Corporate Law

Module 1: Company Law 2013 Part I

1.1: Meaning and Nature Company

 Meaning & Definition

The word company is derived from Latin word (‘com’ means with or together and ‘panis’ means
bread or meal). This means an association of people who took their meals together. A company
is an association who share a common purpose and unite in order to focus their various talents
and organize their collectively available skills or resources to achieve specific, declared goals.

Lindley defined a company as, “A company is a voluntary organization of many persons who
contribute money or money’s worth to common stock and employs it in some trade or business
and who shares the profit or loss arising.”

 Nature of Company

(i) Voluntary Association: A company is a voluntary association formed with the main purpose
of making profit except the Section 8 companies which are Non-Governmental Organizations.
Profit earned, is divided among shareholders or saved for future use.

(ii) Separate Legal Entity: Once the company has been formed with ROC, it becomes a separate
legal entity and has its own name, identity, assets and liabilities. It can own a property, incur
debts, borrow money, employ people, have a bank account, enter into contracts and sue
people.

(iii) Limited Liability: The liability of the members of the company is limited only to the unpaid
value of shares and not their personal assets. In a partnership firm, the creditors can go after
the partner’s personal assets but in a company, they cannot do that. The liability of a company
may be limited either by-
 (a) Company limited by Guarantee- Liability of shareholders is limited to a certain amount of
guarantee mentioned in the memorandum payable at the time of winding up.

(b) Company limited by Shares- Liability of members shall be limited to the extent of unpaid
money or shares held by them.

(iv) Perpetual Succession: ‘Members may come and go but the company goes on forever’. It
means that the company never dies even if members die or leave the company. Perpetual
succession means that a company’s life is determined by the longevity of its members,
shareholders, promoters, directors, employees or anyone else. If a shareholder dies, his shares
will be transferred to other people.

(v) Separate Property: A company is a distinct legal entity and a member cannot claim to be the
owner of the company’s property during the existence of the company.

(vi) Transferability of the Shares: Shares of the company are easily transferable from one
person to another and no share-holder is permanently wedded to a company. Suppose ‘A’
transfers his shares to ‘B’, ‘B’ steps in the shoes of ‘A’ and gets all the rights.

(vii) Common Seal: Even though the company is a separate legal entity, it is run by Board of
Directors and they use a common seal which has the name of the company in it which acts as
the official signature of the company. Without this seal on a document, it is considered as void
and does not have any legal enforce.

(viii) Company to sue and being sued: A company can sue and be sued in its name and even sue
its members. It can also seek damages for defamatory matter about the company.

(ix) Separate Management: A company is administered and managed by Board of Directors.

Shareholders only hold the shares in the company and may or may not take part in its
managements.
  Role of Promoters

A promoter is a person who has control over the affairs of the company directly or indirectly
whether as a shareholder, director or otherwise. The main functions of a promotor are as
follows:

(i) To conceive an idea of forming a company and explore its possibilities.

(ii) To conduct necessary negotiation for the purchase of business in case it is intended to
purchase as existing business.

(iii) To collect the requisite number of persons (7 for public and 2 for private) who can sign the
‘Memorandum of Association’ and ‘Article of Association’ of the company and also agree to act
as first directors of the company.

(iv) To decide about the: (a) Name of the Company, (b) Location of its registered Office, (c) The
Amount and Form of its share capital, (d) Brokers or underwriters for its capital issue, (e) Select
the bankers, (f) Selection of auditors of the company, (g) The legal advisors.

(v) To print to MOA and AOA.

(vi) To make preliminary contracts with vendors, underwriters, etc.

(vii) To make arrangements for the preparation of prospectus, its filing, advertisement, etc.

(viii) To arrange for registration of the company and obtain the certificate of incorporation.

(ix) To defray preliminary expenses.

(x) To arrange the minimum subscription.

 Effects of Pre-incorporation of Contracts

Contracts made on behalf of the company before its incorporation are not binding after the
company came into existence. So the person making the contract has personal liability towards
the contract.
Advantages of Incorporation

(i) The company acquires an independent corporate personality.

(ii) It becomes the owner of its capital.

(iii) It is capable of perpetual succession.

(iv) It can use a common seal.

(v) It can sue in its own name.

(vi) The liability of members is limited.

(vii) Shares of the company are easily transferable.

Disadvantages of Incorporation

(i) Social Responsibility: Companies offer job to hundreds and thousands of people and have
significant impact on society and they also participate in corporate social responsibility
campaigns. They contribute to the development of the society.

(ii) Formality and Expenses: Incorporation of a company is expensive as well as it involves a

number of formalities. These formalities may be regarding the formation of the company as
well as administration of its affairs.

