
Assets: also, companies can make payments to shareholders through assets like real estate and
other investment securities. This practice is not common.
Special: special dividends is a payment that they do outside their regular policy or regulations. It
could be quarterly, annually, or even monthly, depending on the company. Special dividends are
usually a result of the company making extraordinary profits.

Provisions relating to Dividend

Section 205: It stipulates no dividend shall be paid unless it is paid out of current year’s profits
or out of the previous year’s profits or both, arrived at after providing deprecation as per
section 350 and mandates that a minimum percentage of profits has to be transferred to
reserves as per Rules if dividend paid exceeds 10%.(Corresponds to section 123 of CA2013)
Section 205-A-It stipulates that dividend (including interim) declared should be deposited within
5 days of declaration. Any unpaid or unclaimed dividend should be transferred to a special
account within 7 days from the date of expiry of said 30 days. It shall remain for 7 years in the
said a/c for any claim from the shareholders till it is transferred to Investor protection Fund
established u/s 205 –C against which no claims shall lie. (Corresponds to section 124 of New act)
Section 206 -It mandates that dividend to be paid only to the registered shareholder or to his
mandatee. (It is merged in section 123)
Section 206A – If an instrument of transfer is delivered but registration of which is pending,
the right to divided, bonus shares shall be kept in abeyance. (It corresponds to section 126 of CA
2013) The contents of the section have been retained as it is.
Section 207 - It imposes penalty if dividend is not paid within 30 days from the date of
declaration subject to certain exceptions. (It corresponds to Section 127 of CA 2013) With the
above background it will be easier to comprehend, the provisions of Section 123 which
corresponds to Section 205-A of CA1956.

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Provisions relating to payment of dividend:
1. Deprecation must be provided:
Companies can not declare or pay dividend for any financial year unless it is paid
- Out of profits for that year arrived at after providing depreciation in accordance with
provisions sub section 2 of Section123 or
- Out of accumulated profits of the company for any previous financial year or years arrived
at after providing depreciation and remaining undistributed or
- Out of both above or
- Out of money provided by the central government or a state government for payment of
dividend in pursuance of a guarantee given by that government
2. Transfer to Reserves for declaration of dividend.
A company may, before declaration of any dividend transfer such percentage of its profits for
that financial year as it may consider appropriate. The Board of directors is given freedom to
decide the percentage of transfer of profits to reserves before declaring a dividend {First
proviso to section 123(1)
3. Declaration of dividend out of accumulated profits
Second proviso stipulates that in case of inadequacy or absence of profits in any financial
year, any company proposes to declare dividend out of the accumulated profits earned by it in
previous years and transferred to the reserves, such declaration of dividend shall not be made
except in accordance with such rules as may be prescribed in this behalf. Let us see the
conditions provided by the recently displayed rules (subject to modification on the basis of
feedback)
Essence of Rules. As per Rule no.8.1, the very first condition is that the rate of dividend
declared shall not exceed the average of the rates at which dividend was declared by it in the
3 years immediately preceding that year. Further it requires that the amount to be utilised
from reserves shall not exceed 1/10th of total paid up capital and reserves. After drawing
reserves for dividend, the balance reserves shall not fall below 15% of its paid up capital.
Dividend can be declared only after loss or depreciation in the previous years whichever is
less is provided {Rule no.8.2}
The third provision stipulates that no dividend shall be declared or paid by a company from
its reserves other than free reserves. The word” Free reserves” has been defined by Section
2(43) of New Act to mean such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend. However the following shall not be
treated as free reserves:
- any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
- any change in carrying amount of an asset or of a liability recognised in equity,

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 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;
4. Manner of depreciation:
Sub section 2 of123 clarifies that for the purposes of clause (a) of sub-section (1),
depreciation must be provided in accordance with the provisions of Schedule II.
5. Interim dividend:
The Board of Directors of a company may declare interim dividend during any financial
year out of the surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is sought to be declared. In case the company has incurred loss
during the current financial year up to the end of the quarter immediately preceding the date
of declaration of interim dividend, such interim dividend shall not be declared at a rate
higher than the average dividends declared by the company during the immediately
preceding 3 financial years. {Section 123(3)}.This restriction ensures financial prudence.
6. Time limit for deposit of dividend:
The amount of the dividend, including interim dividend, must be deposited in a scheduled
bank in a separate account within 5 days from the date of declaration of such dividend.
Dividend once declared by the shareholders becomes a debt and payable unlike in the case
of interim. But the restriction to deposit within 5 days of declaration even the interim also
ensures that the Board cannot go back on the commitment made by its declaration. {Section
123(4)}
7. Dividend to be paid to registered shareholders:
No dividend shall be paid by a company in respect of any share therein except to the
registered shareholder of such share or to his order or to his banker and shall not be payable
except in cash. Proviso however clarifies that capitalization of profits or reserves of a
company for the purpose of issuing fully paid-up bonus shares or paying up any amount is
permissible. {Section 123(5)}.
8. Mode of payment of dividend:
Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to
the shareholder entitled to the payment of the dividend.
9. Prohibition on payment of dividend:
If a company violates the provisions of sections 73 and 74 with regard to acceptance of
deposits from public, it shall not declare any dividend on its equity shares till such non-
compliance exists. In the old Act, there is prohibition for payment of dividend, if violation of
Section 80-A (redemption of preference shares within stipulated time) continues. {Section
123(6)}

