Module 1

1.1 Basic Principles of Company Law for Incorporation, Prospectus & Securities

Meaning and Definition of a Company (Easy Explanation)

A company is a business organization formed when a group of people come together to carry on business. It is created only when it is
registered under the Companies Act.

Legal Definition:

Section 2(20), Companies Act 2013:

“A company means a company incorporated under this Act or under any previous company law.”

●​ Company is like a legal person​

●​ It can own property, sign contracts, file cases​

●​ It is different from the people who own it​

Important Case Law:

Salomon v. Salomon & Co. Ltd. (1897)

✔ Company’s identity is separate from its members

2️⃣ Types of Companies (Simple and Clear)

Companies are divided into different categories based on:

(A)

Based on Number of Members

1️⃣ Private Company – Sec. 2(68)

●​ Max 200 members​

●​ Restricts share transfer​

●​ Cannot invite public to buy shares​

👉
​
Small/medium businesses​

2️⃣ Public Company – Sec. 2(71)

●​ No restriction on members​

●​ Shares are freely sold in share market​

👉
​
Big companies like Reliance​

3️⃣ One Person Company (OPC) – Sec. 2(62)

 ●​ Only one member + one nominee​

👉
​
New entrepreneurs​

Based on Liability

●​ Limited by Shares → Most companies​

●​ Limited by Guarantee → NGOs, clubs​

●​ Unlimited Company → Very rare​

Based on Ownership

●​ Government Company – Govt. holds ≥ 51% share​

​
(Example: ONGC, LIC)​

●​ Private Ownership – Held by individuals​

Based on Control

●​ Holding Company – controls other company​

●​ Subsidiary Company – controlled by holding co

●​ ​
Nature and Characteristics of a Company

characteristic:

1.​ Separate Legal Entity​

​
The company’s identity is separate from its members.​
​
Example: If members leave or die, the company still continues.​
​
Case Law: Salomon v. Salomon & Co. Ltd. (1897)​

2.​ Limited Liability​

​
Members are responsible only up to the amount unpaid on their shares.​
​
Their personal property cannot be used to pay company debts.​
​
Case Law: State of U.P. v. Renusagar Power Co.​

3.​ Perpetual Succession​

​
The company has continuous existence.​
​
Death, retirement or insolvency of members does not affect the company.​
​
Famous saying: “Members may come and members may go, but the company goes on forever.”​

4.​ Separate Property​

​
The company is the real owner of its property, not the shareholders.​
​
Members cannot claim ownership of company’s assets.​
​
 Case Law: Macaura v. Northern Assurance Co. (1925)​

5.​ Capacity to Sue and Be Sued​

​
The company can file cases in its own name and can also be sued in its own name.​

6.​ Transferability of Shares​

​
In public companies, shares can be freely transferred which provides liquidity to shareholders.​
​
(Private companies have restrictions.)​

7.​ Common Seal (Optional)​

​
The company may use a common seal as its official signature.​
​
Now it is optional under Companies Act, 2013।​
Doctrine of Lifting of Corporate Veil

Meaning:

Normally, a company is treated as a separate legal person

But when members misuse this advantage for fraud or illegal acts, the court will look behind the company to identify the real wrongdoers.

This is called lifting (or piercing) the corporate veil.

When Courts Lift the Veil:

1.​ To prevent fraud or improper conduct​

​
Case: Gilford Motor Co. v. Horne​
​
(Company formed only to avoid contractual restrictions)​

2.​ To prevent tax evasion​

​
Case: Re Sir Dinshaw Maneckjee Petit’s Case​
​
(Company created only to avoid taxes)​

3.​ Enemy character of company​

​
Case: Daimler Co. Ltd. v. Continental Tyre & Rubber Co.​
​
(Company controlled by enemy country persons during war)​

4.​ To protect public interest and welfare laws​

5.​ Sham or dummy companies​

​
If the company exists only on paper to hide illegal act

Citizenship of a Company

●​ A company is a legal person, not a citizen.​

●​ It has nationality and domicile only in the country where it is registered.​

●​ It cannot claim political rights like:​

○​ Right to vote​

○​ Right to contest election​

But:

It can enjoy certain Fundamental Rights related to business such as Article 19(1)(g) – Freedom to trade.

Important Case Law

●​ State Trading Corporation v. CTO (1963)​

​
Held: Company is not a citizen, though it has legal rights.​

Conclusion:

Company = Legal Person ✅

Company ≠ Citizen ❌
Promoters – Position, Duties & Liabilities

🔹 Who is a Promoter?
A promoter is a person who:

●​ Takes the initiative to form a company​

●​ Arranges capital and business structure​

●​ Completes registration formalities​

Legal Status:

Promoter is not an agent (because company not yet formed)

Promoter is not a trustee (but owes fiduciary duties)

→ He is in a fiduciary relationship with the company.

Case Law:

●​ Erlanger v. New Sombrero Phosphate Co.​

​
Held: Promoters must disclose profits made during promotion.​

🔹 Duties of Promoters:
1.​ Duty of Good Faith​
​
Must act honestly for the benefit of company.​

2.​ Duty to Disclose Secret Profits​

​
Must disclose any profit earned while forming company.​
​
Case: Erlanger v. New Sombrero​

3.​ Duty to Avoid Conflict of Interest​

​
Should not take personal advantage against company interest.​
 4.​ Duty to Give Full Information to Company​
​
No concealment of important facts.​

🔹 Liabilities of Promoters:
1.​ For Breach of Fiduciary Duty​
​
If secret profits made → company can recover it.​

2.​ Misstatements in Prospectus​

​
Civil and criminal liabilities apply.​

3.​ Pre-Incorporation Contracts​

​
Promoters are personally liable unless company later adopts the contract.​

4.​ Liability under Companies Act & SEBI Regulations​

​
For fraud, false representations or cheating investors.​

Case Law:

●​ Gluckstein v. Barnes – promoters must refund undisclosed profits.​

Short Summary:

●​ Promoters create the company → but must act honestly.​

●​ If they cheat → court will hold them personally liable

1.2 Incorporation of Companies and Matters Incidental Thereto

Formation and Incorporation of Companies

Starting a company happens in 3 main stages:

Stage 1:

Promotion

Promoters:

●​ Think of the business plan​

●​ Arrange money (capital)​

●​ Prepare important documents​

●​ Hire professionals (CA, CS, lawyers)​

Promoter = Parent of the company

Case Law
 ●​ Twycross v. Grant – Promoter is a person who takes necessary steps to form a company.
●​ Stage 2:

Incorporation (Registration)

Legal birth of the company

Steps:

1.​ Prepare documents → MoA, AoA​

2.​ Submit application to Registrar of Companies (ROC)​

3.​ ROC checks documents​

4.​ ROC issues Certificate of Incorporation (COI)​

COI = Birth Certificate of Company

After this → Company becomes a separate legal entity

Case Law:

●​ Moosa v. Ebrahim – COI is conclusive proof of formation.​

Stage 3:

Commencement of Business

👇Commencement of Business (Section 10A)

Before starting business officially, a company must:

✔ File a declaration that subscribers have paid the share money

✔ Confirm the registered office with ROC

Only then → ROC grants Commencement Certificate

If not done → ROC may close company (strike off)

Mandatory for both:

●​ Public company with share capital​

●​ Private company with share capital

Memorandum of Association (MoA)

MoA = Main document of the company

It tells WHAT business the company can do

Section 2(56) – MoA is the constitution of the company.

Contents (Clauses) of MoA

1.​ Name Clause​

2.​ Registered Office Clause​

 3.​ Object Clause (very important)​

4.​ Liability Clause​

5.​ Capital Clause​

6.​ Subscription Clause​

Doctrine of Ultra Vires

If a company does anything outside its object clause → It is invalid (void)

Case Law

●​ Ashbury Railway Carriage Co. v. Riche​

​
→ Any act beyond MoA is Ultra Vires​

MoA protects shareholders + creditors

Articles of Association (AoA)

📌 AoA = Rule book for company management

📌 It tells HOW company will operate (internal rules)
Section 2(5) – Internal regulations of company.

Examples in AoA:

●​ How meetings will be held​

●​ Voting power​

●​ Appointment of directors​

●​ Share transfer rules​

Doctrine of Constructive Notice

MoA + AoA are public documents.

Law assumes everyone knows their content.

If outsider signs a contract against Articles, they cannot complain.

Case Law

●​ Kotla Venkataswamy v. Ram Murthy​

​
→ Ignorance of Articles = No protection​

Protects company

❌ Does NOT protect outsiders

Doctrine of Indoor Management

Opposite of constructive notice

Protects outsiders dealing with the company.