(iii) Lifting the veil of Corporation: Personality of a company is a legal myth and the reality is
that a company is an association of persons who are in fact the beneficial owners. Sometimes,
the courts lift this veil of corporation and look at the persons behind it which strikes out some
advantages of incorporation.
  Advantages and Disadvantages of company business

Advantages

(i) Easy to form

(ii) Professional Management

(iii) Large-Scale Production

(iv) Open Membership

(v) Limited Liability

(vi) Democratic Structure

(vii) Reduced Taxes

(viii) Stable Structure

Disadvantages

(i) Rigid Process

(ii) Difficulty in Establishment

(iii) Delayed Policy Decision

(iv) Extreme Government Intervention

(v) Lifting of the Corporate Veil

  Kinds of Companies

On the Basis of Mode of Formation/ Incorporation

There are two modes under which a corporate body can be formed; through special act of
Parliament and through registration under Companies Act.

(i) Statutory Company: These are formed under the special legislations of the parliament or
state legislature. They are formed for public service, not with a profit making goal and have
limited liability. They are approved by Central or State Legislature. Some statutory companies
are as follows: (a) RBI, (b) LIC, (c) SBI, etc.

(ii) Chartered Company: These are formed under a charter or by order of monarch or kings or a
queen. They come into existence under Royal Chartered Act. Some well-known chartered
company are as follows: (a) British Broadcasting Corporation, (b) Bank of England, (c) East India
Company.

(iii) Registered Company: These are formed by incorporation and are registered under
Companies Act. Companies Act and the Registrar of Companies have granted a certificate of
incorporation which is the proof the company has observed all necessary formalities.

On the Basis of Liability

(i) Companies Limited by Shares: The company which is limited by the unpaid value of shares,
the liability of members is restricted to the unpaid amount on the shares held by them. The
liability can be enforced during existence or life time of the company as well as during the
winding up. There is no liability where the shares are fully paid up.

(ii) Companies Limited by Guarantee: These companies are mainly registered under Companies
Act and the personal liability of each member is limited upto the amount written in the
memorandum at the time of liquidation.

(iii) Unlimited Companies: These companies do not have any limit on the liability of its members
like in any ordinary partnership. Such companies are not popular in India.
On the Basis of Number of Members

(i) Private Company: A private company: (a) restricts the right to transfer shares, (b) limits the
number of members to 50, (c) prohibits public to subscribe for shares and debentures of the
company, and (d) There should be at least 2 and at most 50 members in a private company.

(ii) Public Company: The ownership of such company is open to public, i.e., anyone can buy and
transfer its shares. There must be at least 7 members and there is no limit to the number of
members. Only the shares of a public company can be assigned in on a stock exchange.

(iii) One Person Company: OPC was first introduced in Companies Act, 2013 where a company
can be formed only by a single person as a member. There is no requirement of minimum share
capital and is mainly beneficial for small traders.

On the Basis of Management Control

(i) Holding and Subsidiary Companies: Some companies hold shares fully or partly by another
company. The company holding the shares become holding company and the company whose
shares are being held is called subsidiary company. The holding company enjoys the right to
control the composition of their board of directors and they also have more than 50% shares.

(ii) Associate Companies: Other companies hold at least 20% shares of the associate companies
and their control over associate company is written in an agreement.

(iii) Government Company: Such companies shave at least 51% of paid-up share capital held by
the government (Central or State or the combination of two). A subsidiary of a government
company is also a government company.

Miscellaneous Category

(i) Dormant Company: These type of companies are formed and registered for future projects
or to hold any intellectual property or an asset and not having any accounting transaction.
(ii) Foreign Company: This company is incorporated outside India which has a place of business
whether by itself or through an agent, physically or through an electronic mode and conducts
business activity in India in any other manner.

(iii) Small Company: It is a type of Private Company with paid-up share capital not more than 50
lakhs or such higher amount as may be prescribed which shall not be more than 10 crores an
annual turnover of not more than 2 crores or such higher amount as may be prescribed which
shall not be more than 100 crores.
1.2: MOA and AOA

 Concepts

A Memorandum of Association (MOA) is a legal document prepared during formation and

registration process of a company to define its relationship with shareholders and it specifies
the objective for which the company has been formed.

An Article of Association (AOA) is a document containing rules and regulations for the
administration of the company.

 Content

Memorandum of Association

(i) Name Clause-

Since a company is a separate legal entity, it must have its own name. It can be done by making
an application to the Registrar of companies for availability. Company can adopt any name if:
(a) no other company has registered under that name before, and (b) it is not undesirable or
prohibited by the Central Government (e.g.: Indian National Flag, Mahatma Gandhi, etc.). If the
name of the company closely resembles the name of the company already registered, the court
may direct the changes of the name of the company.

Once the name has been approved and the company has been registered, then: (a) The name
of the company with registered office shall be affixed on outside of the business premises, (b) If
the liabilities of the members is limited the word ‘Limited’ or ‘Private Limited’ shall be added to
the name, (c) the name and address of the registered office shall be mentioned in all letter-
heads, business letters, notices, etc.