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Provisions relating to Transfer of Unpaid dividends (Section 124).
a) Transfer of unpaid dividend to Special Account - The provisions as contained in Old Act
with regard to transfer of unpaid or unclaimed dividend remains the same except minor changes
described below. Any unpaid or unclaimed dividends remaining after expiry 30 days have to be
transferred to a Special account called “unpaid dividend account” within 7 days of expiry of
30 days from the date of declaration.
b) Display of details in the web site The Company, within a period of 90 days of transfer to
special account, shall prepare a statement of unpaid dividend and display it in the web site of the
company and also on the web site of the Central Government in such form and manner as may be
prescribed. {Section 124(2)}. Rule no.8.3 mandates that the display of details shall be in PDF
format, year wise, with search facility must be easily accessible free of charge and facilitate easy
printing.
c) Failure to transfer attracts interest: If the company fails to transfer dividend to special
account, it shall be liable to pay interest @ 12% and such interest has to be passed for the benefit
of shareholders in proportion to the amount unpaid. {Section 124(3)}.
d) Claimant can apply: Any person who claims a right on such dividend may apply to the
company for payment. {Section 124(4)}
e) Transfer to IEPF: If no claim is made till 7 years from the date of transfer to special account,
the amount along with interest accrued, if any, shall be transferred to Investor Education Fund
established (IEPF) u/s 125(1).
Readers may note under the Old Act only unclaimed dividend was to be transferred and not shares
but as per New Act, even shares relatable to unclaimed dividend along with dividend are to be
transferred with such details as may be prescribed. {Section 124(6)}. Any person who has a claim
on such shares can lodge his claim with Investor Education Protection Fund in prescribed manner.
Rules on transfer to IEPF Rule no. 8.4 prescribes the manner in which unclaimed dividend has to
be transferred to IEPF. Company has to deposit the unclaimed amount within 30 days from due
date in state bank or any other approved bank. A statement in prescribed Form no.8.2 with duly
certified details of dividend by a Company secretary in practice/Chartered accountant/cost
accountant along with receipted challan has to be filed with IEPF. Company has to maintain the
particulars of unpaid dividend transferred to IEPF for a period of 8 years from the date of such
transfer. The same procedure applies to transfer of other amounts such as matured fixed deposits
specified. Rule no. 8.5 deals with the manner of transfer shares to IEPF in respect of which
dividend remained unclaimed and transferred to IEPF. Rule no. 8.6 gives power to authority
constituted to direct companies to transfer amounts due to transfer to Fund and Rule no.8.7
prescribes the procedure to be followed for entertaining a claim against IEPF by
shareholders/claimants/legal heirs. Claimants need to establish their claim.
f) Penal provisions: If any default is committed in compliance of Section 124, the company shall
be punishable with a fine ranging from 5 lakhs to 25 lakhs and every officer who is in default
shall also be punishable with a fine of not less than one lakh but extendable up to 5 lakhs.
{Section 124(7)}

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Punishment for failure to distribute Dividend: {Section 127}
This section corresponds to section 207 of the Old Act and states that where dividend has been
declared but not paid or warrants have not been posted within 30 days of declaration, every
director who is knowingly a party to the default shall be punishable with imprisonment up to 2
years and with a fine of 1,000/- for every day during which the default continues and company
shall be liable to pay simple interest @18% p.a. However immunity can be claimed from the
punishment, if the default in payment is due to operation of any law, dispute about the claim,
incorrect mandate.

Investor’s Education and Protection Fund

EPF stands for Investor Education and Protection Fund. It was formed under Section 205C of the
Companies Act 1956. This is used to promote investor awareness as well as protects the investors’
interests. The dividends of the AMCs (Asset Management Companies), matured deposits, share
application interests/money, debentures etc. are pooled in that are unclaimed for 7 years. Section
124(5) of the Companies Act provides that the amount that is transferred to the unpaid dividend
account of a company which is unpaid or unclaimed by a shareholder for 7 years shall be
transferred with interest accrued to the IEPF.

Objective Of Investor Education And Protection Fund

The objectives of IEPF has been summarised below:
 Making investors aware about the manner in which market functions;
 Educating investors to be able to analyse and make informed decisions;
 Helping investors in realising their rights and understanding laws on investing;
 Promoting research and surveys to impart knowledge among investors.
 Helping investors to be aware and vary of market volatility.

Amount to be credited to the fund

The following type of amount can be credited to the fund:
 Donations/grants by Central Government;
 Interest or other income obtained from investments made from the fund;
 Amount in unpaid dividend account of company;
 Application money obtained for allotment and due for refund;
 Matured deposits or debentures;
 Sales proceeds of fractional shares arising out of the issuance of bonus shares, merger and

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 amalgamation for 7 years or more;
 Redemption amount of preference shares which is unclaimed or unpaid for 7 years or
more;
 All shares and resultant benefits on such shares.

Fund can be utilize for

Funds shall be utilized for the following:
 Refund of unclaimed dividends, matured deposits and debentures, application money due
for refund and interest;
 Promotion of the education of investors, awareness and protection;
 Distribution of any disgorged amount among eligible & identifiable applicants for shares
or debentures, debenture holders or depositors, shareholders who have incurred losses
because of the wrong actions of any person, as per the orders made by the court;
 Reimbursement of legal expenditure incurred in pursuing class action suits under section
37 and 245 by members, debenture-holders/depositors as sanctioned by the tribunal;
 Any other purpose in accordance with such rules as may be prescribed.

How can any person claim fund?

Any person claiming to be entitled to the amount may apply to the IEPF authority for the payment
of the money claimed (in form IEPF-5 along with requisite documents)
Procedure to claim Refund
 Download the form IEPF-5 from the website of IEPF (http://www.iepf.gov.in) for filing
the claim for refund.
 After filling the form save it on your computer and submit the duly filled form. On
successful uploading, an acknowledgment will be generated indicating the SRN.
 Take a printout of the duly filled IEPF-5 and the acknowledgment issued after uploading
the form.
 Submit indemnity bond in original, copy of acknowledgment, and self-attested copy of e-
form along with the other documents as mentioned in the Form IEPF-5 to Nodal Officer
(IEPF) of the company at its registered office in an envelope marked “Claim for a refund
from IEPF Authority”.
 Claim forms completed in all aspects will be verified by the concerned company and on
the basis of company’s verification report, refund will be released by the IEPF Authority
in favor of claimants’ Aadhaar linked bank account through electronic transfer.

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 COMPANY MEETINGS

Meaning and Definition of Company Meeting:

The word “meeting” is not defined anywhere in the Companies Act. Ordinarily, a company may
be defined as gathering, assembling or coming together of two or more persons (by previous
notice or by mutual arrangement) for discussion and transaction of some lawful business. A
company meeting may be defined as a concurrence or coming together of at least a quorum of
members in order to transact either ordinary or special business of the company.

Kinds of Company Meetings:

The meetings of a company may be classified into the following categories:

Meetings of shareholders Meetings of directors:

I. Statutory meeting; 1. Meetings of board of directors;
II. Annual general meeting (AGM) 2. Meetings of directors;
III. Extra ordinary general meeting; 3. Meetings of creditors.
IV. Class meetings. 4. Meetings of debenture-holders.

A. Meetings of Shareholders:
The shareholders are the real owners of the company, but due to certain limitations they cannot
take part in the management of the company. They leave this to their representatives called the
directors. For controlling the board of directors and their activities ‘shareholders’ ‘meetings’ are
held from time to time. Meeting of shareholders can be classified as under.

I. Statutory Meeting:
Every public company having share capital must convene a general meeting of shareholders
within a period of not less than one month and not more than six months after the date on which
it is authorised to commence its business. This is the first meeting of the shareholders of the
company and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

(i) Private company.
(ii) Company limited by Guarantee having no share capital.
(iii) Unlimited liability company.
(iv) A public company which was registered as a private company earlier.
(v) A company which has been deemed as a public company under Sec. 43 A.

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Notice of the Meeting: The directors are required to send a notice of the meeting to all the
members of the company at least 21 days before the date of the meeting stating that it is the
‘statutory meeting’ of the company. If the notice convening this meeting does not name it as the
“Statutory Meeting” it will not Amount to compliance with the provisions of this section.

