© The Institute of Chartered Accountants of India

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

All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transmitted, in any form, or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior permission, in writing, from the
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Basic draft of this publication was prepared by CA. Vandana D Nagpal.
Edition : April, 2023
Committee/Department : Board of Studies (Academic)
E-mail : bosnoida@icai.in
Website : www.icai.org
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ISBN No. : 978-81-962488-9-5
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The Institute of Chartered Accountants of India,
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Indraprastha Marg, New Delhi 110 002 (India)
Printed by :

iii
BEFORE WE BEGIN …
Evolving role of a CA - Shift towards strategic decision making
The traditional role of a Chartered Accountant restricted to accounting and

auditing, has now changed substantially and there has been a marked shift
towards strategic decision making and entrepreneurial roles that add value
beyond traditional financial reporting. The primary factors responsible for the
change are the increasing business complexities on account of plethora of laws,
borderless economies consequent to giant leap in e-commerce, emergence of
new financial instruments, emphasis on Corporate Social Responsibility,
significant developments in information technology, to name a few. These factors
necessitate an increase in the competence level of Chartered Accountants to take
up the role of not merely an accountant or auditor, but a global solution provider.
Towards this end, the scheme of education and training is being continuously
reviewed so that it is in sync with the requisites of the dynamic global business
environment; the competence requirements are being continuously reviewed to
enable aspiring Chartered Accountants to acquire the requisite professional
competence to take on new roles.
Skill requirements at Intermediate Level
At the Intermediate Level, you are expected to not only acquire professional
knowledge but also the ability to apply such knowledge in problem solving. The
process of learning should also help you inculcate the requisite professional skills,
i.e., the intellectual skills and communication skills, necessary for achieving the
desired level of professional competence.
Corporate and Other Laws: Dynamic & Interesting
Laws and rules, in general, regulate the relationship between business and
profession. In specific, a student should have knowledge of the legal framework,
which influences business transactions. This paper intends to make the students
aware of legal provisions of the selected laws and to analyse and apply the
related provisions addressing issues in moderately complex scenarios.
Paper 2 on Corporate and Other Laws is comprising of Company Law and Other
Laws. The syllabus of Corporate and Other Laws has been segregated into two
parts covering the following topics:

iv
Part I: Company Law (70 Marks) Part II: Other Laws (30 Marks)
I. The Companies Act, 2013 1. The General Clauses Act, 1897
II. The Limited Liability 2. Interpretation of Statutes

Partnership Act, 2008
3. The Foreign Exchange Management
Act, 1999
These laws of the country undergo significant changes through amendments/

notifications /circulars which are issued from time to time by their respective
governing authorities. Owing to the dynamic nature of the specified Acts
especially the Companies Act, 2013, the Limited Liability Partnership Act, 2008
and the Foreign Exchange Management Act, 1999, learning, understanding and
applying the provisions of law in problem solving is very interesting and
challenging.
The study material has been revised on the basis of the legislative developments
made up till 30th April, 2023.
Further, the legislative amendments (if any) which will be notified after 30th April,
2023 and which are relevant for a particular attempt, would be informed to the
students separately. Students are advised to check the Board of Studies
Knowledge Portal regularly for further development.
BoS (Academic) – Value added study materials
The Board of Studies (Academic) is the department which serves as the Institute’s
interface with its students. BoS (Academic) leaves no stone unturned to provide
the best-in-class services to you in terms of value-added study materials wherein
the concepts and provisions are explained in lucid language with illustrations,
diagrams, and examples to aid understanding the application of concepts and
provisions. Also, the representation of provisions has been changed, wherever
required, to bring more clarity and understanding of the concepts. Test Your
Knowledge Questions at the end of each chapter contain a rich bank of questions
which will hone your analytical skills.
Framework of Chapters– Uniform Structure comprising of specific

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

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

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

vi
SYLLABUS
PAPER – 2: CORPORATE AND OTHER LAWS

(100 Marks)
PART I – COMPANY LAW AND LIMITED LIABILITY PARTNERSHIP LAW

(70 MARKS)
Objective:
To develop an understanding of the legal provisions and acquire the ability to
analyse and apply the laws in practical situations.
Contents:
I. The Companies Act, 2013 – including important rules and drafting of