The government has the right to grant a license to a company to drop the word ‘limited’ from
its name if: (a) the company is formed for the promotion of commerce, art, religion, science or
any other useful object, and (b) the company intends to apply its income in promoting its object
and prohibits the payment of dividends to its members.
A company cannot apply for alteration of name if: (a) the company has not filed annual returns
or financial statements due for filing with the registrar, or (b) company who has failed to pay or
repay matured deposits, debentures or interests.

(ii) Registered Office Clause-

MOA must contain the state in which the registered office of the company is to be situated and
it should be within 30 days of incorporation or the date on which the business commences,
whichever is earlier. Imitation should be given to Registrar within 30 days of incorporation. All
communications and notices should be sent to the registered office and all important
documents are kept in the registered office.

Registered Office Clause can be altered: (a) If the registered office shifts from one place to
another within the same city it can be done by passing a resolution by Board of Directors, (b) if
the registered office shifts from one place to another but within the same state, it can be done
by passing a special resolution at shareholders meeting and the intimation of the change should
be filed with the registrar within 30 days of the change, and (c) If the registered office shifts
from one state to another the memorandum should be altered.

A company can change the registered office from one state to another: (a) to enable the
company to carry on business more economically or more efficiently, (b) to attain its main
purpose by new or improved means, (c) to enlarge or change the local area of its operators,
(d) to carry on business which under the existing circumstances may conveniently be combined
with the business of the company, (e) to restrict or abandon any of the objects specified in the
memorandum, (f) to sell or dispose of the whole, or nay part of the undertaking, (g) to
amalgamate with any other company or body of persons.

(iii) Object Clause-

The object clause or the objective clause defines and limits the scope of the company’s
operations and explains how the members’ capital will be used. Companies aren’t allowed to
do any business other than the one stated in the MOA.
The object clause should contain: (a) a list of objects the company will be pursuing after its
incorporation, (b) the incidental or relative object that are necessary to achieve the main
object, (c) the objects which are not included in incidental or main object, (d) nothing that is
against the public interest and the country’s general rule of law.

The object clause can be divided into: (a) main objects of the company to be pursued by
company on its incorporation, (b) objects incidental or ancillary to the attainment of the main
objects, and (c) other objects.

Alteration of Object Clause: the procedure for the alteration of the Object clause is the same as
the procedure for the alteration for registered office from one state to another.

(iv) Liability Clause-

The liability of the members is limited to the extent of the unpaid shares or by guarantee,
according to the form by which the company is formed. In the absence of this clause, it is
deemed that the liability is unlimited.

Alteration of Liability Clause cannot be done in order to increase the liability of the members or
prejudice their interests. It can be done only if the members put it in writing either before or
after a particular alteration is made by passing a special resolution.

(v) Capital Clause-

In case of any company except Unlimited Company, memorandum shall state the amount of
share capital with which the company is to be registered thereof into shares of a fixed amount.

Alteration of Capital Clause can be done by passing an ordinary resolution in the general body
meeting and shall not require to be confirmed by the court. Cancellation of shares does not
mean a reduction in share capital. A notice of alteration of capital must be filed with the
registrar within 30 days of such alterations.

(vi) Subscription or Association Clause-

It is a declaration made by subscribers who signed the memorandum to form a company. Their
signature shall be attested by at least one witness.
Articles of Association

Articles of a public company limited by shares usually provide for the following rules: (i) Share
Capital and Alteration thereof, (ii) Meetings of company, (iii) Rights of shareholders,
(iv) Accounts and audits, (v) Dividends, (vi) Indemnity, (vii) Winding up, (viii) Appointments,
remuneration, qualification, powers, etc. of Board of Directors, (ix) Share Certificate and
Warrants, (x) Payment, calls, transfer, lien, transmission, forfeiture, etc. of shares, (xi) Votes to
members, (xii) Capitalization of profits, (xiii) Seal, (xiv) Adoption of preliminary contracts

Alteration of AOA can be done subject to the following conditions or restrictions:

(i) Alteration can be done only by a special resolution of the shareholders of the company even
if the articles prescribe an ordinary resolution for its alteration or even if the members agree.

(ii) No alteration of Articles will be allowed if it violates the provisions of the Companies Act or
any other provisions of general law which may be applied.

(iii) No alteration of Articles will be allowed if it violates the conditions mentioned in MOA.

(iv) Alteration must not contain anything illegal.

(v) An alteration cannot require a member or a class of members to purchase more shares in
order to increase their liability.

(vi) Alteration in existing articles require consent of Central Government.

(vii) An alteration must not affect the interests of minority shareholders.

(viii) If the alteration wants to convert a public company into a private company, it has to take
permission form the Central Government.

(ix) Alteration must be made in the interest of the company as a whole even if the private
interests of some companies may be affected.

(x) AOA may be altered with retrospective effect.

  Doctrine of Constructive Notice

MOA and AOA are public documents which are pre-requisite for registration of a company and
are available for inspection in the office of the company or in the office of the Registrar of
Companies on the payment of fee. Every person involved with the company is assumed to have
read the MOA and AOA. They cannot claim later that they were ignorant of the documents.