Outsiders can assume:

●​ Internal rules are properly followed by directors/employees​

Case Law
●​ Royal British Bank v. Turquand (1856)​
​
→ Outsider is not required to check internal procedures.​
Exceptions (where not applicable)

❌ Knowledge of irregularity
❌ Suspicious situation
❌ Forgery → No protection
Case: Ruben v. Great Fingall Consolidated

Rectification of Name of Company

If the registered name:

●​ is same or​

●​ very similar to another company/trademark​

Then:
●​ ROC may order change of name​

●​ Company must change name within 3 months​

Section 16, Companies Act 2013

If company refuses → ROC can allot a new name and penalty may apply.

1.3 — PROSPECTUS & ALLOTMENT OF SECURITIES

Meaning of Prospectus

Section 2(70), Companies Act, 2013

A prospectus is a document that invites the public to buy shares or debentures of a company.

✔ Issued only by Public Companies

✔ Aim → Raise funds from general public

✔ Must provide true and full information to avoid cheating investors

Case Law:

Rex v. Kylsant – False statements → Criminal liability

Types of Prospectus

🅐 Shelf Prospectus — Section 31

●​ One single prospectus for multiple issues of securities​

●​ Valid for 1 year​

 ●​ Must file an Information Memorandum before every new issue​

●​ Used by → Banks & financial institutions (e.g., SBI Bonds, LIC Bonds)​

📌 Benefit → Saves cost for company

🅑 Red Herring Prospectus — Section 32

●​ Issued before price and number of shares are finalized​

●​ Used in Book Building Process (common in IPOs)​

●​ Final price decided after investor bidding​

●​ Filed with ROC before public offer​

Example: IPOs of Zomato, Paytm, Tata Technologies

🅒 Abridged Prospectus — Section 2(1)

●​ Short summary of full prospectus​

●​ Must be attached with share application forms​

●​ Contains only important facts​

●​ Makes it easy for investors to understand​

📌 Mandatory under SEBI guidelines

🅓 Deemed Prospectus — Section 25

When a company:

1.​ Allots securities to an intermediary (like merchant banker), and​

2.​ They sell it to the public​

That document = Deemed Prospectus

Used in Offer for Sale

🅔 Offer for Sale

●​ Promoters / Existing shareholders sell their shares to public​

●​ Company does not receive money​

●​ Used when:​
​
 ✅ Promoters want to reduce holding​
✅ Company wants public listing​
​

Matters to be Stated in Prospectus

(Section 26 — Compulsory Disclosures)

It must contain:

✔ Company name, registered office

✔ Capital structure

✔ Objects of the company

✔ Promoters & Directors details

✔ Financial statements

✔ Risk factors

✔ Minimum subscription

✔ Details of underwriters

✔ Consent of experts (CA, CS, auditors)

✔ Statement of business history

📌 Purpose → Investor Protection 🚨

The Golden Rule of Prospectus

Golden Rule:

Prospectus must contain full, fair, frank and accurate disclosures only.

No:

❌ Hiding facts
❌ False statements
❌ Exaggerations
Case Law:

New Brunswick Railway Co. v. Muggeridge

→ True & complete disclosure is compulsory.

Short Line for Exams:

“The Golden Rule = No Misleading Information”

ALLOTMENT OF SECURITIES & LIABILITIES

Public Offer of Securities to be in Dematerialized Form

✔ Mandatory under SEBI regulations

✔ Shares issued only in Demat Form

✔ Eliminates fraud → No fake/duplicate share certificates

Depositories:

●​ NSDL (National Securities Depository Ltd.)​

●​ CDSL (Central Depository Services Ltd.)​

Criminal Liability for Misstatements in Prospectus

Section 34

If a prospectus contains:

●​ False information or​

●​ Misleading statements​

Then:

✔ Imprisonment up to 3 years

✔ Fine up to ₹10 Lakh

📌 Criminal = Punishment by Court

Civil Liability for Misstatements in Prospectus

Section 35

People responsible must:

✔ Compensate investors for loss

✔ Refund investment money

Who is liable?

●​ Directors​

●​ Promoters​

●​ Experts (if consent given)​

Escape from liability only if:

✅ They prove no knowledge of misstatement

Punishment for Fraudulently Inducing Persons to Invest Money

Section 36

If a person:

●​ Gives false statements​

●​ Conceals important facts​

To cheat people into buying securities →

✔ Imprisonment: up to 10 years

✔ Fine: up to 3 times the profit made

📌 Serious offence = Investor cheating

Punishment for Personation for Acquisition of Securities

Section 38

When someone:

●​ Pretends to be another person​

●​ Uses fake signatures​

●​ Applies with fake identity​

Punishment:

✔ Imprisonment up to 3 years

✔ Fine not less than amount involved

This prevents fraud in IPOs.

Allotment of Securities by Company

Rules:

1️⃣ Must receive minimum subscription

2️⃣ Application money ≥ 5% of share value

3️⃣ Shares allotted only after receipt of proper funds

4️⃣ Refund money if minimum subscription not achieved within 30 days

✔ Protects public investors

✔ Prevents bogus fundraising

Securities to be Dealt with in Stock Exchanges

Section 40

Before listing → Company must take permission from Stock Exchange

Without listing → Public issue is illegal

Ensures transparency & regulation by SEBI

Private Placement

Private Placement (Section 42, Companies Act 2013)

Private placement means offering securities (shares, debentures, etc.) to a selected group of persons, not to the public at large. It is a
private source of raising capital without making a public issue. It is governed by Section 42 of the Companies Act, 2013 and Rule 14
of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Features

1.​ Offer can be made to a maximum of 200 persons in a financial year (excluding QIBs and employees under ESOP).​

2.​ Offer is made through a private placement offer-cum-application letter in Form PAS-4.​

3.​ A prior special resolution of shareholders is required.​

4.​ Subscription money must be received only through banking channels (no cash).​

5.​ Money must be kept in a separate bank account in a scheduled bank.​

6.​ Securities must be allotted within 60 days from receipt of application money.​

7.​ Return of allotment must be filed with the ROC in Form PAS-3 within 15 days of allotment.​

8.​ No public advertisements or marketing is allowed.​

Restrictions

1.​ Company cannot use funds raised until allotment and filing of return with ROC.​

2.​ If securities are not allotted within 60 days, the money must be refunded within the next 15 days, otherwise 12% interest
becomes payable.​

3.​ Offer cannot exceed 200 persons limit; otherwise it will be treated as a public offer.​

Procedure

1.​ Board meeting to approve the private placement and identify persons.​

2.​ General meeting to pass special resolution.​

3.​ Issue of PAS-4 to selected investors.​

4.​ Receipt of money through proper banking channels.​

5.​ Allotment of securities within 60 days.​

6.​ Filing of PAS-3 with ROC within 15 days of allotment.​

7.​ Updating company’s statutory registers.​

Objectives / Advantages

1.​ Faster and easier way of raising funds compared to public issue.​

2.​ Helps bring in strategic or professional investors (like PE/VC).​

3.​ Ensures retention of control as shares are allotted to limited persons.​

4.​ Lower cost of compliance.​

Penalties
Failure to comply may result in a penalty up to ₹2 crore or the amount involved, whichever is lower. Also, the raised amount may
need to be refunded to investors.

Example

A company offers shares to 50 private investors by sending PAS-4 and receives money through bank transfers. It allots shares within
60 days and files PAS-3. This is a private placement.

Absolutely! ✅
Here is a more detailed and very easy-to-understand version of your requested topics with case laws, suitable for exam writing and
assignments.

You can copy–paste directly.

Share Capital & Debentures

Share Capital – Meaning

Share capital is the total money raised by a company by issuing shares to people. It represents the ownership of members in the company.

A joint stock company’s foundation is its share capital → used for business growth.

Case Law:

Bharat Insurance Co. Ltd. v. Kanhaiya Lal

→ Court held that share capital is the company’s permanent capital and is a security for creditors.

Kinds of Share Capital (Section 43)

A) Equity Share Capital

• Equity shareholders are real owners

• They have voting rights in company decisions

• Dividend is not fixed → depends on profit

B) Preference Share Capital

• Preference shareholders get:

1.​ Preference in dividend (fixed rate)​

2.​ Preference in repayment of capital on winding up​

​
• No voting rights except in special matters​

📌 Other classifications:
• Authorized/Registered Capital – maximum amount company can issue

• Issued Capital – part actually offered to public

• Subscribed Capital – shares accepted by investors

• Called-up Capital – amount demanded by company

• Paid-up Capital – amount actually paid by shareholders

📚 Case Law:
CIT v. Standard Vacuum Oil Co.

→ Share capital classifications are important for legal rights.