Objects of Statutory Meeting: The statutory meeting is held to inform the shareholders about
matters relating to incorporation, allotment of share, the details of the contracts concluded by the
company, etc. According to Stephenson, “Statutory Meeting is convened in order to aord the
shareholders an opportunity for seeing what degree of success has attained the floatation of the
company and in order that any special matters requiring their approval may be laid before them”.

Statutory Report: The directors are required to prepare and send a report called the ‘Statutory
Report’ to every member of the company at least 21 days before the date of the meeting. If the
report is sent later it shall be deemed to have been duly forwarded if it is so agreed to by a
unanimous vote of the members entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy
of this report should be sent to the Registrar

Effect of Non-compliance:
(i) If default is made in complying with the provisions of Section 165, every director or
other officer of the company who is in default will be liable to a fine which may extend
to Rs. 500.
(ii) (ii) If the statutory meeting is not held or the statutory report is not filed as per the
provisions of Companies Act, the company may be compulsorily wound up under the
orders of court. [Sec. 43(6)] The court may, however, give direction for the statutory
report to be filed or a meeting to be held as the case may be and refuse to order the
winding up of the company. [Sec. 443(3)]

II. Annual General Meeting (AGM):

It is a meeting of shareholders which is held once in a year.
The object of holding this meeting is to review the progress and prospects of the company and
elect its office-bearers for the coming year.

Holding of the Meeting: The first annual general meeting of the company is held within 18
months of its incorporation. After holding such meeting it is not necessary to hold any other
annual general meeting in the year of its incorporation and in the next year. Subsequent annual
general meeting must be held by the company each year within six months of the closing of the
financial year. I the interval between any two annual general meetings must not be more than
fifteen months. The registrar is empowered to extend the time upto a period to three months
except in the case of first annual general meeting.

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Notice: The Board of Directors has to call Annual General Meeting giving 21 days notice to all
the members entitled to attend the meeting. However, such a meeting may be called with shorter
notice, if it is agreed to by all the members to vote in the meeting. Certified copies of Profit and
Loss Account and Balance Sheet, Directors’ Report and Auditor’s Report should also be
forwarded to the members at least 21 days before the holding of the meeting of the company.
Considering the importance of annual general meeting to shareholders it has been held that the
directors must call the meeting even though the accounts are not ready or the company is not
functioning.

Effect of Non-Compliance:
(i) If default is made in holding the annual general meeting in accordance with the above
provisions, the Central Government may on the application of any member of the
company, call or direct for the calling of the meeting and give such directions for this
purpose as it thinks proper. The directions may include that one member of the company
present in person or by proxy shall be deemed to constitute the meeting. (Sec. 167)
(ii) If default is made in holding a meeting of the company in accordance with the above
provisions, the company and its every officer who is in default shall be punishable with a
fine which may extend to five hundred and in case of continued defaults, with a further
fine which may extend to Rs. 250 for every day during which such default continues,
(i) Routine Business: (a) Adoption of Annual Accounts, Directors’ Report and
Auditors’ Report. (b) To declare the dividend. (c) To elect the directors in place
of those retiring by rotation. (d)To appoint auditors and fix their remuneration.
(ii) (ii) Special Business: (a) To increase Authorised Capital. (b) To alter the Articles
of Association, etc.

III. Extraordinary General Meeting:

Extraordinary meeting is a general meeting which is held between two Annual General
Meetings. Extraordinary General Meeting is Called to discuss any particular matter of urgent
importance to the company. This meeting is called for the consideration of any specific subject,
decision of which cannot be postponed to the next Annual General Meeting

This meeting may also be called to discuss the following:

(i) Alteration of any clause of Memorandum of Association; or
(ii) Changes in the Articles of Association; or
(iii) Scheme of the reduction of share capital etc.

 The Extraordinary General Meeting may be called by the Directors or may be convened by
the Shareholders if the Board of Directors does not arrange for it despite their requisition to
call it.
 Directors may call the Extraordinary General Meeting in accordance with the procedure laid
down in the Articles of Association of the company.

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 Shareholders holding at least one-tenth of the paid-up share capital of the company can
make a requisition to the Board of Directors to convince such a meeting.
 If due to any reason it is impracticable to hold extraordinary general meeting the Company
Law Board may order to call such meeting either on its own initiative or on the application
of any director or any member of the company who are entitled to vote at the meeting.
Section 186 of the Companies Act empowers the Company Law Board to call only
extraordinary general meeting and not the annual general meeting of the company.
 If no such meeting is convened within 21 days of their requisition, shareholders may
themselves convene the meeting within 3 months from the date of their requisition. A notice
of 21 days has to be given to members indicating the nature and particulars of the resolutions
to be discussed.
 The special resolutions passed at Extraordinary General Meeting have to be filed with the
Registrar within 15 days.

IV. Class Meetings:

When the meeting of a particular class of shareholders takes place such as preference shareholder
meeting, it is known as class meeting. Such a meeting can be attended only by that class of
shareholders. The articles define the procedure for calling such meeting. Such a meeting is called
for the alteration in the rights and privileges of the shareholders and for the purpose of
conversion of one class of shares into another.

B. Meetings of Directors:

I. Meetings of Board of Directors:

At Least One Meeting in Every Three Months: The directors of a company exercise most of
their powers in a joint meeting called the meeting of the Board. In the case of every company, a
meeting of the Board of Directors must be held:
(i) At least once in every three months, and
(ii) At least four such meetings shall be held in every year. [Sec. 285]

In other words, no three months should pass without directors’ meeting being held, and no year
should expire without at least four directors’ meetings having been held in it. The object of this
section is to ensure that the Board meetings are held at reasonably frequent intervals so that the
directors may be in touch with the management of the affairs of the company. However, the
Central Government is empowered to relax the rule with regard to any class of companies
(Section 285). The object of this provision is to save smaller companies having insufficient
business to be transacted at Board meetings from unnecessary hardships and expenditure
involved in holding them.

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Notice: There is no need to send notice, if the articles provide for meetings to be held at regular
intervals’ e.g., monthly, the time and place being fixed. Also, if all the directors should meet
casually, and are willing to hold a meeting, the meeting can be held notwithstanding the absence
of notice. Unless the articles of the company provide a definite period of notice, a reasonable
notice must be given of the Board meeting. What is a reasonable notice will depend on any
particular case. If a proper notice is not given the proceedings are invalid unless all the directors
are present at the meeting. The notice should mention the place, time and date of the meeting.
The day must be a working day and the time should be during business hours unless agreed
otherwise by all the directors. It is not necessary to state in the notice the business to be
transacted, unless the articles of the company or the Act so require.