If a person or a party deals with the company and the transaction is beyond the powers of the
company, he cannot enforce it against the company he shall be personally liable to bear the
consequences of such dealings.

One exception to the above doctrine is that so far as the internal proceedings of the company
are concerned the outsider dealing with the company, can assume that everything has been
regularly done.

 Doctrine of Ultra Vires

The Object Clause is the heart of MOA which lays down the objectives which the company has
to observe on incorporation of the company under this Act. If the company act beyond the
objectives set in the object clause, such an act is termed as Ultra Vires and neither the Board
nor any highest authority can justify or confirm. Such an act is void ab initio void in nature.
Since the act is void, neither the shareholders can do anything.

When the company does an act in furtherance of its objects, it is intra vires (intra = within, vires
= power) the company. When the company does an act outside the scope of its objects, it is
ultra vires (intra = outside, vires = power) the company. This rule was first laid down by the
House of Lords in Ashbury Railway, Wagon Co. v/s Riche.

 Doctrine of Indoor Management

Doctrine of constructive notice protects the company from an outsider while doctrine of indoor
management protects the outsider against the company.
It is the right of every person to read the MOA and AOA of the firm but they have no right to
inquire into the internal affairs of the firm. Every person has the right to assume that the
internal proceedings and affairs are regularly being carried on.

Exceptions to the Rule of Indoor Management:

(i) Knowledge of internal irregularities of the company: A third party cannot claim protection
under this rule if the company has actual or constructive notice regarding the non-compliance
and irregularity of the internal procedure.

(ii) Suspicion of Irregularity: When the circumstances are so suspicious that an inquiry is invited
by the person dealing with the company, the doctrine is not applicable.

(iii) Acts void ab initio: This doctrine does not apply to acts that are void ab initio. E.g.: where
documents are forged.

(iv) Acts, outside the apparent authority of the company: When the act of an officer whose act
does not fall under the authority, the contract is not binding on the company.

(v) No knowledge of Articles: A person who at the time of entering into a contract with the
company does not have knowledge about the company’s AOA, cannot be saved by the doctrine.
1.3: Prospectus

Prospectus is a document issued as a prospectus and includes notice, circular, advertisements,

or any other document inviting deposits from the public or inviting offers from the public for
the subscription or purchase of any shares or debentures of a body corporate.

 Contents

For filing and issuing the prospectus of a public company, it must be signed and dated and
contain all the necessary information as follows:

(i) Name and registered address of the office, trustee, secretary, etc.

(ii) Date of the opening and closing of the issue.

(iii) Statements of Board of Directors about separate bank accounts where receipts of issues are
to be kept.

(iv) Statements of Board of Directors about the details of utilization and non-utilization of
receipts of previous issue.

(v) Consent of directors, bankers, auditors, for expert opinions.

(vi) Authority for issue and details of the resolution passed for it.

(vii) Procedure and time scheduled for the allotment and issue of securities.

(viii) The capital structure of the company in the manner which may be prescribed.

(ix) The objective of a public offer.

(x) The location of the business and its objectives.

(xi) Particulars related to risk factor of the specific project, gestation period of the project and
other details relating to the project.

(xii) The details of any material frauds committed by the company in the last five years.
(xiii) The related party transaction entered during the last 5 years immediately preceding the
issue of prospectus.

(xiv) Minimum subscription and what amounts are payable on the premium.

(xv) Details of directors, their remuneration, and extent of their interest in the company.

(xvi) Aggregate amount proposed to be raised through all the stages of offers of specified
securities made through the shelf prospectus.

(xvii) Reports for the purpose of financial information such as auditor’s report, report of profit
and loss, etc.

 Golden Rule

People invest in the company based on the prospectus and hence it is the primary responsibility
of every person authorizing the issue of prospectus to see that it contains true information and
not any fraudulent picture of the public. This is known as the golden rule for framing
prospectus.

 Misstatement in Prospectus

Every information must be disclosed to the public. The statement which does not qualify to the
particulars mentioned in the prospectus, or any other information is intentionally and willfully
concealed by the director of the company, would be constructed as a misstatement.
Statements which produce wrong impression of actual facts, false or untrue statements, or
omission of any fact would be constructed as a misstatement.

Misstatements include: (i) Untrue statements, (ii) Statements which produce wrong impression,
(iii) Statements which are misleading, (iv) Concealment of material fact, (v) Omission of facts.

A statement included in prospectus shall be deemed untrue if: (i) statement is misleading in the
form and context in which it is included, (ii) the omission is calculated to mislead.
  Types of Prospectus

(i) Abridged Prospectus: It is a summary of prospectus filed before the registrar of the
companies which includes all the features of a prospectus. This short form of all the information
of the prospectus makes it easy for an investor to know all the useful information and arrive at
an investment decision. When any form of the purchase of securities of a company is issued, it
must be accompanied by an abridged prospectus.