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

4. Share Capital and Debentures
5. Acceptance of Deposits by Companies
6. Registration of Charges
7. Management and Administration
8. Declaration and Payment of Dividend
9. Accounts of Companies
10. Audit and Auditors
11. Companies Incorporated Outside India
II. The Limited Liability Partnership Act, 2008 including important Rules

vii
PART II- OTHER LAWS (30 MARKS)
Objectives:
(a) To develop an understanding of the General Clauses Act.
(b) To develop an understanding of the rules for interpretation of statutes
(c) To have basic understanding of the Foreign Exchange Management Act,
1999.
Contents:
1. The General Clauses Act, 1897: Important Definitions, Extent and
Applicability, General Rules of Construction, Powers and Functionaries,
Provisions as to Orders, Rules, etc. made under Enactments and
Miscellaneous Provisions.
2. Interpretation of Statutes: Rules of Interpretation of Statutes, Aids to
Interpretation, Rules of Interpretation/ Construction of Deeds and
Documents.
3. The Foreign Exchange Management Act, 1999: Significant definitions and
concepts of Current and Capital Account Transactions.
Note: If new legislations are enacted in place of the existing legislations, the
syllabus would include the corresponding provisions of such new legislations with
effect from a date notified by the Institute.
The specific inclusions/exclusions in the various topics covered in the syllabus will
be effected every year by way of Study Guidelines, if required.

viii
CONTENTS
MODULE 1
CHAPTER-1: Preliminary
CHAPTER-2: Incorporation of Company and Matters Incidental thereto
CHAPTER-3: Prospectus and Allotment of Securities
CHAPTER-4: Share Capital and Debentures
CHAPTER-5: Acceptance of Deposits by companies
CHAPTER-6: Registration of Charges
MODULE 2
CHAPTER-7: Management and Administration
CHAPTER-8: Declaration and Payment of Dividend
CHAPTER-9: Accounts of Companies
CHAPTER-10: Audit and Auditors
CHAPTER-11: Companies Incorporated Outside India
MODULE 3
CHAPTER-12: The Limited Liability Partnership Act, 2008
CHAPTER-1: The General Clauses Act, 1897
CHAPTER-2: Interpretation of Statutes
CHAPTER-3: The Foreign Exchange Management Act, 1999

ix
DETAILED CONTENTS: MODULE – 1
CHAPTER 1 : PRELIMINARY
Learning Outcomes............................................................................................................. ..... .1.1
Chapter Overview .................................................................................................................... 1.2
1. Introduction .................................................................................................................... 1.2
2. Short Title, Extent, Commencement and Application ......................................... 1.2
3. Definitions.............................................................................................................. ........... 1.4
Test Your Knowledge ............................................................................................................ 1.27
CHAPTER 2 : INCORPORATION OF COMPANY AND MATTERS INCIDENTAL

THERETO
Learning Outcomes ................................................................................................................. 2.1
1. Introduction to Incorporation of Companies & Promotor ................................ 2.3
2. Formation of Company ..................................................................... ........................... 2.4
3. Members Severally liable in certain cases i.e. Reduction in Minimum

Membership .................................................................................... ................................ 2.9
4. Incorporation of Company ........................... ........................................................... 2.10
5. Formation of Companies with Charitable Objects, etc. .................................... 2.20
6. Effect of Registration ................................................................................................. 2.27
7. Memorandum of Association – MOA .................................................................... 2.28
8. Articles of Association – AOA .................................................................................. 2.38
9. Doctrine of Constructive Notice and Doctrine of Indoor

Management. ............................................................................................................... 2.42
10. Act to Override Memorandum, Articles, etc. ....................................................... 2.46
11. Effect of Memorandum and Articles .................................................................... 2.46

x
12. Alteration of memorandum ..................................................................................... 2.48
13. Alteration of articles ................................................................................................... 2.54
14. Alteration of memorandum or articles to be noted in every copy .............. 2.55
15. Registered office of company ................................................................................ 2.55
16. Commencement of business etc. .......................................................................... 2.59
17. Conversion of companies already Registered ................................................... 2.61
18. Subsidiary company not to hold shares in its Holding Company ................ 2.62
19. Service of documents ............................................................................................... 2.63
20. Authentication of documents, Proceedings and Contracts ........................... 2.65
21. Execution of Bills of Exchange, etc. ....................................................................... 2.65
Summary .................................................................................................................................. 2.67
CHAPTER 3 : PROSPECTUS AND ALLOTMENT OF SECURITIES

1. Introduction ................................................................................................................. 3.3
2. Public offer and Private Placement ...................................................................... 3.3
3. Regulation of issue and transfer of Securities etc. .......................................... 3.7
4. Prospectus .................................................................................................................... 3.8
5. Mis-statements in prospectus .............................................................................. 3.24
6. Punishment for fraudulently inducing persons to invest money .............. 3.32
7. Action by affected persons .................................................................................. 3.33
8. Punishment for personation for acquisition, etc., of securities .................. 3.34
9. Punishment for fraud .............................................................................................. 3.35
10. Allotment of securities by company ................................................................... 3.37
11. Securities to be dealt with in stock exchanges ............................................... 3.41

xi
12. Global Depository Receipt .................................................................................... 3.45

13. Private Placement ................................................................................................... 3.46
Summary .................................................................................................................................. 3.53
Test Your Knowledge ........................................................................................................... 3.54
CHAPTER 4 : SHARE CAPITAL AND DEBENTURES