Agenda: The term ‘agenda’ means things to be done. In the present context it is a statement of
the business to be transacted at a meeting. It also sets out the order in which the business is to be
dealt with. Though the Companies Act does not make it obligatory on the secretary to send an
agenda or to incorporate the same in the notice of Board Meeting, yet by convention it
necessarily accompanies the notice calling the meeting. When the agenda is enclosed with the
notice each director gives due consideration to the proposed business and comes with necessary
preparations for discussion in the meeting.

Quorum: There must be a proper quorum for every meeting. The quorum for Board Meeting
should be at least two directors or one-third of total strength of the Board of Directors, whichever
is more subject to a minimum of two directors. While determining the total strength, the
vacancies are not counted. Again the directors who are interested in any of the resolutions to be
passed at the Board Meeting shall not be counted for the purpose of quorum of that resolution. If
at any time the number of interested directors exceeds or is equal to two-thirds of the total
strength of directors, then the remaining directors who are not interested will be the quorum for
that item, provided their number is not less than two [Sec. 283]. If the meeting of the Board
could not be held for want of quorum then unless the articles otherwise provide the meeting shall
automatically stand adjourned till the same day in the next week and at the same time and place.
Where that day happens to be a public holiday then the meeting stands adjourned to the next
succeeding day, at the same time and place. If a meeting could not be held for want of a quorum,
it shall all right be counted towards the minimum number of meetings which must be held in
every year under Sec. 285. [Sec. 288]
Board meetings are called for the following business:
(i) To issue shares and debentures.
(ii) To make calls on shares.
(iii) To forfeit the share
(iv) To transfer, the shares.
(v) To fix the rate of dividend.
(vi) To take loan in addition to debentures.
(vii) To invest the wealth of the company.
(viii) To think over the difficulties of the company.
(ix) To determine the policies of the company.

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II. Meetings of the Committees of Directors:
The Board of Directors may form certain committees and delegate some of its powers to them.
These committees should consist of only directors. The delegation of powers to such committees
is to be authorised by the Articles of Association and should be subject to the provisions of the
Companies Act.
In a large company routine matters like Allotment, Transfer, Finance are handled by sub-
committees of the Board of Directors. The meetings of such committees are held in the same
way as those of Board Meetings.

III. Meetings of Creditors:

The meetings of creditors are called when the company proposes to make a scheme for
arrangement with its creditors. Section, 391 to 393 of the Companies Act not only give powers to
the company to compromise with the creditors but also lay down the procedure of doing so.

IV. Meetings of Debenture Holders:

Meetings of the debenture holders are held according to the conditions contained in the
debenture trust deed. These meetings are called from time to time where the interests of
debenture holders are involved at the time of reconstruction, reorganisation, amalgamation or
winding up of the company. The rules and regulations entered in trust deed relate to the notice of
the meeting, appointment of a Chairman of the meeting, passing the resolutions, quorum of the
meeting and the writing and signing of minutes.

Proxy: Any member, entitled to attend and vote in a meeting, can appoint another person to
attend and vote on his behalf. The person appointed is called the Proxy. The appointment of a
Proxy must be made by a written instruction signed by the appointer and deposited with the
company, not more than 48 hours before the meeting. A Proxy is not entitled to speak in the
meeting and vote only in a poll unless the articles provide otherwise. A Proxy need not be a
member of the company. A member of a private company cannot appoint more than one Proxy
to attend on the same occasion, unless the articles otherwise provide. A body corporate which is
a member of a company can appoint a representative or proxy, by resolution of the Board. The
President of India or the Governor of a State, if he is a member of a company, may appoint any
person to act as his representative in a meeting.

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 DIRECTOR & KMP

MEANING
A director includes any person occupying the position of director by whatever name called. Only
an individual can be appointed a director.

POSITION OF DIRECTORS
1. Directors as Agents - When the directors enter into contract with third parties sign
documents for and on behalf of the company etc, they act as the agent of the company. They
bind the company be their acts.
2. Directors as Trustees - They are in the position of trustees, when they manage the assets
and properties of the company. Similarly when they exercise the powers entrusted to them they
are in the same position. It means that they should safeguard the interest of the company and
should never abuse the powers for promoting their personal ends.
3. Directors as Officers - Directors also act as officers of the company. When they have to
manage the affairs of the company, they are in the position to Chief Executive Officers. Thus the
directors combine in themselves the roles of agents, trustees and officers.

CLASSIFICATION OF DIRECTORS in a Company

A company has different types of directors, and all of them have different roles in the company.
Let’s study about all the directors one by one.

1) Managing Director - Managing director is a person who has substantial powers of

management of the company. He is given this power by the articles of the company, agreement
with the company, passing resolution in the general meeting of the company, or by the board of
directors.

2) Independent Director - A person becoming the independent director of the company must
fulfil certain criteria given under section 149(6) of the Companies Act, 2013, which states that an
independent director is a person other than managing director, whole-time director, or nominee
director, and:
 He must have relevant experience and should be a person of integrity as per the board.
 A person appointed as an independent director shall not be a promoter of the same
company or any other company which is the holding, subsidiary, or associate company of the
same company in which he has been appointed.
 The person shall not be related to the promoters or directors of the company or its holding,
subsidiary, or associate company.

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 The person must not have any money-related relationship with the company or its
holding, subsidiary, or associated company other than his salary.
 None of his relatives or he himself shall not have any kind of interest in the company.
Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the paid-up
capital.

Section 149(4) of the Companies Act, 2013, states that every listed public company must have
1/3rd of its total directors as independent directors.
Example: XYZ Ltd is a listed public company having a total of 15 directors. 1/3rd of 15 is 5.
Therefore, the company will have 5 directors as independent directors.
Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that the
following companies will have at least 2 independent directors:
 Companies having paid-up share capital of Rs. 10 crores or more.
 Companies having a turnover of Rs. 100 crores or more.
 Companies having outstanding loans, debentures, deposits, in aggregate of more than Rs. 50
crores.

3) Small Shareholders Director - As per the Companies Act, 2013, a small shareholder
means a shareholder holding shares of the nominal value of Rs. 20,000 or less.
As per Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
 every listed company having paid-up share capital of Rs. 5 crores or more and
 also having 1000 or more shareholders holding shares of the nominal value of Rs. 20,000
or less may have a small shareholder director elected by such small shareholders.

4) Women Director –
 Every listed company, and every other public company having a turnover of Rs. 300
crore or more and
 paid-up share capital of Rs. 100 crore or more
must appoint at least 1 women director in the company.
The women director can be appointed at any time during registration of the company or even
after incorporation and shall hold the office till the next annual general meeting (AGM) of the
company from the date of her appointment. She can also resign from the office at any time by
giving notice to the company.