Nature of Shares

A share is:

✔ Movable property

✔ A piece of the company’s capital

✔ A bundle of rights and obligations of a shareholder

Rights include:

• Right to vote

• Right to dividend

• Right to share profits and assets

• Right to transfer shares (subject to Articles)

📚Important Case Laws:

1️⃣ Borland’s Trustee v. Steel Brothers & Co.

→ Share is not just money, but a bundle of rights.

2️⃣ V.B. Rangaraj v. V.B. Gopal

→ Restrictions on transfer of shares must be in the Articles of Association.

Debentures – Meaning & Nature

Debentures represent borrowed capital.

A debenture is a written acknowledgment of debt issued by the company.

✔ Debenture-holders are creditors

✔ They get fixed interest

❌ They do not have ownership or voting rights

Types:

• Secured / Unsecured

• Convertible / Non-convertible

• Redeemable / Irredeemable
📚 Case Laws:
Sheikh Brothers v. C.I.T.

→ Debenture= proof of loan

Chunilal B. Mehta v. CIT

→ Debenture-holders get priority as creditors

Equity Shares with Differential Voting Rights (DVRs)

These are equity shares where voting rights are not equal.

Examples:

• Lower voting rights, but higher dividend

• Higher voting rights for promoters to retain control

Why companies issue DVRs?

• To raise funds without losing control

• Useful for founders of startups & family-run businesses

Conditions for issuing DVRs:

• Allowed in Articles of Association

• Ordinary resolution approval

• Company must have consistent profits (3 years)

• No late filing of annual returns

• DVRs must not exceed 74% of total share capital

📚 Case Example:
Tata Motors DVR issue (2010)

→ One of India’s first successful DVR issues

Issue & Redemption of Preference Shares (Section 55)

Redemption = repayment of preference capital by company.

Rules:

✔ Only fully paid-up preference shares can be redeemed

✔ Redemption can be done:

▪ From company profits → Transfer equal amount to Capital Redemption Reserve (CRR)

▪ From fresh issue of shares

❌ Cannot redeem out of capital directly

✔ Premium paid must come from Securities Premium Account
📚 Case Law:
Narandas v. S.A.L. Narayan Row

→ Procedure must ensure capital is not reduced without legal compliance

Sweat Equity Shares (Section 54)

Sweat equity shares are issued to employees or directors as reward for:

• Technical know-how

• Intellectual Property (patents, copyrights)

• Value additions to the company

Not issued for cash → issued for service or innovation.

Rules for Sweat Equity:

• Special Resolution in General Meeting required

• Valuation by registered valuer

• Lock-in for 3 years

• Details to be included in Board Report

• Can be issued by both listed & unlisted companies

📚 Case Law:
In Re: Datamatics Financial Services Ltd.

→ Sweat equity justified for valuable services

🎯 Purpose:
• Motivates talent

• Helpful for startups unable to pay high salaries

Quick Comparison Table

Shareholder = Owner of company

Debenture-holder = Creditor of company, no ownership

Equity shareholders = Voting rights + no fixed dividend

Preference shareholders = Fixed dividend + priority repayment

Shares = Equity capital

Debentures = Loan capital

Application of Premiums Received on Issue of Shares

(Section 52 – Securities Premium Account)

When shares are issued at a price more than their face value → the extra amount is called Share Premium.

Example: Face value ₹10, Issue price ₹15 → Premium ₹5.

Premium must be transferred to Securities Premium Account.

🔹 This amount cannot be used freely, only for specific purposes:

1.​ Issue of fully paid bonus shares​

2.​ Write-off preliminary expenses​

3.​ Write-off discount on issue of shares/debentures​

4.​ Buy-back of shares​

5.​ Premium payable on redemption of preference shares / debentures​

📌 Securities Premium = treated like capital, not free profit.

Prohibition on Issue of Shares at Discount

(Section 53)

Rule: A company cannot issue shares at a discount.

Only exception:

➡️ Sweat Equity Shares (Section 54)

🚫 If company issues shares at discount:
→ Company + officers liable for penalty

→ Discount amount must be refunded

Purpose: To protect investors and prevent share value manipulation.

Transfer & Transmission of Securities

(Section 56)

A) Transfer of Shares

➡️ Voluntary act by a shareholder

➡️ Executed by transfer deed (Form SH-4)
➡️ Applicable to both private and public companies
➡️ Private company may restrict transfer (as per Articles)
B) Transmission of Shares

➡️ Occurs automatically by law

➡️ On death/insolvency/mental incapacity of shareholder
➡️ No consideration (no payment) required
➡️ Legal heir gives proof → company registers his name
📌 Transfer = voluntary
📌 Transmission = by operation of law
Power of Limited Company to Alter Share Capital

(Section 61)

A company can change its share capital by Ordinary Resolution:

It may:

1.​ Increase authorized share capital​

2.​ Consolidate shares → larger shares​

3.​ Sub-divide shares → smaller shares​

4.​ Cancel unsubscribed shares​

5.​ Convert fully paid shares to stock and vice-versa​

📌 Must be authorized by Articles of Association.

Further Issue of Share Capital

(Section 62 – Rights Issue)

When company increases subscribed capital → must first offer new shares to existing shareholders in proportion (Right Shares).

Types:

1.​ Rights Issue (offer to existing members)​

2.​ ESOP – Employees Stock Option Plan​

3.​ Preferential Issue to selected persons​

📌 Purpose: Prevents dilution of ownership of existing shareholders.

Issue of Bonus Shares

(Section 63)

Bonus shares are free shares issued to existing shareholders out of:

✔ Free reserves

✔ Securities premium

✔ Capital redemption reserve

📌 No cash outflow — just conversion of reserves → capital

📌 Must be authorized by Articles
📌 Cannot issue in lieu of dividend
Purpose: To reward shareholders + increase share capital structure.

Reduction of Share Capital

(Section 66)

Company may reduce its share capital by:

• Extinguishing unpaid capital

• Writing off accumulated losses

• Paying back excess capital

✔ Requires:

✅ Special Resolution
✅ Approval of National Company Law Tribunal (NCLT)
✅ Notice to creditors
📌 Protects creditor interests.
Restrictions on Purchase by Company or Giving of Loans for Purchase of Its Shares

(Section 67)

Company cannot:

🚫 Buy its own shares

🚫 Give loan/guarantee/security to enable others to buy its shares
✔ Exceptions:

• Employee welfare schemes

• ESOPs (Employee Stock Purchase Schemes)

Purpose: Prevent artificial inflation of share price.

Power of Company to Purchase Its Own Securities (Buy-Back)

(Section 68)

Company can buy back its own shares:

Sources of Buy-Back:

✔ Free reserves

✔ Securities premium

✔ Proceeds of earlier issue (not same kind of shares)

Conditions:
• Authorized by Articles

• Special resolution (if >10% & ≤25% of capital)

• Max limit: 25% of paid-up capital + free reserves

• Debt–equity ratio ≤ 2:1

• Completed within 1 year

• Shares must be extinguished within 7 days

Prohibition for Buy-Back in Certain Cases

(Section 70)

Buy-back not allowed if:

1.​ Company has defaulted in repayment of deposit/interest/dividends​

2.​ Company has defaulted in loans to banks/financial institutions​

3.​ Company has not complied with annual reports & filing requirements​

✔ Buy-back restores investor confidence only when finances are healthy.

Debentures

(Sections 71)

Debenture = Loan instrument acknowledging company debt.

Features:

• Fixed interest

• Secured or unsecured

• Can be convertible to shares

• Debenture holders are creditors (no voting rights)

Company may create Debenture Redemption Reserve (DRR) to ensure repayment.

Power to Nominate

(Section 72)

A shareholder or debenture-holder can nominate a person who will receive securities after their death.

✔ Applicable to individuals

✔ Protects heirs from legal disputes

✔ Simple procedure with nomination form

📌 Nominee becomes owner after death — no need for succession certificate.

MODULE 2 – Deposits

(Sections 73–76A, Companies (Acceptance of Deposits) Rules, 2014)

Acceptance of Deposits – Meaning

A deposit means any money received by a company with a promise to repay after a period of time, with or without interest.

➡️ It can be taken from members or public, subject to legal conditions.

