Module 5: Company and Its Members and Shareholders (Lecture 2)

(B) Membership by application and registration:

The registration of a person’s name as a member of a company may take place in any one of the
following ways:

1. By Application and Allotment

When a person submits a written application to the company requesting the allotment of shares,
and the company accepts this application, an allotment is made in his favour. Upon such allotment,
when his name is entered in the register of members, he legally becomes a member of the company.

This process involves two essential steps:

(a) A valid offer by the applicant to take shares, and

(b) Acceptance of that offer by the company through allotment.

Example: If Mr. A applies for 100 shares in a company and the company allots those shares to
him, his name will be entered in the register of members, making him a member by application
and allotment.

2. By Transfer of Shares

A person may become a member through the transfer of shares from an existing shareholder. The
transferor (the current shareholder) executes a proper transfer deed in favour of the transferee (the
buyer). Once the company approves the transfer and records the transferee’s name in the register
of members, the transferee acquires all the rights and liabilities of membership.
Example: If Mr. B transfers his 50 shares to Mr. C, and the company registers Mr. C’s name in the
register of members, Mr. C becomes a member by transfer.

3. By Succession or Transmission of Shares

Membership may also arise by operation of law, such as in cases of death, insolvency, or lunacy
of a shareholder. When a shareholder dies, his shares are transmitted to his legal representative or
heir. Similarly, in the event of insolvency, the shares are transmitted to the official assignee or
receiver. The person in whose favour the shares are transmitted becomes a member upon
registration of his name in the register of members.

Example: If Mr. D, a shareholder, dies and his son Mr. E inherits the shares, Mr. E becomes a
member by transmission after the company records his name.

4. By Acquiescence or Estoppel

In certain circumstances, a person who has not been formally registered may still be treated as a
member if his conduct indicates that he has accepted the rights and obligations of membership. If
a person allows his name to appear in the company’s records as a member, receives dividends, or
participates in company meetings, he may be estopped (legally prevented) from denying his
membership. This principle of “membership by estoppel” operates to prevent unfair denial of
membership where a person’s behaviour has led others to believe that he is a shareholder.

Example: If Mr. F attends general meetings and receives dividends as a shareholder, he cannot
later deny being a member, even if his name was not formally entered in the register.

Case Law:
Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Comp Cas 563 (SC)
Facts: In this case, certain individuals had applied for shares in Swadeshi Polytex Ltd. and were
allotted shares by the company. However, their names were not yet entered in the Register of
Members of the company at the time when a dispute arose concerning their right to participate in
the company’s affairs. These individuals claimed that since the shares had been allotted to them
and the share certificates were issued, they should be treated as members of the company even
though their names were not formally registered in the company’s register of members.
Issue: The main issue before the Supreme Court was:

Whether a person whose name has not been entered in the Register of Members, but to whom
shares have been allotted and share certificates issued, can be regarded as a “member” of the
company.

Rule / Principle of Law:

According to Section 41(2) of the Companies Act, 1956 (now Section 2(55) of the Companies Act,
2013), a person becomes a member of a company only when his name is entered in the register of
members. Mere allotment of shares or possession of share certificates does not confer membership
until registration is completed.

Judgment:

The Supreme Court held that a person whose name has not been entered in the Register of
Members cannot be treated as a member of the company, even if shares have been allotted to him
or share certificates issued in his name. The Court emphasized that entry in the register of members
is conclusive evidence of membership, and until such entry is made, the person has no legal rights
as a member such as voting rights or the right to receive notice of meetings.

(C) Membership By Beneficial Ownership:

Every person holding equity share capital of a company and whose name is entered as beneficial
owner in the records of the depository shall be deemed to be a member of the concerned company.
S.2(55) 3..

Who can become a Member:

Persons Who Can Become Members

1. Individuals (Natural Persons): Any individual who is competent to contract under the
Indian Contract Act, 1872 can become a member.

Minors: A minor is not competent to contract and, therefore, cannot be a member in his own name.
However, shares may be held on behalf of a minor by a lawful guardian, subject to company
approval. Persons of Unsound Mind cannot become members, as they are not competent to
contract. An insolvent cannot become a member since his property, including shares, vests in the
official assignee. However, he continues to be a member until his name is removed from the
register.

2. Companies

A company, being an artificial legal person, can become a member of another company, provided
it is authorized by its Memorandum or Articles of Association. However, a subsidiary company
cannot be a member of its holding company (except in limited circumstances under Section 19 of
the Companies Act, 2013).

3. Partnership Firms

A partnership firm, not being a legal entity distinct from its partners, cannot become a member in
its firm name. However, the partners may jointly hold shares in their individual names.

4. Limited Liability Partnerships (LLPs)

An LLP is a body corporate under the LLP Act, 2008, and hence can become a member of a
company in its own name.

5. Co-operative Societies, Trusts, and Associations

A co-operative society or other registered body corporate can become a member if permitted by
its constitution and the company’s Articles. A trust cannot become a member in its trust name, but
trustees may hold shares on behalf of the trust.