(ii) Shelf Prospectus: It is issued when a company or any public financial institution offers one or
more securities to the public. The validity period of such prospectus starts with the
commencement of the first offer and is valid for up to 1 year. The organization must provide an
information memorandum when filing the shelf prospectus.

(iii) Red Herring Prospectus: This does not contain the information about prices of securities
offered and number of securities to be issued. According to the act, the firm should issue this
prospectus to the registrar at least 3 days before the opening of the offer and subscription list.

(iv) Deemed Prospectus: When any company to offer securities for sale to the public, allots or
agrees to allot securities, the document will be considered as a deemed prospectus through
which the offer is made to the public for sale.
1.4: Private Placement and ESOPs

 Private Placement

Meaning-

Private placement by companies means offering its securities or inviting to subscribe its
securities for a select group of person other than by way of public issue through a private
placement offer letter. Private placement of securities can be made only to select people or
identified person. If the offer is advertised or marketed, then it will be considered a public offer
and not a private placement by company.

Rules-

(i) Each Private Placement offer should be previously approved by the shareholders of the
company, by a Special Resolution.

(ii) No fresh offer can be made unless the allotments with respect to any offer or invitation
made earlier or that offer or invitation has been withdrawn or abandoned by the company.

(iii) All money received under private placement to be made by cheque or demand draft only.

(iv) Qualified institutional buyers and employees of the company being offered securities under
a scheme under employee’ stock option are excluded in calculating the number.

(v) Company shall not expect to utilize money raised through private placements unless
allotment is made and the return of allotment is filed with the registrar.

(vi) Company should be restricted from making any advertisement of the offer to public.

(vii) A company shall issue a private placement offer cum application letter only after the
relevant special resolution or resolution from the Board has been filed with the registrar.

(viii) The value of such offer or invitation per person shall be with an investment size of less
than ₹20,000/- of face value of the securities.
(ix) The company shall maintain a complete record of private placement offers in Form PAS-5 a
copy of which will be filed with the registrar along with the requisite fee within 30 days of
circulation of private placement offer letter.

(x) Allotment of securities shall be done within 60 days of receipt of the application failing
which the application money shall be refunded within 15 days of the expiry of 60 days
otherwise interest at a rate of 12% p.a. shall be required to be aid from the 60th day.

Procedure-

Private placement shall be made only to a selected group of persons who have been identified
by the Board, whose number shall not exceed 50 or such higher number, i.e., not more than
200, excluding the qualified institutional buyers and employees of the company being offered
securities under a scheme of employees’ stock option, in a financial year.

(i) A resolution should be passed by the Board of Directors for private placement of securities.

(ii) Preparation of notice of board meeting along with draft resolution to be passed in the board
meeting.

(iii) A General Body Meeting must be convened, where in the proposed offer of securities has
been previously approved by the shareholders of the company, by a special resolution, for each
of the offer or invitation.

(iv) Opening separate bank account for maintaining and keeping subscription money and
ensure that money received form only those persons whose name is addressed in form.

 ESOPs.

Meaning-

ESOP or Employee Stock Ownership Plan is a type of employee benefit plan which is intended
to encourage employees to acquire stock or ownership in the company. Earlier ESOPs were
given to employees to acknowledge their proven contribution to the company. Now, ESOPs are
used as compensation and motivational tool as startups can’t afford high salaries at the starting
stage. ESOP are plans where employees purchase a number of shares instead of salary in the
company at a discounted price.

Employees have to wait for a certain time period (vesting period) before they can exercise the
right to purchase those specified number of shares.

Step by Step Process for issue of ESOP-

(i) Preparation of list of eligible employees for ESOP: Employees should be carefully selected for
participation in ESOP scheme after considering their experience, roles and responsibilities, etc.

(ii) Preparation of ESOP policy: While making the policy, one should keep in mind: (a) Quantum
of ESOP pool, (b) employee selection and evaluation criteria, (c) rights of option holders, (d)
rights of shareholders, etc.

(iii) Board Approval: After selected the number of employees for the policy, next step is to
convene a Board Meeting for the board approval for number of employees participating in the
scheme, draft ESOP scheme, etc.

(iv) General Meeting: General meeting for members of the company will have to convene for
their approval of ESOP scheme by Special Resolution.

(v) Filing of Form MGT-14: E-form MGT-14 must be filed by all companies except Private Limited
Companies attaching Special Resolution for approval of Scheme, Explanatory Statement, etc.

(vi) Preparation & Dispatch of Grant Letter after Approval of Shareholders: A Grant Letter is
sent by the Company to all the eligible shareholders containing entitlement, vesting schedule,
date of vesting, exercise price, etc.

(vii) Vesting of ESOPs: There must be minimum 1 year time gap between granting of ESOP and
vesting of option.
(viii) Exercise of ESOPs: After completion of vesting period, the employees can either apply for
shares or further wait upto the last date on which exercise can be made or not apply for shares.

(ix) Allotment of Shares: If shareholders apply for shares, companies need to allot the shares
and file an e-form for allotment of shares v=by attaching Special or Ordinary Resolution for
approval of ESOP.