📌 Deposits are a high-risk area, so law strictly regulates them to protect the public.
Definition of Deposits

(Section 2(31))

Deposit includes:

✔ Any money received by a company through loan, deposit, or in any other form repayable in future

But ❌ excludes certain amounts like:

• Bank loans

• Share application money (if shares allotted within 60 days)

• Money received from directors

• IPO/Right Issue proceeds

• Security deposits from employees

• Advance against sale of goods (within 365 days)

📌 If untreated within the required period → will be treated as deposit

Eligibility to Accept Deposits

1.​ Private companies can accept deposits only from their members, within prescribed limits.​

2.​ Only Eligible Public Companies (Net worth ≥ ₹100 Cr OR Turnover ≥ ₹500 Cr + credit rating) can accept deposits from public.​

3.​ Government companies can accept deposits from public with relaxed compliance requirements.
4.​ Applicability of Deposit Provisions
​ Applies to all companies except banks, NBFCs, housing finance companies, and those regulated by RBI Act.​

​ These excluded companies are already covered by strict financial laws, so Companies Act provisions do not apply.​

​ All other companies must comply with Sections 73–76A for accepting deposits.​

Conditions for Acceptance of Deposits from Members

●​ Must issue DPT-1 circular & file with ROC before accepting deposits.​

●​ Maintain Deposit Repayment Reserve Account with 20% of deposits maturing next year + obtain credit rating.​

●​ Provide security for secured deposits & repay within legal time period. Damages for Fraud (Section 75)
1.​ If deposits are accepted with intent to defraud, company & officers will be liable.​
 2.​ Punishment may include imprisonment up to 10 years and heavy fine up to ₹10 crore or deposit amount.​

3.​ Depositors can recover entire money + interest through NCLT.​

Time Period & Acceptance Limit for Deposits
1.​ Deposit tenure: Minimum 6 months, Maximum 36 months (Exception: 3–6 months up to 10% limit).​

2.​ Private companies can take deposits up to 100% of capital + free reserves + securities premium.​

3.​ Eligible Public Companies can take 25% from public + up to 10% as short-term deposits.​
Registration of Charges

(Section 77–87, Companies Act, 2013)

1.​ A charge means an interest/lien on company property/assets given as security for a loan — in favour of a creditor.​

2.​ Company must register every charge (creation, modification, satisfaction) with ROC using Form CHG-1/CHG-9.​

3.​ Registration must be done within 30 days, extendable up to 300 days with additional fees & Tribunal approval.​

📌 Purpose: Protect creditors + give public notice of encumbrances on company assets.

📌 If charge is not registered → it becomes void against liquidator & creditors.
Creation of Charge

1.​ Charge is created when company borrows money and gives security over its assets (fixed or floating).​

2.​ Can be created over movable, immovable, tangible or intangible assets (like goodwill, IP, receivables).​

3.​ Board Resolution + charge documents required for registration.​

Modification of Charge

1.​ Any change in terms of charge — amount, interest, property, conditions — must be registered with ROC.​

2.​ Modification also filed in CHG-1 (for companies) within prescribed time.​

3.​ Failure → penalties on company + officers.​

Satisfaction of Charge

1.​ When loan is repaid fully, the charge is satisfied / released.​

2.​ Company must file Form CHG-4 within 30 days to update ROC.​

3.​ ROC issues Certificate of Satisfaction → clears records of encumbrance.​

Types of Charges

A) Fixed Charge

1.​ Created on specific identifiable assets like land, building, machinery.​

2.​ Company cannot sell or deal with the asset without lender permission.​

3.​ Best for long-term property-based security.​

B) Floating Charge
 1.​ Created on changing assets like stock-in-trade, raw materials, receivables.​

2.​ Company can use/sell assets in normal business until charge crystallizes.​

3.​ Used where assets fluctuate regularly.​

📌 Difference:
Fixed = on permanent asset, immediate security

Floating = covers circulating assets, operates in background

Crystallization of Charge

1.​ Floating charge becomes fixed on the assets it covers when certain events occur.​

2.​ Events of crystallization:​

​
• Company goes into liquidation​
​
• Company stops business​
​
• Company breaches loan terms​
​
• Creditor intervenes due to financial distress​

3.​ After crystallization → company cannot freely deal with assets.​

📌 Idea: Floating charge → fixed charge when things go wrong.

Case Laws

1️⃣ Illingworth v. Houldsworth (UK)

→ Definition and difference between fixed & floating charges clarified.

2️⃣ Re Yorkshire Woolcombers Association Ltd. (1903)

→ Classic test of floating charge: present over a class of assets that changes.

3️⃣ National Provincial Bank v. Charnley

Absolutely ✅ Here are clean, detailed and easy notes for Module 2.3 – Meetings that you can directly copy-paste into your study material.
(Sections are from the Companies Act, 2013)

MEETINGS

Kinds of Meetings

1.​ General Meetings​

​
• AGM – Annual General Meeting (Sec. 96)​
​
• EGM – Extraordinary General Meeting (Sec. 100)​
 2.​ Board Meetings – Meetings of directors (Sec. 173)​

3.​ Class Meetings – For specific class of shareholders (Sec. 48)

Types of Resolutions

1.​ Ordinary Resolution – Simple majority (more than 50%) required.​

2.​ Special Resolution – 75% majority required + must mention in Notice.​

3.​ Board Resolution – Passed in Board Meetings for management decisions.​

Notice of Meetings (Sec. 101)

1.​ Clear 21 days notice required for General Meetings.​

2.​ Must include date, time, place and agenda.​

3.​ Shorter notice valid if:​

​
• 95% of members with voting rights agree.

Quorum (Sec. 103)

1.​ Minimum number of members required to start the meeting.​

2.​ Public company: 5 members personally present (up to 1000);​

​
then 15 (up to 5000), then 30 (above 5000).​

3.​ Private company: 2 members personally present.

Chairman of Meeting (Sec. 104)

1.​ Elected by members if articles are silent.​

2.​ Ensures proper conduct of meeting & maintains order.​

3.​ Has casting vote in case of a tie.

Proxy (Sec. 105)

1.​ A proxy is a person authorized to attend and vote on behalf of a member.​

2.​ Must be deposited 48 hours before the meeting.​

3.​ Proxy cannot speak unless articles permit.

Voting and Its Types

1.​ Show of Hands – one person = one vote (Sec. 107).​

2.​ Poll – voting proportional to number of shares held (Sec. 109).​

3.​ E-Voting – mandatory for listed + big companies (Sec. 108).​

4.​ Postal Ballot – voting by post/electronic means (Sec. 110).​

✅ VOTING & ITS TYPES
Show of Hands (Sec. 107)

• One person = one vote

• Quick way for ordinary matters

Poll (Sec. 109)

• Voting based on number of shares held

• More accurate, especially for major decisions

• Can be demanded by members holding:

✔ 10% voting power OR

✔ ₹5 lakhs paid-up capital

E-Voting (Sec. 108)

• Mandatory for listed companies

• Members can vote from anywhere → increases participation

Postal Ballot (Sec. 110)

• Members vote through postal/electronic mode

• Used when physical meeting not required

📌 Good for large companies with many shareholders.

MEETING & AGENDA

• Agenda = list of items to be discussed

• No decision can be taken on items not on agenda

• Two types of business:

✔ Ordinary Business = routine matters (accounts, dividend)

Special Business = everything else

CIRCULATION OF MEMBERS’ RESOLUTIONS (Sec. 111)

• Members having 1/10th voting power or ₹5 lakh capital

can request company to circulate their proposal

• Company must send it to all members before meeting

📌 Ensures shareholder democracy.

MINUTES (Sec. 118)

• Official written record of meeting

• Must be signed by Chairman within 30 days

• Stored permanently at the registered office

• Member can inspect minutes

📌 Minutes are legal evidence of decisions.

REGISTER OF MEMBERS & SECURITY HOLDERS (Sec. 88)

• Company must maintain register of:

✔ Members

✔ Debenture holders

✔ Other security holders

• Contains names, addresses, share/debenture details

• Open for inspection during business hours

SIGNIFICANT BENEFICIAL OWNERS (SBO) (Sec. 90)

• A person who holds 10% or more beneficial interest in shares

• Must give declaration to company

• Objective: prevent hidden ownership & money laundering

13️⃣ ANNUAL RETURN (Sec. 92)

• Filed in MGT-7 within 60 days of AGM

• Contains:

✔ Shareholding pattern

✔ Directors & KMP details

✔ Meetings held

✔ Changes in ownership

📌 Signed by Company Secretary / Director.