5) Additional Director - The board of directors has the power to appoint additional directors
if required by the company. If a person has not been appointed as an additional director in the
general meeting, then he or she will not be appointed as an additional director of the company.

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The tenure of the additional director will be till the time of the next annual general meeting
(AGM) or the last date on which the annual general meeting should be held, whichever is
earlier.
Example: In the year 2020-21, if the last date for the company to take AGM is 30th September,
but the company has not taken AGM on that date due to some reasons and postponed the same to
30th October. Still, the tenure of the additional director appointed during the last AGM will
come to an end on 30th September.

6) Alternate Director - If the existing director of the company is not present in India for the
last 3 months, then the company shall appoint an alternate director in his place.
A company can appoint an alternate director if the articles of the company authorise so or by
way of passing a resolution in the company’s general meeting.
The alternate director will hold the office till the term of the existing director on whose place
he has been appointed or if the existing director returns to India.

7) Nominee Director - The nominee director is not appointed or removed by the company.
He is appointed by the financial institution, by an agreement, by the Government, or by any
other person in order to represent his interest in the company.
The company does not have the power to retire such directors, nor are they retired by rotation.
Only the agencies who have nominated such a director can remove the nominee director.
Example: If XYZ Ltd took a loan from SBI bank, then the bank (to monitor the activities of the
company) will appoint a nominee director in the company till the time the company does not
repay the loan.

8) Executive Director - An executive director is the company’s full-time working director.

They are in charge of the company’s activities and have a higher level of accountability. During
their operations in the company, they must be attentive and cautious.

9) Non-executive Director - A non-executive director is not involved in the day-to-day

operations of the company. They may take part in the planning or policy-making process,
challenging the executive directors to make decisions that are in the company’s best interests.

QUALIFICATION OF DIRECTORS
1. Only individuals can be appointed as directors of the company.
2. They must have contractual capacity.
3. They must possess qualification shares, if laid down in the Articles. In such a case the
qualification must be acquired within 2 months of their appointment as directors. The nominal
value of qualification share should not exceed Rs.5,000.

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DISQUALIFICATION OF DIRECTORS
The following persons are disqualified for appointment as directors of a company;
1. A person of unsound mind
2. An undischarged insolvent
3. Any person who has applied for being adjudged an insolvent
4. Any person who had been sentenced with imprisonment for an offence involving moral
turpitude for a period exceeding 6 months and a period of 5 years has not elapsed since the
date of expiry of the sentence
5. A person who has not paid the call money and the calls in arrear are outstanding for
more than 6 months
6. Any person disqualified by a court for appointment as director for having committed fraud
in management

APPOINTMENT OF DIRECTORS

a. Appointment by Articles of Association

First directors are usually named in the Articles if the Articles are silent, the signatories to the
memorandum shall be deemed to be the first directors of the company.

b. Appointment of Directors by the Company

Subsequent directors are elected by shareholders at the AGM.
If a company adopts the principle of retirement by rotation, 1/3rd of the directors must retire by
rotation. The retiring directors are eligible for re-appointment.

c. Appointment by Board of Directors

 The Board can appoint additional directors. They can fill up casual vacancy caused by
death, resignations, etc.
 They can also appoint alternate director. If empowered by Articles, the Board may appoint
an alternate director during his absence for a period of the less than 3 months from the date in
which meetings of the Board are ordinarily held.

d. Appointment by Third Parties

If authorized by the Articles, third parties such as vendor of the business, banking or financial
institutions which have advanced loans to the companies, can appoint their nominees on the
Board.

e. Appointment by Central Government

The Central Government can also appoint directors on an order passed by the Company Law
Board or on the application of not less than 100 members of the company or of members
holding 10% of the total voting power.

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Terms of Appointment
The following are the conditions for the appointment of the Directors-
 Only a natural person may be appointed as a Director.
 A person may not be appointed as a director unless he or she has a Director ID number
(DIN).
 The person will receive a Digital Signature Certificate (DSC) from the accrediting
authority for appointment as director.
 Every person nominated for appointment as a director must submit his or her DIN and
declaration that he or she is eligible for appointment as a director under the Companies Act,
2013.
 Everyone will give their consent to serve as a director on Form DIR-2 before or after his
or her appointment.
 A person may not be eligible for appointment as a director, if he or she does not qualify
under subsection (1) of Section 164 of the Companies Act, 2013.
 One cannot hold directorship of more than 20 companies at one time including any other
directorate position. In addition, the maximum number of public companies for which a
person may be appointed as director should not exceed 10.
 In calculating the number of directorships, the directorship of a dormant company,
independent private limited companies, non-profit associations, alternate directorships excluded.

NUMBER OF DIRECTORSHIP
Every public company must have at least 3 directors and every private company must have at
least 2 directors.
The maximum number of directors a company can appoint is 15. However, the maximum
number of directors in a company can be increased beyond 15 by passing a special resolution.

REMOVAL OF DIRECTORS
A director of a company can be removed from office by the company by an ordinary resolution
before the expiry of his term, when such a director has acted in fraudulent manner or abused
his fiduciary position.
The Central Government can remove a director under certain circumstances.
The Company Law Tribunal may also order for removal of a director where an application
has been made to it on charges of oppression and mismanagement of the company affairs.

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VACATION OF OFFICE
A director must vacate his office in the following circumstances;
i. When he is found to be of unsound mind by a competent court
ii. If he is adjudged an insolvent
iii. If he fails to obtain his qualification shares within the prescribed time or ceases tohold at
any time thereafter
iv. If he is convicted of an offence involving moral turpitude and sentenced to imprisonment
for not less than 6 months
v. If he fails to pay any call money within 6 months
vi. If he absents himself from 3 consecutive Board meetings or from all meetings of the
Board for a continuous period of 3 months whichever is longer without obtaining leave of
absence from the Board
vii. If he becomes disqualified by an order of the Court
viii. If he fails to disclose to the Board his interest in any contract entered into by the company.

POWER OF DIRECTORS
According to sec.292, the powers are mentioned below;
1. General Powers – The board of directors of a company is entitled to exercise all such powers
and to do all such acts and things as the company is authorized to do. However the Board shall
not do any act which is to be done by the company in general meeting.
2. Statutory Powers – By means of resolutions passed at the Board meetings, the following
powers can be exercised by the directors.
i. To make calls
ii. To issue debentures
iii. To borrow money otherwise than on debentures
iv. To make loans

3. Other powers to be exercised at Board Meetings

i. To fill up casual vacancy in the office of directors
ii. To appoint additional directors, if authorized by the articles
iii. To appoint an alternate director if authorized by the articles
iv. To accord sanction to contracts in which any director or his relative is interested
v. To recommend a certain rate of dividend to be declared at the annual general meeting

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vi. To make investments in the companies in the same group
vii. To appoint the first auditors of the company
viii. To fill up the casual vacancy of the office of an auditor not caused by resignation

4. Restrictions on the powers of directors

The following powers cannot be exercised by the Board without the consent of the shareholders
in the general meeting.
i. To sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company
ii. To extent time for repayment of any debt due by a director
iii. To borrow money where the money to be borrowed together with that already borrowed is
in excess of the aggregate of the paid up capital and free reserves
iv. To contribute to charitable funds in excess of the prescribed limit

DUTIES OF DIRECTORS
1. Fiduciary Obligation
Since the company is an artificial person, it acts through the agency of natural persons who are
known as directors. Though the directors have powers, they have to do it for the benefit of the
company. Accordingly they must display good faith in all dealings or acting on behalf of the
company.