(x) Issue Share Certificate & Payment of Stamp Duty: Within 30 days of allotment, the Company
need to issue share certificate to the shareholders and pay stamp duty on issue of shares
according to the stamp rate prevailing in the state.

Advantages of ESOP-

(i) Retainership Instrument: Since the employees can exercise their rights of ESOP only after
certain period of time, it acts as a retainership instrument which helps retain employees.

(ii) Ownership Feeling: Getting the shares of the company makes the employees feel as the
owners of the company. They get a share in the profits in form of dividends and are motivated
to work for the best.

(iii) Non-cash Compensation Tool: It is a non-cash compensation tool to compete for the best
human resources.

(iv) No reduction in profits: It gives an opportunity or corporate to pay without a reduction on

book profits.

(v) Increases Morale: It boosts morale of the employees.

Disadvantages of ESOP-

(i) When ESOPs are exercised the founder’s shareholding gets diluted.

(ii) Since are no marketability or liquidity of shares of private company, hence there are chances
of dispute between employers and employees when employees leave the organization.
(iii) There are also chances of disputes while transfer of shares and the value at which shares
should be transferred.

 Kinds of Shares

PREFERENCE SHARES

Rights of Preference Shareholders-

(i) Preference shareholder will get fixed rate or fixed amount of dividends before equity
shareholders.

(ii) They will get return on capital on winding up of the company before equity shqareholders.

Classes of Preference Shareholders -

(i) With Reference to Dividends-

(a) Cumulative Preference shares: These have rights to receive arrears of dividends before
making payments to equity shareholders.

(b) Non-cumulative Preference Shares: They do not have any rights for receiving arrears of
dividends.

(ii) With Reference to Participation in Surplus Profits-

(a) Participating Preference Shares: According to AOA after distributing the profits to Equity
shareholders, Preference Shareholders also have a right to participate in the remaining profits.

(b) Non-Participating Preference Shares: Preference shareholders which do not have right to
the remaining profits after distribution to Equity Shareholders are called non-participating
preference shareholders.
(iii) With Reference to Convertibility-

(a) Convertible Preference Shares: Those shares which can be converted into Equity Shares.

(b) Non- Convertible Preference Shares: Those shares which cannot be converted to Equity
Shares.

(iv) With Reference to Redemption-

(a) Redeemable Preference Shares: These shares can be redeemed by the company at a
specific time for the repayment or earlier.

(b) Irredeemable Preference Shares: These shares can be redeemed by the company only at
the time of winding up.

EQUITY SHARES

These shares are those different from preference shares. These shares are the most common
type of shares issued and carries maximum ‘risk and reward’ of the business.

Difference between Equity and Preference Shares-

Basis Preference Shares Equity Shares

Right to They receive dividend before They receive dividend after
Dividend equity shares. preference shares.
Rate of Board of directors propose a rate of
Fixed rate of dividend.
Dividend dividend every year.
If Preference shares are The company declares dividends
Arrears of cumulative, then the company pays every year. In case the company
Dividend its arrears of dividend before does not declare, then the company
equity shares. will pay it in the coming years.
 If the terms of issue provide, then
the company can convert Equity shares cannot be converted to
Convertibility
preference shares into equity preference shares.
shares.

Redemption Preference shares redeem on due The company may buy-back its
date. Equity shares.
Preference shareholders have
Equity shareholders have voting
Voting Rights voting right only in special
rights in all circumstances.
circumstances.
Refund of capital can be done at Refund of capital is only done at the
Refund of any point of time and if it is done time of winding up or liquidation
Capital during winding up, it is done before after the payment to preference
equity shares. shares.
Right to They do not have the right to
They have the right to participate in
participate in participate in the management of
the management of the company.
Management the company.

 Kinds of Debentures

Debenture is one of the capital market instrument which helps business households to raise
funds form the market for the development of business. The word ‘debenture’ is derived from a
Latin word ‘debere’ which means to borrow or to take a loan.

Salient Features of Debenture-

(i) Acknowledgement of debt.

(ii) Issued by the company under its common seal.

(iii) Can be both, secured and unsecured.

(iv) Rate of interest and date of payment is pre-determined.

(v) Freely transferable by debenture holders.

(vi) Do not have any voting rights in the company.

(vii) Interest payable are charged against the profits of the company.

Provisions Governing Debentures-

The following provisions of the Company Act 2013, govern the floating, issue and allotment
with regards to the debentures:

(i) Definition – Section 2(30)

(ii) Nature of Debentures – Section 44

(iii) Provisions relating to issue and allotment of debentures – Section 71

(iv) Rules relating to issue and allotment of debentures – Rule 18 of the Companies Rules, 2014

Types of Debentures-

(i) Based on Performance-

(a) Redeemable Debentures: Date of redemption is specified in the debenture certificate.

(b) Irredeemable Debentures: They continue till perpetuity and there is no specified date.