Resolutions and Agreements to be Filed

(Section 117 — Companies Act, 2013)

• Certain important resolutions must be filed with Registrar of Companies (ROC)

• Filing is done in Form MGT-14

• Time limit → within 30 days of passing the resolution

📌 Resolutions that must be filed:

●​ Special Resolutions (e.g., Alteration of MOA/AOA, Change of name)​
 ●​ Board Resolutions for important matters such as:​
​
✔ Borrowing beyond limits​
​
✔ Buy-back of shares​
​
✔ Investing company funds​
​
✔ Appointment of MD/Manager​

●​ Agreements affecting company’s structure or rights of members​

📌 Purpose → Maintains transparency & public record

Report on Annual General Meeting

(Section 121)

• Applicable only to listed companies

• Company must prepare a fair and correct report of AGM

• Must contain:

✔ Proceedings/Business transacted

✔ Summary of deliberations

✔ Details of voting results

✔ Name of Chairman & attendees

• File with ROC within 30 days in Form MGT-15

📌 Ensures accountability of listed companies to stakeholders

📌 MEETINGS & COMMITTEES

Meetings of Board and Its Committees

(Sections 173–175, Secretarial Standards SS-1)

• Board Meeting = Meeting of Directors for business decisions

• Committee Meetings = Smaller group to handle specific duties

Example: Audit Committee, Nomination & Remuneration Committee

📌 Decisions taken here are management decisions (not shareholder decisions)

Frequency of Board Meetings

• Minimum 4 Board Meetings every financial year

• Maximum gap between two meetings → 120 days

• First Board Meeting → within 30 days of incorporation

• Committee meetings → frequency decided by law or Board

Example: Audit Committee must meet 4 times per year

Convening of Board Meetings

• Meeting is called by Company Secretary or authorized director

• Notice of 7 days required (can be by email)

• Shorter notice allowed in urgent matters

• Must include Agenda & Notes on Agenda

Proceedings of Board Meetings

• Chairman conducts meeting

• Discussions recorded as Minutes

• Voting: By show of hands / Electronically

• Minutes signed within 30 days and kept permanently

📌 Minutes = legal evidence of the meeting

Quorum for Board Meetings

(Section 174)

• 1/3rd of total strength or 2 directors, whichever is higher

• Participation allowed through video conferencing

• If quorum not present → meeting adjourns automatically

Resolution by Circulation

(Section 175)

• Used when urgent approval required and meeting cannot be held

• Draft resolution circulated by email/hand delivery to all directors

• Approved if majority of directors agree

• Must be noted in next Board Meeting minutes

DIVIDEND

Meaning of Dividend

• Dividend = Share of profits distributed to shareholders

• Paid only out of profits of current year or past year after depreciation

• Not a right of members → Board decides, members approve

Declaration of Dividend
(Section 123 — Companies Act, 2013)

✔ Sources Allowed

• Current year’s profits

• Past profits (retained earnings)

• Government-provided money for dividend (in case of guarantee company)

✔ Conditions

• Depreciation must be provided

• Loss of previous year must be set-off before paying dividend

• Dividend must be paid within 30 days of declaration

• Transfer a part of profits to Reserves before distribution (optional as per rules)

📌 Interim Dividend
• Declared by Board between two AGMs

• If company incurs loss during the year → interim dividend must be reasonable

Unpaid Dividend Account

(Section 124)

• If dividend is not claimed/paid within 30 days,

→ Amount transferred to Unpaid Dividend Account within 7 days

• Statement of unpaid dividend to be placed on company website

• If still unclaimed for 7 years → amount shifted to IEPF

• Shareholders can claim refund from IEPF Authority

📌 Purpose → Protect shareholders from losing money & ensure transparency

Investor Education & Protection Fund (IEPF)

(Section 125)

• A Central Government fund used for:

✔ Promoting investor education & awareness

✔ Refund of unclaimed dividends, matured deposits/debentures

✔ Distribution of disgorged amounts (fraud recovery)

• Items transferred to IEPF after 7 years:

➤ Unpaid dividends

➤ Matured deposits/debentures

➤ Unpaid gratuity, bonus, etc.

📌 Shares related to unpaid dividend also transferred to IEPF
Punishment for Failure to Distribute Dividend

(Section 127)

• If dividend not paid within 30 days of declaration →

➤ Company must pay interest @ 18% p.a. from the 31st day

➤ Officers in default → imprisonment up to 2 years + fine ₹1000/day

✔ No punishment if delay is due to:

• Operation of law (e.g., court dispute)

• Shareholder instructions not available

• Shareholder not entitled to payment

• Natural calamities / circumstances beyond control

📌 Law ensures that once declared → payment cannot be delayed

ACCOUNTS, AUDIT & AUDITORS

Books of Accounts

Section 128 – Companies Act, 2013

• Every company must maintain proper Books of Accounts including:

✔ All money received and spent

✔ Assets & liabilities

✔ Sales & Purchases

✔ Inventory details

• Books must be kept at Registered Office (RO), or other place with Board approval

• Books can be electronic (digital mode allowed)

• Books must be preserved for 8 years

Purpose: Transparency + accurate financial position

Financial Statements

Section 129

A complete financial statement includes:

• Balance Sheet

• Profit & Loss Account (or Income & Expenditure Account for Section 8 co.)

• Cash Flow Statement (except for small/OPC/dormant companies)

• Statement of Changes in Equity (if applicable)

• Notes to Accounts

Must show true and fair view + follow Schedule III format

📌 Board of Directors must approve financial statements before presenting at AGM

National Financial Reporting Authority (NFRA)

Section 132

• A regulatory authority for professional audit standards in India

• Functions:

✔ Regulation of auditors

✔ Monitoring compliance of accounting & auditing standards

✔ Power to investigate misconduct of auditors

✔ Can impose penalty and debar auditors

Penalty Example:

CA guilty of misconduct → Fine: ₹1 lakh to ₹5 x audit fees + debar up to 10 years

Auditors

Appointment of Auditor

Section 139

• First Auditor → Appointed by Board within 30 days of incorporation

• Subsequent Auditor → Appointed by Members at AGM for 5 years term

• Mandatory ratification removed by Companies Amendment Act 2017

Resignation & Removal

• Auditor must file Form ADT-3 with Registrar on resignation

• Removal before expiry → Special Resolution + Central Govt approval

Qualifications

• Only Chartered Accountant (CA) can be appointed as auditor

Disqualifications

(Not eligible if):

• Employee or officer of company

• Holding securities of company > face value ₹1,000

• Indebted/guarantor of company

• Auditor of more than 20 companies at a time (as per limit)

Rights of Auditors
• Access to Books of Accounts at all times

• Right to seek information/explanations from officers

• Right to attend AGM and express opinion

• Right to report fraud to Central Govt

Duties of Auditors

• Report whether financial statements show true and fair view

• Check compliance with accounting standards

• Report fraud above ₹1 crore to Central Government

• Maintain professional skepticism and confidentiality

Liabilities of Auditors

• Civil liability → Compensation for losses

• Criminal liability → Imprisonment for fraud (Section 147)

• Action by NFRA for misconduct

📌 Case Law
➤ Re Kingston Cotton Mill (1896) — Auditor is “watchdog, not a bloodhound”

➤ Satyam Scandal — Increased strict action against auditors in India

Auditor’s Report

• Opinion about whether accounts are true & fair

• Must be attached to Financial Statements

• Includes qualification, observation & recommendation

• Signed and submitted to shareholders in AGM

Internal Audit

Section 138

• Conducted by internal auditor (CA/CMA/other professional)

• Applicable to:

✔ Listed companies

✔ Certain public & private companies based on capital/turnover thresholds

• Continuous review of internal controls

Cost Audit

Section 148

• Audit of cost records (production cost, material/labour cost etc.)

• Applicable to companies in regulated sectors (e.g., Pharma, Power, Cement)

• Conducted by Cost Accountant (CMA)

Annual Report

• Includes audited financial statements

• Must be circulated to all members before AGM

• Placed on the company website

Directors’ Report

Section 134

• Presented by Board → explains financial results + corporate policies

• Includes:

✔ State of the company’s affairs

✔ Dividend declaration

✔ CSR report

✔ Directors’ responsibility statement

✔ Loans/guarantees, related party transactions

Director’s Responsibility Statement ensures that:

→ Accounts prepared fairly

→ Proper internal financial controls maintained

Integrated Reporting

• Modern reporting system focusing on financial + non-financial performance

• Covers:

✔ Social responsibility

✔ Environmental performance

✔ Corporate governance

MODULE 3 — DIRECTORS

1.​ Director Identification Number (DIN)​

​
• DIN is a unique identification number allotted by Central Government to a person who wants to become a director.​
​
• Only one DIN is issued to a person for lifetime.​
​
• DIN must be mentioned in all company documents and returns.​
 ​
• Application made in Form DIR-3 with ID and address proof.​

2.​ Types of Directors​

​
a. Executive Director – Involved in day-to-day management.​
​
b. Non-Executive Director – Not involved in daily operations, only policy roles.​
​
c. Managing Director – Entrusted with substantial powers of management.​
​
d. Whole-Time Director – Full-time employee of the company.​
​
e. Independent Director – Non-executive director with no financial interest; ensures corporate governance (mandatory
for listed companies).​
​
f. Nominee Director – Nominated by banks/financial institutions or Government.​
​
g. Additional Director – Appointed by Board; holds office till next AGM.​
​
h. Alternate Director – Acts in place of original director when he is outside India.​
​
i. Women Director – Mandatory for certain prescribed companies.​
​
j. Small Shareholders’ Director – Represents small shareholders in listed companies.​