2. Duty to Care
The directors should work very careful and honesty so that the company will get more profits.
Directors must act honesty in the performance of his duties.

3. Duty to attend the Board Meeting

Board meetings are the appropriate places for the decisions and policy making of the company.
If the does not attend the meetings, it shows his negligence. If he absents for 3 consecutive
meetings, then he shall be removed from the company. It is the duty of the directors to attend the
board meetings regularly.

4. Duty not to delegate

The directors must perform their duties personally. The powers of the company are delegated to
the directors. Therefore he cannot delegate his powers to others persons.

5. Duty to disclose interest

Every director who is in any way whether directly or indirectly concerned or interested in
arrangement or proposed contract or arrangement, entered into or on behalf of the company shall
disclose the nature of his concern or interest at a meeting of the board of directors.

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6. Statutory Duties
Some of the important duties laid down in the Companies Act are listed below;
a. To sign a prospectus and deliver it to the Registrar before its issued to the public
b. To see that all moneys received from applicants for shares are kept in a scheduled bank
c. Not to allot shares before receiving minimum subscription.
d. To forward a statutory report to all its members at least 21 days before the dateof the
meeting
e. To hold the meetings at least once in 3 months
f. If a director is interested in a contract, to disclose the nature of his interest
g. To call for annual general meeting every year
h. To file all statutory returns with prescribed authorities
i. To take steps for filing declaration of solvency in the case of voluntary winding up.

LIABILITY OF DIRECTORS
A. liability to outsiders
The directors are personally liable to third parties of contract in the following cases;
 When they contract with outsiders in their personal capacity
 When they contract as agents of an undisclosed principal.
 When they enter into a contract on behalf of prospective company
 When the contract is ultra vires the company
 When they fail to repay application money
 When they make miss-statement in prospectus
 When they make irregularity.

B. Liability to Company
The directors shall be liable to the company for the following;
 Where they have acted ultra vires the company
 When they have acted negligently
 Where there is a breach of trust
 Directors are liable to the company for misfeasance (Failure to discharge obligation)

C. Criminal Liability of Directors

Directors may incur criminal liability for the following activities;
a. Misstatement in the prospectus

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b. Failure to file return of allotment
c. Failure to issue share certificates within the prescribed period
d. Failure to pay dividend within 30 days from the date of declaration
e. Failure to lay before the AGM audited profit and loss account and balance sheet
f. Failure to file copies of special resolution with the Registrar within 30 days of passing the
resolution
g. Failure to furnish the necessary information to the company’s auditors
h. Destruction of important document
i. Holding the office of directors in more than 20 companies excluding private companies.

MANAGING DIRECTOR
Meaning
Managing Director is a director who is entrusted with substantial powers of management,
which would not be otherwise available to him. Routine administrative work is not included in
the term “Substantial Powers of management”. A managing director is appointed
a) As result of an agreement entered into with the company or
b) As a result of a provision contained in the memorandum or articles or
c) In pursuance of a resolution passed wither by the Board or by the company in general
meeting

Some of the important points worth noting regarding managing director are given below
1. Without the approval of Central Government no change can be effected in the terms of
appointment of a managing director
2. A managing director cannot be appointed for a period exceeding 5 years at a time
3. A person cannot act as a managing director of more than 2 companies at a time
4. The remuneration should not exceed 5% of the annual net profits if there is one managing
director. If there is more than one such director, 10% for all of them together. This can be paid
by way of monthly payment or at a specified percentage of net profits or by both ways.

MANAGER
Manager and managing director have similar functions to perform. The important difference
between the two is that while a managing director must be a director, a manager need not be a
director. Only an individual can be appointed as a manager.

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Subject to the superintendence, control and direction of the Board of directors, a manager is
entrusted with the management of the whole or substantially the whole of the affairs of the
company.
1. A company cannot have more than one manager
2. The powers of a manager are wider than those of a managing director, because the manager
may be entrusted with the management of whole of the affairs of the company.
3. Maximum remuneration payable to a manager cannot exceed 5% of the annual net profits
4. Manager cannot be appointed for a period exceeding 5 years at a time

MANAGERIAL REMUNERATION
Managerial remuneration may take the form of monthly payments (salary), or a specified
percentage of net profits or a commission, etc. this expression shall include the value of
perquisites. The total managerial remuneration payable by a public limited company to its
director or manager must not exceed 11% of the net profits of the company for that financial
year. Remuneration to a managing director or whole time director may be paid not exceeding 5%
of the net profits and if there is more than one such director, 10% for all of them together.
In a year of no profits or inadequate profits, such managerial remuneration shall be governed by
the provisions of Schedule XIII of the Companies Act, 1956.
Otherwise, the remuneration payable to directors is usually determined by the Articles of
Association or a resolution passed by the company in its general meeting. The total managerial
remuneration payable to directly managing director, or manager and whole-time director should
not exceed 11% of the net profit and if profit is inadequate, a sum not exceeding Rs.50, 000 per
annum, this will applicable for public company and there is no restriction for private company.

WOMEN DIRECTORS
Woman Director – Companies Act 2013
As per the Companies Act, 2013, it is mandatory to appoint at least one woman director as a
board member in certain types of companies. The penalty for non-compliance of provision
extends to a fine of Rs.10,000 with a further fine of Rs.1000 per day if the contravention
continues.

Criteria - A company, whether a public company or a private concern, will be required to

mandatorily appoint at least one woman director if it fulfils any of the following criteria:
1. It is a listed company whose securities are listed on any stock exchange.
2. It is a company having Paid-up capital of Rupees 100 crore or more, and
Turnover of Rupees 300 crores or more.

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Procedure for Appointment of Woman Director
A Woman Director can be appointed during the time of company registration or after
incorporation by the Board Members and the Shareholders.