(ii) Based on Security-

(a) Secured Debentures: They are created by way of charge (maybe fixed or floating) over
assets of the company.

(b) Unsecured Debentures: They are created without any charge over the assets of the
company. There is no protection to the debenture holder.
(iii) Based on Priority-

(a) First Mortgage Debentures: They have the first preference over all other debentures and
they get their money in form of assets of the company first at time of liquidation.

(b) Second Mortgage Debentures: They have the second preference over first mortgage
debentures and they get their money in form of assets of the company after the first mortgage
debentures are satisfied.

(iv) Based on Convertibility-

(a) Fully Convertible Debentures: These can fully be converted into equity shares and the
details like conversion ratio, rights of debenture holder after conversion and trigger date for
conversion are defined at the time of issue of these debentures.

(b) Partially Convertible Debentures: Half of the debentures can be converted into equity
shares and the other half is redeemed at the expiry date. This option is given to the debenture
holder. These shares are also known as optionally convertible shares.

(c) Non-Convertible Debentures: These cannot be converted into equity shares. They are
redeemed at the maturity date.

(v) Based on Record-

(a) Registered Debenture: Information about the debenture holder like name, address,
number of debentures, etc. are recorded and if the debenture is transferred to another person,
the details about that person is also recorded.

(b) Unregistered Debenture: There is no information about unregistered or bearer debenture

and the principle amount and the interest is paid to the bearer of the instrument as against the
name written over such instrument. These are easily transferable in the market.
  Buying Back

Buy-back is a provision of the Companies Act, 2023, that permits a company to buy its own
shares or other securities with inherent advantages to the corporate and its shareholders.

Role of Buy-back-

(i) Achieve a specific capital structure.

(ii) Return surplus money to shareholder’s/ security holders.

(iii) Ensure the underlying price of shares/ security is correctly reflected.

(iv) Control unwarranted fall in share or security value.

Methods Buy-back-

Shares can be bought from

(i) Existing shareholders on an impartial basis, or

(ii) Open market transation.

Pre-requisites of Buy-back-

(i) Must be permitted by AOA of the corporation.

(ii) A special resolution has been passed which enables the corporate to authorize buy-back. If
the buy-back is 100% or less of the paid Capital and Free Reserves, the board resolution can
fulfil the same.

(iii) The buy-back of equity shares is less than 25% of its total paid-up equity capital in the fiscal
year.
(iv) The magnitude in relation to the combination of secured and unsecured debts owed by the
corporate is not over double the paid capital and its free reserve.

(v) All the shares or different given securities for buy-back are totally paid up.

Other Necessary Provisions

(i) Each Buy-back ought to be completed about one year from the date of passing of Special
Resolution or Board Resolution.

(ii) After completing buy-back, the corporate cannot create issue of same shares for a period of
six months. But there is no prohibition for the issue of bonus shares or issue of shares within
the subsisting obligations like conversion of warrants, options, etc.

(iii) Before the buyback of shares, the corporate that has been licensed by a special resolution
shall file with the ROC a letter of offer.

(iv) A declaration of economic condition should be signed by a minimum of one director of the
corporate and filed with the ROC.

(v) Provision for buy-back must stay open for minimum 15 days and the letter for minimum 30
days after the date the letter of offer is dispatched.

(vi) No provision of buy-back shall be created for one year after the closure of preceding buy-
back.

(vii) Shares bought back about 7 days of the last date of completion of buy-back must be
extinguished and physically destroyed.

(viii) Maintain a register of shares and securities which contain information about when and by
whom the shares were bought back, date of cancellation of shares or securities, etc.

(ix) After completion of buy-back, within 30 days, the shares must be files with the ROC.
Prohibitions Relating to Buy-back of Shares-

A company shall not purchase its shares or securities:

(i) Through any company, along with its own company.

(ii) Through investment trustor cluster of investment companies.

(iii) Buyback is not prohibited if a default is created by a company for repayment of deposits,
interest payment, redemption of debentures or preference shares, etc.

(iv) If it is not complied with the provisions of Section 9, 123, 127, and Section 129 of the
Companies Act, 2013.

Procedure for Buy-back of Shares-

Buyback of Shares

Step 1: A company can buy back its own shares by authorizing it in AOA.

Step 2: If the buyback is 10%, or less than the total paid-up equity capital of the company, the
Board members will pass a resolution without the approval of the members.

Step 3: If the buyback is upto 25% of the paid-up equity of the company, a special resolution is
to be passed at the member’s meeting.

Passing of Special Resolution

Step 4: For passing a special resolution a notice is to be issued to the shareholders within 21
days from the date of passing of special resolution.

Step 5: Explanatory statements should be provided by explaining the purpose of buyback of

shares along with the notice.

Step 6: Form MGT-14 along with application fee should be files with the Registrar of Companies
(ROC) in 30 days from the day of passing the special resolution.
Letter of Offer

Step 7: A company should file a letter of offer along with the applicable fee to the Registrar of
Companies (ROC) and it must be signed by at least two directors, on of which should be
managing director.