Legal Requirement of Minimum Directors:

Public Company – 3

Private Company – 2

One Person Company – 1

Maximum – 15 (can exceed by Special Resolution)

3.​ Appointment and Re-appointment​

​
• First directors are named in Articles of Association.​
​
• Subsequent directors are appointed by shareholders in AGM.​
​
• Independent Directors can hold office for two terms of five years each.​
​
• In public companies, at least two-third directors must be rotational and one-third retire at every AGM (Eligible for
re-appointment).​
​
• Form DIR-12 must be filed after appointment.​

4.​ Disqualifications of Directors (Section 164)​

​
A person cannot be appointed as director if:​
​
• Unsound mind.​
​
• Undischarged insolvent.​
​
• Convicted for offence and sentenced to imprisonment for six months or more.​
​
• Failed to file financial statements/annual return for three years.​
​
• Involved in fraud.​
5.​ Vacation of Office (Section 167)​
​
Director must vacate office if:​
​
• Disqualified under Section 164.​
​
• Absent from all Board meetings for 12 months.​
​
• Convicted of offence and sentenced to six months or more.​
​
• Failed to disclose interest.​
​
• Ceases to hold qualification shares (if required).​

6.​ Retirement, Resignation and Removal​

​
a. Retirement by rotation – In public companies, 1/3rd rotational directors retire at every AGM.​
​
b. Resignation – Director may resign by giving notice; file Form DIR-11 with ROC.​
​
c. Removal – Members can remove director by Ordinary Resolution under Section 169 after giving opportunity of being
heard.​

7.​ Duties of Directors (Section 166)​

​
• Act in good faith for the company’s interest.​
​
• Exercise duties with due care, skill and diligence.​
​
• Avoid conflict of interest.​
​
• Not make any secret profits.​
​
• Act within powers and according to Articles of Association.​

8.​ Rights of Directors​

​
• Right to participate and vote in Board Meetings.​
​
• Right to access books of accounts and records.​
​
• Right to receive remuneration and reimbursement.​
​
• Right to be indemnified by company for actions done in good faith.​
​
• Right to inspect minutes and records of meetings.​

9.​ Register of Directors and Key Managerial Personnel (Section 170)​

​
• Company must maintain a Register containing personal details and shareholdings of directors and KMP.​
​
• Register kept at Registered Office and open for inspection.​

10.​ Loans to Directors (Section 185)​

​
• Company cannot give loan, guarantee or security to:​
​
– Directors​
​
– Any person in whom the director is interested​
​
• Exceptions:​
​
– Loans to Managing Director or Whole-Time Director as part of service conditions.​
​
 – Companies whose ordinary business is lending.​

11.​ Disclosure of Interest (Section 184)​

​
• Director must disclose concern or interest in other companies/firms.​
​
• Disclosure made in first Board Meeting each financial year.​
​
• Interested director cannot participate in related discussions.​

12.​ Declaration by Directors​

​
• A director must declare that he is not disqualified under Section 164, in Form DIR-8 at time of appointment and
annually.​

13.​ Loan and Investment by Company (Section 186)​

​
• Company cannot exceed the specified limit of:​
​
– 60% of paid-up capital + securities premium + free reserves​
​
OR​
​
– 100% of free reserves + securities premium​
​
whichever is higher​
​
• If limit exceeded → Special Resolution required.​
​
• Interest rate cannot be lower than prevailing Government rate.​

14.​ Investments to be held in Company’s Own Name (Section 187)​

​
• Company must hold investments in its own name.​
​
• Exceptions:​
​
– Holding in depository system​
​
– Shares held for benefit of employees (ESOP trust)​

15.​ Related Party Transactions (Section 188)​

​
• Applies to contracts where directors, relatives or KMPs have interest.​
​
• Requires Board approval.​
​
• Special Resolution required if prescribed limits exceed.​
​
• Interested director cannot vote on related party matter.​

16.​ Register of Contracts or Arrangements (Section 189)​

​
• Register must be maintained for all related party contracts.​
​
• Signed by all directors present.​
​
• Kept at Registered Office for inspection.​

17.​ Case Laws​

​
• Percival v. Wright – Directors owe duty to company, not individual shareholders.​
​
• Cook v. Deeks – Directors cannot divert business opportunity for personal gain.​
​
 • Regal (Hastings) Ltd. v. Gulliver – Secret profits not allowed; fiduciary duty.​
BOARD CONSTITUTION AND ITS POWERS

(Company Law Notes – Copy-Paste Format)

1.​ Board Composition​

​
• Section 149 of Companies Act, 2013.​
​
• Board of Directors is the primary management body of the company.​
​
• Minimum directors: Public Company – 3; Private Company – 2; One Person Company – 1.​
​
• Maximum – 15 directors (can increase with Special Resolution).​
​
• Mandatory appointment of:​
​
– Woman Director (for prescribed classes of companies)​
​
– Independent Directors (minimum 2 for listed companies)​
​
• Board must have a proper mix of executive and non-executive directors for better governance.​

2.​ Restrictions on Powers of Board (Section 180)​

​
Certain powers can be exercised by the Board only with prior approval of shareholders by Special Resolution, such as:​
​
a. Sell, lease or dispose of whole or substantially whole of the company’s undertaking.​
​
b. Borrow money beyond paid-up capital and free reserves.​
​
c. Invest compensation received for merger or amalgamation.​
​
d. Approve schemes of loans or guarantees beyond prescribed limits.​
​
• Purpose: To protect shareholders from misuse of powers by Board.​

3.​ Powers of Board of Directors (Section 179)​

​
The Board has the authority to manage the company’s business and affairs. It can:​
​
a. Make calls on shares.​
​
b. Issue securities including debentures.​
​
c. Borrow money and invest company funds.​
​
d. Approve financial statements and Board’s Report.​
​
e. Diversify business and acquire property.​
​
f. Appoint or remove key managerial personnel.​
​
g. Approve amalgamation, mergers and acquisitions.​
​
• These powers are exercised through Board Resolutions passed in meetings.​

4.​ Board Committees​

​
Committees are formed to ensure better supervision and governance. Mandatory committees include:​

a. Audit Committee (Section 177)

• Applies to listed and certain large public companies.

• Minimum 3 directors; majority Independent Directors.

• Functions:

– Review financial statements

– Monitor internal control and audit

– Recommend appointment and remuneration of auditors

b. Nomination and Remuneration Committee (NRC) (Section 178)

• Minimum 3 non-executive directors; majority independent.

• Functions:

– Identify suitable directors and KMP

– Decide remuneration policy

– Evaluate director’s performance

c. Stakeholders Relationship Committee (Section 178)

• Mandatory for companies with > 1000 shareholders, debenture holders, or deposit holders.

• Resolves grievances of shareholders and investors.

Other Committees (as per company needs):

• Corporate Social Responsibility (CSR) Committee

• Executive Committee

• Risk Management Committee (mandatory for top listed companies)

• Sexual Harassment Committee under POSH Act

5.​ Contribution to Charitable Funds​

​
(Section 181)​
​
• Board may contribute to charitable funds.​
​
• If contribution exceeds 5% of average net profits of previous 3 years, shareholder approval is required.​

6.​ Contribution to Political Parties​

​
(Section 182)​
​
• Company can contribute any amount to a registered political party.​
​
• Must be authorized by Board Resolution.​
​
• Details of contribution must be disclosed in profit and loss account.​
​
• Government companies and Section 8 companies are not allowed to contribute.​

7.​ Contribution to National Defence Fund​

​
(Section 183)​
​
• Board may contribute any amount to National Defence Fund.​
 ​
• No shareholder approval required.​
​
• Contribution must be disclosed in Board’s Report.​
Case Laws
1.​ Howard Smith Ltd. v. Ampol Petroleum Ltd. – Directors must exercise powers for proper purpose.​

2.​ Needle Industries v. Needle Industries Newey – Board decisions must be in the interest of the company.​

APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

1.​ Appointment of Key Managerial Personnel (KMP)​

​
• Section 203 of Companies Act, 2013.​
​
• KMP are top-level managerial officials responsible to manage and control the company’s affairs.​
​
• Mandatory appointment of KMP in:​
​
a) All listed companies​
​
b) Public companies with paid-up capital ≥ ₹10 Crore​

• KMP Includes:

i. Managing Director (MD) or Chief Executive Officer (CEO) or Manager

ii. Whole-Time Director

iii. Company Secretary (CS)

iv. Chief Financial Officer (CFO)

• Appointment must be done through a Board Resolution specifying terms, salary and duties.

• A whole-time KMP cannot hold office in more than one company except in a subsidiary company with Board approval.