Director Identification Number

Any person who wishes to hold the position of Director in an Indian company must first obtain
Director Identification Number (DIN) which is a unique identification number for each director.
A Woman Director must first obtain DIN to become Director of a Company. In case a Woman
Director is being appointed during the company incorporation process itself, DIN will be
generated along with the incorporation certificate. No person can hold or acquire more than one
DIN.
Consent to Act as Director
In case of appointment of Woman Director in existing company, consent in Form DIR-2 given
by the Woman Director is to be filed with the Registrar of Companies within 30 days of her
appointment.

Roles of Women Directors

Women director has to play the role like any other director. Women can take up a role of Nominee
Director who will be nominated by a party in the company to take care of its interest. Also,
Women can take up a role of Independent Director who is not liable to retire by rotation.
Women Directors can hold a maximum of twenty directorships that includes the sub-limit of ten
public companies. Any contravention on this part shall be subjected to a fine ranging between
Rs. 5000 -Rs.25000.

Vacancy in the Position of a Women Director

A Woman Director may leave the company on any reasons such as resignation, removal,
automatic vacation or retirement by rotation before the expiry of her term as a Director. The Board
of Directors must fulfil this vacancy known as intermittent vacancy within a period of 3 months.
A company can also have more than one woman director and the vacancy caused by one of them
will not be considered as an intermittent vacancy, as the company still satisfied the Companies
Act of 2013 with respect to Women Directors.

Alternative Director
In case of absence of a Woman Director for a period of not less than 3 months, the board must
appoint an alternative director to ensure the smooth functioning of the company. The alternative
director shall leave the firm after the return of the woman Director. In case of more than one
woman director, it is optional for the company to appoint an alternative director.

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Term of Women Director
A woman director can hold the position of Director until her next Annual General Meeting from
the date of appointment. She is also entitled to seek for reappointment at the general meeting. The
tenure of women director is liable to retirement by rotation similar to other directors. Like any
other director, a Woman Director can also tender her resignation any time before the expiry of
her term by giving a notice to the company.

INDEPENDENT DIRECTORS
Independent Director – Companies Act 2013. An independent director is a non-executive director
who does not have any kind of relationship with the company that may affect the independence
of his/her judgment.
Companies Which Are Required to Appoint Independent Directors

I. LISTED PUBLIC COMPANY

Every listed public company shall have
 At least one-third of a total number of directors as independent directors.
 Any fraction contained in that one-third shall be rounded off as one.

II. UNLISTED PUBLIC COMPANY

The Central Government may prescribe the minimum number of independent directors incase of
any class(es) of public companies.
As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014,the
following classes of companies shall have at least 2 directors as independent directors.
 Public Companies with paid-up share capital of Rs. 10 crores or more.
 Public Companies with turnover of Rs. 100 crores or more.
 Public Companies with aggregate outstanding loans, debentures, and deposits, exceeding
Rs. 50 crores.

Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role includes
improving corporate credibility and governance standards by working as a watchdog and help in
managing risk. Independent directors are responsible for ensuring better governance by actively
involving in various committees set up by company

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The independent directors are required because they perform the following important role:
1. Facilitate withstanding and countering pressures from owners;
2. Fulfil a useful role in succession planning;
3. On issues such as strategy, performance, risk management, resources, key appointments and
standards of conduct he must support in gaining independent judgment to bear on the board’s
deliberations
4. While evaluating the performance of board and management of the company bring an
objective view
5. Scrutinizing, monitoring and reporting management’s performance regarding goals and
objectives agreed in the board meetings
6. Safeguard the interests of all stakeholders, particularly the minority shareholders;
7. Balance the conflicting interest of the stakeholders;
8. Satisfying themselves that financial controls and systems of risk management are in
operation and check on the integrity of financial information
9. In situations of conflict between management and shareholder’s interest, aim towards the
solutions which are in the best interest of the company
10. Establishing the suitable levels of remuneration of
 Executive directors,
 Key managerial personnel
 Senior management

Duties of an Independent Director

The Independent Directors shall :
1. Undertake appropriate induction and regularly update and refresh their skills, knowledge,
and familiarity with the company
2. Attempt to attend company’s general meetings
3. Attempt to attend BOD’s meetings and board committees meeting being a member
4. Have adequate knowledge about the company and the external environment in which it
operates
5. Report matters concerning the unethical behaviour, actual or suspected fraud or violation
of the company’s code of conduct or ethics policy
6. Acting within his authority, assist in protecting the legitimate interests of the company,
shareholders and its employees
7. Not to unfairly obstruct the functioning of the company or committee of the board

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8. Participate in the board’s committee being chairpersons or members of that committee
9. Not to disclose confidential information, including commercial secrets, technologies,
advertising and sales promotion plans, unpublished price sensitive information, unless such
disclosure is expressly approved by the board or required by law
10. Ascertain and ensure that the company has an adequate and functional vigil mechanism and
to ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use.

DIRECTOR IDENTIFICATION NUMBER (DIN)

DIN is a unique Director Identification number allotted by the Central Government to any person
intending to be a Director or an existing director of a company.
It is an 8-digit unique identification number which has a lifetime validity. Through DIN, details
of the directors are maintained in a database.
DIN is specific to a person, which means even if he is a director in 2 or more companies, he has
to obtain only 1 DIN. And if he leaves a company and joins some other, the same DIN would
work in the other company as well.
DIN is used - whenever a return, an application or any information related to a company will be
submitted under any law, the director signing such return, application or information will mention
his DIN underneath his signature.
DIN is applied as follows with relevant forms:
1. SPICe Form:- Application for allotment of DINs to the proposed first Directors in respect of
New companies shall be made in SPICe form only.
2. DIR-3 Form:- Any person intending to become a director in an already existing company
shall have to make an application in e-form DIR-3 for allotment of DIN.
3. DIR-6 Form:- Any changes in the particulars of the directors shall be filed in form DIR-6

Reasons for Surrendering or Cancelling the DIN

The Central government may cancel the DIN due to the following reasons:
1. If a duplicate DIN has been issued to the director
2. DIN was obtained by fraudulent means
3. On the death of the concerned person
4. The person has been declared unsound mind by the court
5. The person has been adjudicated as insolvent
The director can also surrender the DIN in Form DIR-5. With the form, he has to submit a
declaration that he has never been appointed as a director in the company and the said DIN has
never been used for filing any document with any authority. Upon verifying the e-records, the
central government will de-activate the DIN.

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Note that, once a person is appointed as a director in any company as per the Companies Act
2013, he cannot relinquish his DIN in the future. Even if he doesn’t remain a director anymore in
that company or in any other company, his DIN will exist as it is.

OTHER KEY MANAGERIAL PERSONNEL

Key Managerial Personnel refers to a group of people who are in charge of maintaining the
operations of the company. Accounting Standard 18(AS-18) states that Key Managerial Personnel
(KMP) are people who have authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise. Chief Executive Office, Chief Financial Officer, Company
Secretary, Whole Time Director are the Key Managerial Personnel.