Step 8: Within 20 days of filing with the ROC, the letter should be dispatched to the
shareholders.

Declaration of Solvency

Step 9: In case of listed company, along with letter of offer, declaration of solvency should also
be filed with the ROC and signed by at least 2 directors, one of which should be the managing
director.

Step 10: The offer of buyback will remain for 30 days from the date of dispatch of letter of offer

Step 11: If buyback of company is oversubscribed, the number of shares to be returned back
and the acceptance per shareholder should be on proportionate basis.

Acceptance of Offer

Step 12: The Company has to complete the verification of the offers received within 15 days
from the date the offer ended and the shares lodged will be accepted unless a Communication
rejection is made within 21 days from the date the offer ended.

Opening of Bank Account

Step 13: After the closure of the offer, the company should open a separate bank account and
deposit the total amount payable as consideration for the shares offered for the buyback.

Step 14: Since consideration should be paid within 7 days of verification, hence the shares that
are to be returned must be destroyed within 7 days of completion of buyback.

Step 15: After completion of buyback every company must maintain a register of shares which
have been bought back. This register should be maintained at the registered office of the
company or any other person authorized by the board.
Return of Buy-back

Step 16: The buyback has to be filed with Register of Companies in 30 days form the completion
of buyback.

 Sweat Equity

Sweat Equity Shares (SES) are issued by a company to its directors or employees at a discount
or for consideration other than cash for providing know-how or making any value additions
which generate synergy to the company. SES helps in making share-based payments to
company employees which helps retain the employees by rewarding them for their services.
Here, an ‘employee’ is an employee who has become permanent and is working in India or
outside India for a minimum of 1 year.

SES can be issued by any company registered under the Companies Act, 2013. Earlier it could
only be issued by those companies which had started business at least one year prior to the
disbursement of such shares but because of the amendment in 2017, it can now be issued by
any company.

Conditions for Issue of Sweat Equity Shares-

(i) For issue of SES, the company must pass a special resolution.

(ii) Number of shares, present market price of the shares are to whom the shares are issued
must be specified in the resolution.

(iii) The equity shares should be allotted within 12 months from the date of passing the special
resolution.

(iv) The company must be incorporated for at least one year.

(v) If the sweat equity share of a company is listed in stock exchange, they are issued as per the
Securities and Exchange Board of India. If not listed, then it is issued as per the rules.
(vi) The sweat equity and the share certificate issued to the directors and the employees shall
be locked in for a period of 3 years, the date of which shall be stamped in bold or mentioned on
the share certificate.

Quantum of Issue of Sweat Equity-

A company cannot issue sweat equity shares for more than 15% of the existing paid-up equity
share capital in a year or share of issue value of 5 crore, whichever is higher. The issue of sweat
equity shares cannot be more than 25% of the paid-up equity capital of the company at any
time. In case of a startup, sweat equity cannot be issued for more than 50% of its paid-up
capital up to the period of 5 years from the date when it was registered.

Pricing and Valuation of Sweat Equity-

Registered valuer will determine the price of the sweat equity and also value the Intellectual
Property Rights. The registered valuer shall provide a proper report to the Board of Directors
with justification for such valuation. The valuation report should be sent to the shareholders
with the notice of general meeting.

Procedure for Issue of Sweat Equity Shares-

(i) A board meeting is arranged for considering the proposal of issue of sweat equity shares, and
to fix the time, date, place and agenda for a general meeting to pass a special resolution.

(ii) Written notices are issued to the shareholders for the general meeting containing the
following information: (a) Date of Board meeting in which the proposal for issue of SES was
accepted, (b) The reason behind the issue of SES, (c) The class to which the shares will be
issued, (d) The total number of shares to be issued, (e) The class of directors or employees to
whom the shares are to be issued, (f) The terms and condition under which the shares will be
issues, (g) The time period of the alliance of such person with the company, etc.
(iii) A general meeting is held wherein the special resolution is passed.

(iv) A form is filed with MCA within 30 days of passing the special resolution.

(v) A board meeting is held where SES are allotted.

(vi) Form is filed within 30 days of passing the Board resolution for allotting the sweat equity.

(vii) Another form is maintained for the register if sweat equity which will be at the registered
office of the company or any other registered office as the board sees fit.

(viii) The entries in the register shall be authenticated by the Company Secretary or any other
authorized person.

Disclosure in the Directors Report-

Following details must be disclosed in the director’s report:

(i) Class of directors or employees to whom the shares were issued.

(ii) The class of shares issued as sweat shares.

(iii) Number of shares held by the directors and the employees and the names of allottees
which have more than 1% of the issued share capital.

(iv) The reason for the issue of shares.

(v) Terms and conditions for issue of shares.

(vi) Total number of shares issued and the percentage of shares of post issued and paid-up
share capital.

(vii) Amount of money received by the company after issue of SES.

(viii) Diluted earnings per share in accordance with the issue of sweat shares.