2.​ Managing Director and Whole-Time Director​

​
• Managing Director (MD):​
​
– Entrusted with substantial powers of management​
​
– Responsible for major policy and operational decisions​

• Whole-Time Director (WTD):

– A full-time employee involved in daily operations

Eligibility Conditions for MD / WTD / Manager (Section 196):

• Age between 21 to 70 years (above 70 allowed with Special Resolution)

• Not an undischarged insolvent or convicted person

• Term of appointment cannot exceed 5 years at a time

• Re-appointment not earlier than one year before expiry of term

Approval Requirements:

• Board Resolution + Filing with ROC

• Company approval in General Meeting

• Approval of Central Government needed only if conditions of Schedule V are not fulfilled

3.​ Manager, CEO and CFO​

​
• Manager:​
​
– Controls management but subject to Board control​
​
– Cannot be employed elsewhere simultaneously​

• CEO (Chief Executive Officer):

– Overall management and strategic control of business

• CFO (Chief Financial Officer):

– Responsible for finance, accounts, budgeting, reporting etc.

Appointment of CEO and CFO is mandatory in:

• Listed companies

• Certain specified public companies by rules

4.​ Company Secretary (CS)​

​
• Mandatory for:​
​
– Listed companies​
​
– Public companies with paid-up capital ≥ ₹10 Crore​
​
• Responsible for compliance, governance, secretarial records, filing returns, etc.​
​
• Must be a member of ICSI.​

5.​ Remuneration of Managerial Personnel (Section 197)​

​
• Managerial Personnel = MD, WTD, Manager and KMP​
​
• Total Managerial remuneration must not exceed 11% of Net Profits in a financial year.​
​
• Individual Limits:​
​
– MD / WTD / Manager: 5% of net profits (single person)​
​
– If more than one MD/WTD/Manager together: 10% of net profits​
​
• Remuneration can exceed limits only with:​
​
– Shareholder approval by Special Resolution​
​
– Compliance with Schedule V​
Modes of Remuneration:

• Salary

• Perquisites (car, house, medical benefits etc.)

• Commission based on profits

• Stock Options (ESOP)

• Bonus, allowances and other benefits

Remuneration in Case of No Profits or Inadequate Profits:

• Company can pay remuneration as per Schedule V maximum limits.

• Central Government approval required if limits exceeded.

6.​ Disclosure Requirements​

​
• Company must disclose full details of managerial remuneration in Board’s Report.​
​
• Remuneration policy must be recommended by Nomination and Remuneration Committee (for applicable companies).​

7.​ Removal / Vacancy of KMP​

​
• Board of Directors has power to remove for misconduct or poor performance.​
​
• Vacancy in the office of KMP must be filled within 6 months.​

8.​ Case Laws ​

​
• LIC v. Escorts Ltd. – Directors and managerial personnel must act for company’s benefit.​
​
• Lee v. Lee’s Air Farming Ltd. – Managing Director can also be employee of the company.​
PREVENTION OF OPPRESSION & MISMANAGEMENT

1️⃣ Majority Rule and Minority Rights

• In a company, decisions are generally taken on the basis of majority rule.

• Minority shareholders must accept majority decisions in normal business operations.

• BUT if majority acts unfairly or harms minority rights, law protects minority shareholders.

• Protection is available under Sections 241–246, Companies Act, 2013.

📌 Case Law:
• Foss v. Harbottle (1843) – Court will not interfere in internal management if majority is acting lawfully.

2️⃣ Principle of Non-Interference

• Courts/Tribunals do not interfere in internal matters of the company unless:

– Acts are illegal

– Oppressive to minority

– Prejudicial to company’s interest

• Ensures smooth management while preventing misuse of majority power.

3️⃣ Meaning of Oppression

• Oppression = Continuous and unfair conduct that violates minority’s rights.

• Example:

– No notice of meetings to minority

– Unfair allotment of shares to reduce minority shareholding

– Removal from management without reason

• Must show lack of probity (honesty) and prejudice to shareholders.

📌 Case Law:
• Shanti Prasad Jain v. Kalinga Tubes Ltd. – Oppression must be continuous and burdensome.

4️⃣ Meaning of Mismanagement

• When company affairs are conducted in a manner:

– Against interest of company/public

– Leading to financial loss or fraud

• Examples:

– Misuse of company funds

– Non-compliance with law

– Misrepresentation in accounts

5️⃣ Who Can Apply for Relief? (Section 244)

Minimum Shareholding Requirement:

• 100 shareholders OR

• 1/10th of total members (whichever is less) OR

• Members holding 1/10th of issued share capital

• However, Tribunal may waive these requirements.

6️⃣ Application to Tribunal (Section 241)

• Minority may apply to National Company Law Tribunal (NCLT) if:

– Affairs are oppressive

– Mismanagement is happening

• Tribunal can enquire and provide relief.

7️⃣ Powers of Tribunal (Section 242)

Tribunal can order:

• Removal of directors
• Regulate conduct of company affairs

• Cancel or amend any share transfer or allotment

• Recovery of undue gains from directors

• Appointment of independent directors

• Restrict future management decisions

✅ Objective: To end oppressive conduct and protect company & shareholders.

8️⃣ Class Action (Section 245)

• Shareholders or depositors can file a class action suit if acts of directors/auditors are prejudicial to their interests.

• It prevents fraudulent actions like:

– Misstatements in prospectus

– Wrong auditing reports

– Illegal conduct damaging investors

📌 Landmark Case:
• Re: Gujarat Bottling Co. – Class action protects collective rights of shareholders.

9️⃣ Reconstruction and Amalgamation (Sections 230–240)

• Reconstruction = Internal reorganization of company structure.

• Amalgamation = Two or more companies combine to form one new entity.

• Purpose: Better business management, avoid failure, protect shareholders.

• NCLT approval required to ensure fairness & prevent oppression.

Example Situations:

• Sick company merges with healthy company for revival

• Assets/liabilities transferred to new company

MODULE 4 CORPORATE SOCIAL RESPONSIBILITY (CSR) & SECRETARIAL AUDIT

A) Corporate Social Responsibility (CSR)

1️⃣ Applicability of CSR (Section 135, Companies Act 2013)

CSR becomes compulsory if a company in any of the previous 3 financial years meets any one of these conditions:

• Net worth ≥ ₹500 Crore OR

• Turnover ≥ ₹1000 Crore OR

• Net Profit ≥ ₹5 Crore

📌 Applies to:
• All companies (Public/Private/Foreign) meeting the above criteria

2️⃣ CSR Committee

• Company must form a CSR Committee of Board consisting of 3 or more directors

– At least 1 independent director must be included (if independent director is required for company)

• Duties:

– Formulate CSR policy

– Recommend CSR projects and expenditure

– Monitor CSR activities

👉 Exception: Private or unlisted companies not required to appoint independent director → Then CSR Committee can be formed
with 2 directors.

3️⃣ CSR Policy & Permitted CSR Activities (Schedule VII)

CSR Policy must include:

• List of CSR projects

• Mode of implementation

• Monitoring process

Permitted CSR Areas include:

• Eradicating hunger, poverty, healthcare

• Promoting education, gender equality

• Environmental sustainability

• Rural development projects

• Clean Ganga program

• Disaster management

• Sports promotion

• Contribution to Prime Minister’s National Relief Fund (PMNRF)

🚫 NOT Allowed as CSR:

• Activities in normal business course (except COVID-19 relief rule)

• Political contributions

• Activities benefiting only company employees

• Projects outside India (except sports training)

4️⃣ CSR Expenditure

Minimum spending:

• 2% of average net profits during immediately preceding 3 financial years

• If amount unspent:

– Transfer to Unspent CSR Account within 30 days

– Amount must be spent within 3 years

• If still unspent → Transfer to funds mentioned in Schedule VII within 6 months

Punishment if CSR is Not Complied:

• Fine on company + responsible officers

• Amount must ultimately be paid to specified government funds

5️⃣ Net Profit for CSR

• Net Profit is calculated as per Section 198

• Excluding:

– Profits from overseas branches

– Dividend received from other CSR-compliant companies

6️⃣ CSR Reporting Requirements

• Board’s Report must contain:

– Composition of CSR Committee

– Details of CSR policy and projects

– CSR amount spent and unspent

• CSR Report must be placed on company website

• Form CSR-2 must be filed with ROC

📌 Case Law / Real Example

• Tata Group → One of the earliest and biggest CSR contributors in India

• Infosys → CSR in education & rural development recognized widely

B) Secretarial Audit (Section 204)

1️⃣ Meaning

• Independent audit to check whether company is following corporate laws compliance properly

• Conducted by: Practicing Company Secretary (PCS)

2️⃣ Applicability of Secretarial Audit

Mandatory for:
• Listed companies

• Public companies with:

– Paid-up capital ≥ ₹50 Crore OR

– Turnover ≥ ₹250 Crore

3️⃣ Scope of Secretarial Audit

Includes checking compliance of:

• Companies Act, 2013

• SEBI Regulations

• FEMA, Depositories Act

• Listing Regulations

• Insider Trading rules

• Board processes and records

4️⃣ Secretarial Audit Report

• Prepared in Form MR-3

• Attached to Board’s Report

• Auditor must report fraud or non-compliance to authorities

📌 Objective
• Ensure transparency

• Corporate governance and investor protection

• Prevent frauds and penalties

WINDING UP

1️⃣ Meaning of Winding Up

• Winding up is the process of closing a company and distributing its assets to creditors and shareholders.