Key Managerial Personnel under Companies Act, 2013

Under Section 2 of the Companies Act 2013, Key Managerial Personnel in reference to a company
are as follows:
 Chief Executive Officer/Managing Director
 Company Secretary
 Whole Time Director
 Chief Financial Officer

Chief Executive Officer/Managing Director

The managing director or chief executive officer is responsible for running the whole company.
Also, the managing director has authority over all operations and has the most power in a
managerial hierarchy.
He is also responsible for innovating and growing the company to a larger scale. In many
countries, a managing director is also called a Chief Executive Officer (CEO).

Company Secretary
A company secretary is a senior level employee in a company who is responsible for the looking
after the efficient administration of the company. The company secretary takes care of all the
compliances with statutory and regulatory requirements.
He also ensures that the targets and instructions of the board are successfully implemented.
However, in some countries, a company secretary is also called a corporate secretary.

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Whole Time Director
A Whole Time Director is simply a director who devotes the whole of his working hours to the
company. He is different from independent directors in the sense that he has a significant stake in
the company and is part of the daily operation. A managing director may also be a whole time
director.

Chief Financial Officer

Chief Financial Officer (CFO) is a senior level executive responsible for handling the financial
status of the company. The CFO keeps tabs on cash flow operations, does financial planning, and
creates contingency plans for possible financial crises.

TYPES of COMMITTEES
Committees are a sub-set of the board, deriving their authority from the powers delegated to
them by the board. Under Section 177 of Companies Act, 2013, Board of Directors may delegate
certain matters to the committees set up for the purpose. Committees are formed as a means to
improve board effectiveness and efficiency in areas where more focused, specialised and
technically oriented discussions is required.

Some of the important committees to be constituted by the Board as follows

1. Audit Committee:
Applicability:
 Every Listed Public Companies and Public Companies having a Paid-up share capital of
10 crore rupees or more, and a turnover of Rs. 100 Crore or more.
 Additionally All Public Companies which have in aggregate outstanding loans,
debentures and deposits exceeding 50 crore rupees are required to constitute an Audit
Committee.

Composition of Audit Committee as per Companies Act, 2013:

 Minimum 3 directors with majority of Independent Director.
 Members including the Chairman of Audit Committee should be able to read and
understand financial statement.

Composition of Audit Committee as per clause 49 of Listing Agreement:

 Minimum of 3 Director of which 2/3rd are independent Directors.
 All members should be financially literate and at least 1 member shall have accounting or
related financial management expertise.

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Vigil Mechanism:
 Vigil Mechanism provides adequate safeguard against victimisation of persons. It is
established for directors and employees to report their grievances and concerns.
 Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014 describes about
establishment of Vigil Mechanism for every Listed Company and companies prescribed
below:
 Companies which accepts deposits from public.
 Companies which have borrowed money from bank and public financial institutions in
excess of Rs.50 Crores.
 The Board of Directors shall nominate a director to play role of Audit Committee for the
purpose of Vigil Mechanism for reporting purpose. The aggrieved person will have direct
access with the Chairperson/Nominated Director of the Audit Committee.
 The details of establishment of such mechanism shall be disclosed on the company’s
website, and in the Board ‘report.
 Penalty for the Violation of Audit Committee Provisions: The Company shall be
punishable with a fine of Rs. 1 lakh to Rs. 5lakh and every officer of the company who is
in default shall be punishable with imprisonment upto 1 year or with Rs. 25,000 to Rs. 1
lakh or with both.

Function of Audit Committee:

 To recommend appointment, remuneration and terms of appointment of the Auditor of
the Company.
 To establish a Vigil Mechanism Policy.
 To call for remarks of the auditors about the internal control system.
 At the Annual General Meeting, the chairman of the Committee should be present to
answer the shareholder’s inquiry.
 To discuss any issues related to internal and statutory auditors and the management of the
Company.

2. Nomination and Remuneration Committee:

Applicability:
 Every Listed Public Companies and Public Companies having a Paid-up share capital of
10 crore rupees or more, and a turnover of Rs. 100 Crore or more.
 Additionally All Public Companies which have in aggregate outstanding loans,
debentures and deposits exceeding 50 crore rupees are required to constitute an Audit
Committee.

Composition of Nomination and Remuneration Committee as per Companies Act,2013:

 Minimum of 3 Non-Executive Directors out of which two shall be Independent Directors.

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  Chairperson shall be an Independent director.

Functions of Nomination and Remuneration Committee:

 Recommendation of success plans for the directors.
 To review the elements of the remuneration package, structure of remuneration package.
 To review the changes to remuneration package, terms of appointment, severance fee,
requirement and termination policies and procedures.
 To recommend the shortlisted candidates who are qualified to be director and who can be
appointment in senior management.
 The committee is authorised to seek information about any employee and the
management is directed to co-operate.
 The Committee can be present at the General Meeting to answer the shareholder’s
queries.

3. Stakeholders Relationship Committee:

Section 178 of Companies Act,2013 states that a company which holds 1000 numbers of
shareholders, debenture holders, deposit holders and any other security holders at any time
during a financial year.

Composition of Stakeholders Relationship Committee:

 As per the SEBI Listing regulations the Committee should consist of least three directors,
with at least one being an Independent director, shall be members of the committee and
in case of a listed entity having outstanding SR equity shares, at least two-thirds of the
committee shall comprise of independent directors.
 The chairperson of the Committee shall be a non-executive director and such other
members as may be decided by the Board.
As per regulation the Committee shall meet at least once in a year. The chairperson or, in his
absence any other member of the committee authorized by him in this behalf shall attend the
general meetings of the Company.

Functions of Corporate Stakeholders Relationship Committee:

The Committee shall resolve complaints related to transfer / transmission of shares, non-receipt
of annual report and non-receipt of declared dividends, general meetings, approve issue of new/
duplicate certificates and new certificate on split /consolidation / renewal etc. approve
transfer/transmission, dematerialization.

4. Corporate Social Responsibility Committee:

Section 135 of Companies Act,2013, with Companies (CSR Policy) Rules,2014 states that every
company having :

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  net worth of not less than Rs.500 crores or more
 or turnover of not less than Rs. 1000 crores or more
 or Net Profit of Rs.5 crore or more
shall constitute a Corporate Social Responsibility Committee.

Composition of CSR Committee as per Companies Act, 2013 :

In case of Listed Company at least 3 Directors out of which 1 should be an Independent Director.

Functions of Corporate Social Responsibility Committee:

 To suggest and devise a CSR Policy according to the Schedule VII of Companies Act,
2013 to the board.
 To recommend the amount of expenditure of the devised policy above.
 To monitor the CSR Policy of company from time to time and prepare a transparent
monitoring mechanism.
 Institution of a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the company.

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