6. Foreign Nationals and Foreign Companies

Foreign nationals and foreign companies can become members of an Indian company subject to
compliance with the Foreign Exchange Management Act (FEMA), 1999, and the rules of the
Reserve Bank of India (RBI).
Persons Who Cannot Become Members

Minors (except through lawful guardians and with company’s consent)

Persons of Unsound Mind

Undischarged Insolvents

Partnership Firms (since they lack a separate legal personality)

Subsidiary Companies holding shares in their holding company (except in limited cases permitted
by law)

Right and Privileges of Member:

The rights and privileges of a member refer to the legal powers, benefits, and protections that a
shareholder enjoys by virtue of being part of a company. These rights arise from the Companies
Act, 2013, the company’s memorandum and articles of association, and the contractual
relationship between the member and the company. Broadly, these rights ensure that members can
participate in the company’s management, share in its profits, and safeguard their interests against
misuse of power by directors or majority shareholders.

1. Statutory Right:

a) Right to Receive Notice and Attend General Meetings (Section 101): Every member is
entitled to receive notice of general meetings and to attend, speak, and vote on resolutions
discussed in such meetings.
b) Right to Vote (Section 47): Each equity shareholder has voting rights in proportion to their
shareholding, while preference shareholders have voting rights only on matters affecting
their interests.
c) Right to Appoint Proxy (Section 105): Members can appoint a proxy to attend and vote on
their behalf at general meetings.
d) Right to Inspect Statutory Registers and Documents (Section 94): Members can inspect the
register of members, annual returns, and other statutory records maintained by the
company.
 e) Right to Transfer Shares (Section 56): Members have the right to transfer their shares to
another person, subject to the provisions in the company’s Articles of Association.
f) Right to Dividend (Section 123): Members are entitled to receive dividends declared by
the company in proportion to their shareholding.
g) Right to Participate in Surplus Assets on Winding Up (Section 318 & 326): Upon winding
up, members are entitled to a share in the surplus assets of the company after liabilities and
debts are paid.
h) Right to Call for Extraordinary General Meeting (EGM) (Section 100): Members holding
at least one-tenth of the paid-up share capital can requisition the Board to call an
extraordinary general meeting.
i) Right to Apply for Prevention of Oppression and Mismanagement (Sections 241 & 242):
Members can approach the National Company Law Tribunal (NCLT) if they believe the
company’s affairs are being conducted in a manner oppressive to minority shareholders or
prejudicial to the company’s interest.
j) Right to Copies of Financial Statements and Annual Reports (Section 136): Members are
entitled to receive copies of the company’s financial statements, auditor’s report, and
director’s report before every annual general meeting.

(B) Documentary Right:

These are the rights given to the members by the MOA and AoA.

Case Law: Life Insurance Corporation of India v. Escorts Ltd. & Others, AIR 1986 SC 1370

Faxt: The case arose when the Life Insurance Corporation of India (LIC), a statutory corporation
and a major shareholder in Escorts Ltd., issued a special notice under Section 284 of the Companies
Act, 1956 seeking the removal of one of Escorts Ltd.'s directors, Mr. D.K. Modi, at the company’s
annual general meeting. LIC held more than the required percentage of shareholding to propose
such a resolution. However, Escorts Ltd. and Mr. Modi objected to this move. It was contended
that LIC, being a government-controlled entity, was acting at the behest of the Central Government
and that the move was politically motivated, thus raising questions about the independence and
legitimacy of LIC’s actions. The matter eventually reached the Supreme Court of India for
adjudication.

Issues:

The Supreme Court had to determine three main legal issues. First, whether LIC, as a shareholder,
had the right to issue a special notice under Section 284 of the Companies Act to propose the
removal of a director. Second, whether LIC’s status as a government-controlled corporation
affected its capacity to act independently as a shareholder. And third, whether the alleged political
motivations behind LIC’s action could invalidate the exercise of such a statutory right.

Rule:

The case revolved around the interpretation of Section 284 of the Companies Act, 1956, which
permits shareholders to remove a director by passing an ordinary resolution, provided that a special
notice is given. The provision applies equally to all shareholders, regardless of their identity,
nature, or control. The Companies Act does not distinguish between a private individual
shareholder and an institutional or government-controlled shareholder in terms of their rights under
this section. Under corporate law principles, the shareholder’s rights are statutory in nature, and
cannot be restricted merely on the basis of the shareholder’s internal structure or affiliations, unless
there is a clear violation of law.

Judgment:

The Supreme Court, in a landmark judgment, upheld the rights of LIC as a shareholder, affirming
that it was acting in its capacity as a member of the company, and not as a delegate or agent of the
Central Government. The Court rejected the argument that LIC’s action was politically motivated,
stating that motive is irrelevant so long as the shareholder is exercising a legal right conferred by
statute. The Court also noted that the Companies Act permits shareholders to take part in corporate
governance, including the removal of directors, and this right cannot be curtailed or questioned
merely because the shareholder is a government body.