• After winding up, the company ceases to exist as a legal entity.

• Conducted by a Liquidator appointed by Tribunal / Company.

📌 Relevant Sections: 270–365, Companies Act 2013

2️⃣ Legal Provisions for Winding Up

Winding up may take place in two ways:

• Winding Up by the Tribunal

• Voluntary Winding Up

3️⃣ Winding Up by the Tribunal (Compulsory Winding Up)

(Sections 271 – 303)

A petition for winding up can be filed if:

1.​ Company is unable to pay its debts​

2.​ Affairs of company are conducted fraudulently​

3.​ Company has acted against sovereignty & integrity of India​

4.​ Default in filing financial statements or annual returns for 5 consecutive years​

5.​ Just and equitable grounds (e.g., deadlock between directors)​

Who can file petition?

• Company itself

• Creditors

• Contributories (shareholders)

• Central/State Government

• Registrar of Companies (ROC) with approval

Procedure:

• Petition filed to NCLT

• Tribunal hears matter and may appoint Provisional Liquidator

• Tribunal may pass winding up order

• Liquidator takes control of assets and distributes them

• After liquidation, company name is removed from register

📌 Case Law:
• Hind Overseas Pvt Ltd v. Raghunath Prasad – “Just and equitable” clause includes dispute between members causing breakdown
of company operations.

4️⃣ Voluntary Winding Up

Voluntary winding up means the company itself decides to wind up.

Two types:

A) Members’ Voluntary Winding Up

• Only when company is solvent

• Directors must declare that company can repay all debts within specified period

B) Creditors’ Voluntary Winding Up

• When company is not solvent

• Meeting of creditors required

• Creditors appoint Liquidator

Procedure:

• Special Resolution for winding up

• Notice to ROC in Form MGT-14

• Appointment of Liquidator

• Realization of assets & settlement of debts

• Preparation of final report and filing with Tribunal

• Company dissolved and name removed from ROC

5️⃣ Role of Liquidator

• Takes charge of company property

• Realizes (sells) assets

• Pays debts in order of priority

• Distributes surplus among shareholders

• Submits reports to Tribunal and ROC

6️⃣ Procedure Before Tribunal & Appellate Tribunal

• Matters heard by NCLT (National Company Law Tribunal)

• Appeals go to NCLAT (National Company Law Appellate Tribunal)

• Further appeal lies to Supreme Court

7️⃣ Order of Payment During Winding Up

Priority follows:

1.​ Insolvency Resolution Process Costs​

2.​ Secured Creditors​

3.​ Workmen dues​

4.​ Government dues​

5.​ Unsecured creditors​

6.​ Preference shareholders​

7.​ Equity shareholders (if any surplus)

8.​ ESG & CORPORATE GOVERNANCE

A) Environmental, Social & Governance (ESG)

1️⃣ Meaning of ESG

• ESG refers to standards that measure a company’s environmental care, social responsibility, and ethical governance.

• It helps evaluate how responsible a company is toward society, employees, environment, and law.
2️⃣ Components of ESG

A) Environmental

• Pollution control

• Efficient use of resources (water, energy)

• Waste management

• Carbon emission reduction

• Use of renewable energy

B) Social

• Employee welfare and safety

• Human rights and labour standards

• Community development

• Product safety and customer satisfaction

• Diversity and gender equality

C) Governance

• Ethical business practices

• Transparency and disclosure

• Strong board structure

• Compliance with laws

• Anti-corruption & whistle-blower policies

✅ ESG enhances company reputation, attracts investors & ensures sustainable business growth.

B) Corporate Governance

1️⃣ History of Corporate Governance in India

• Started gaining importance after corporate scandals like Harshad Mehta Scam (1992) & Satyam Scam (2009).

• Major developments:

– Kumar Mangalam Birla Committee Report (1999)

– SEBI Listing Agreement Clause 49 introduced

– Companies Act 2013 strengthened governance mechanism

– SEBI LODR Regulations 2015 enforced new disclosure norms

2️⃣ Meaning of Corporate Governance

• Corporate Governance refers to a system of rules, practices and processes by which a company is directed and controlled.

• Ensures transparency, accountability, fairness and responsibility in management decisions.

• Objective: Protecting interests of shareholders and stakeholders.

📌 Famous Definition:
Cadbury Committee – “Corporate Governance is the system by which companies are directed and controlled.”

3️⃣ Requirements under Corporate Governance (Key Provisions)

A) Board Structure

• Optimum mix of Executive & Non-Executive Directors

• Appointment of Independent Directors for unbiased decisions

• At least one Woman Director (for listed companies)

B) Board Committees

• Audit Committee

・Supervises financial reporting

• Nomination & Remuneration Committee

・Appointment + pay structure decisions

• Stakeholders Relationship Committee

・Grievance handling

• CSR Committee

・CSR activity planning & expenditure

C) Disclosure & Transparency

• Maintenance of proper accounts & internal controls

• Timely disclosure of important matters to stock exchanges

• Publishing Annual Report, Corporate Governance Report, Financial Statements

D) Stakeholder Rights

• Fair treatment of shareholders

• Conduct of meetings (AGM / E-Voting / Postal Ballot)

E) Ethics & Compliance

• Code of Conduct for Board and Senior Management

• Prevention of fraud & insider trading

• Vigil mechanism / Whistle-blower protection

4️⃣ Corporate Governance Report

• Mandatory for listed companies

• Included annually in Annual Report

• Usually contains:

– Composition of Board & Committees

– Meetings held and attendance of directors

– Remuneration details

– Related Party Transactions

– Compliance certificate under corporate governance

– Risk management framework

• Must be signed by CEO / CFO or authorized director

• Also certified by Company Secretary confirming compliance

INSIDER TRADING

1️⃣ Meaning of Insider Trading

• Insider trading means buying, selling, or dealing in securities of a listed company based on Unpublished Price Sensitive
Information (UPSI).

• It is considered fraud because insiders gain unfair advantage over general investors.

2️⃣ Who is an Insider?

According to SEBI (Prohibition of Insider Trading) Regulations, 2015

Insider means:

a) Connected Person

• Directors, KMP, employees, auditors, bankers, lawyers, promoters etc.

• Anyone with direct or indirect access to company information

b) Deemed Insider

• Immediate relatives of insiders

• Persons having professional or business relation with company and receiving UPSI

3️⃣ Unpublished Price Sensitive Information (UPSI)

• UPSI is information that is not made public and can affect share price if published.

Examples of UPSI:

• Financial results

• Dividend decisions

• Issue of shares or buy-back

• Mergers / Takeovers / Amalgamation

• Major contracts or expansion plans

• Change in key managerial personnel

• Any event affecting stock price

👉 Trading in securities while in possession of UPSI is prohibited.

4️⃣ When Laws on Insider Trading are Applicable?

✅ Applicable to:
• Listed companies

• Securities proposed to be listed

• Insiders & connected persons

• Brokers, advisors, auditors dealing in listed company information

⚠️ Not applicable when:

• Information is generally available to public

• Trading done without UPSI

• Certain permitted transactions like employee stock options (ESOPs) under rules

5️⃣ Key Compliance Requirements

Companies must ensure:

• Code of Conduct for prevention of insider trading

• Trading Window closure during UPSI period

• Structured Digital Database to record UPSI sharing

• Pre-clearance for trades by designated persons

Insiders must:

• Maintain confidentiality of UPSI

• Disclose holdings & trades to company and stock exchange

6️⃣ Penalties for Insider Trading

Under SEBI Act, 1992 & Insider Trading Regulations

Penalties include:

• Monetary penalty: ₹10 lakh to ₹25 crore, whichever is higher

• Profit made from insider trading must be returned

• Criminal punishment may include:

– Imprisonment up to 10 years

– Additional fines as decided by SEBI

• Restriction from trading or holding management position

📌 SEBI has the power to investigate, search records, and take strong action.
7️⃣ Important Case Laws

• SEBI v. Rakesh Agrawal — Insider trading violates fairness in securities market

• Hindustan Lever Ltd. Case (1998) — Trading based on inside merger information is illegal