1. Introduction ................................................................................................................. 4.3
2. Share Capital-Types ................................................................................................... 4.4
3. Certificate of shares ................................................................................................. 4.11
4. Voting Rights ............................................................................................................ 4.15
5. Variation of shareholders’ rights ........................................................................ 4.18
6. Calls on share ........................................................................................................... 4.20
7. Issue of shares at a premium or discount ........................................................ 4.22
8. Issue of Sweat Equity Shares ............................................................................... 4.26
9. Issue and Redemption of Preference Shares .................................................... 4.30
10. Transfer and Transmission of Securities and the Allied Provisions ........... 4.35
11. Alteration of share capital .................................................................................... 4.47
12. Debenture ................................................................................................................. 4.75
Summary .................................................................................................................................. 4.86
Test Your Knowledge ........................................................................................................... 4.87
CHAPTER 5 : ACCEPTANCE OF DEPOSITS BY COMPANIES

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

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

5. Provisions regarding acceptance of deposits from public by
eligible companies .................................................................................................. 5.22
6. Punishment for Contravention of Section 73 or Section 76......................... 5.31
7. Repayment of deposits accepted before commencement of the
Companies Act, 2013 ............................................................................................. 5.32
8. Power of Central Government to Decide Certain Questions ....................... 5.33
Summary .................................................................................................................................. 5.33
CHAPTER 6 : REGISTRATION OF CHARGES
Chapter Overview ................................................................................................................... 6.2
1. Introduction ................................................................................................................. 6.2
2. Duty to Register Charges, etc. ............................................................................... 6.5
3. Deemed notice of charge ..................................................................................... 6.10
4. Consequences of non-registration of charge ................................................. 6.12
5. Application for Registration of Charge by charge-holder ............................ 6.13
6. Acquisition of property subject to charge and modification of charge ... 6.14
7. Register of Charges ................................................................................................. 6.16
8. Company to Report Satisfaction of Charge ..................................................... 6.18
9. Power of Registrar to Make Entries of Satisfaction and Release in

Absence of Intimation from Company .............................................................. 6.19
10. Intimation of Appointment of Receiver or Manager ...................................... 6.20
11. Punishment for Contravention ............................................................................. 6.21
12. Rectification by Central Government in Register of Charges ..................... 6.22
Summary .................................................................................................................................. 6.23

CHAPTER a
1
PRELIMINARY
LEARNING OUTCOMES
At the end of this chapter, you will be able to:

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

a 1.2 CORPORATE AND OTHER LAWS
CHAPTER OVERVIEW
Preliminary chapter of the Act covers

Short title, extent and Application Definitions
commencement
1. INTRODUCTION
The Companies Act, 2013 is an Act to consolidate and amend the law relating to
companies. The legislation was necessitated to meet changes in the national and
international economic environment and for expansion and growth of economy
of our country.
The Companies Act, 2013 received the assent of the Hon’ble President of India on
29th August 2013 and was notified in the Official Gazette on 30 th August 2013 for
public information stating that different dates may be appointed for enforcement
of different provisions of the Companies Act, 2013, through notifications.
Section 1 came into force on 30 th August 2013; 98 sections came into force on
12th September 2013; 143 sections were enforced from 1 st April 2014 and so on.
The Companies Act, 2013 is rule based legislation with 470 sections and seven
schedules. The entire Act has been divided into 29 chapters. Each chapter has at
least one set of Rules. The Companies Act, 2013 aims to improve corporate
governance, simplify regulations and strengthen the interests of investors. Thus,
this enactment makes our corporate regulations more contemporary.
2. SHORT TITLE, EXTENT, COMMENCEMENT

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

PRELIMINARY 1.3 a
Further, section deals with the extent to the applicability of the Act. It says that
the Act shall extend to the whole of India.
This section also specifies the date of commencement of this Act. Accordingly,
this section shall come into force at once and the remaining provisions of this Act
shall come into force on such date as the Central Government may, by
notification in the Official Gazette, appoint and different dates may be appointed
for different provisions of this Act and any reference in any provision to the
commencement of this Act shall be construed as a reference to the coming into
force of that provision.
This Section furthermore states of the applicability of the Act. The provisions of
this Act shall apply to-
(a) companies incorporated under this Act or under any previous company law;
Example 1: ABC Ltd. was incorporated on 1.1.1972 under the Companies Act,
1956. So, the Companies Act, 2013 shall also be applicable on ABC Ltd.
(b) insurance companies, except in so far as the said provisions are inconsistent
with the provisions of the Insurance Act, 1938 or the Insurance Regulatory
and Development Authority Act, 1999;
(c) banking companies, except in so far as the said provisions are inconsistent
with the provisions of the Banking Regulation Act, 1949;
(d) companies engaged in the generation or supply of electricity, except in so
far as the said provisions are inconsistent with the provisions of the
Electricity Act, 2003;
(e) any other company governed by any special Act for the time being in force,
except in so far as the said provisions are inconsistent with the provisions of
such special Act, and
(f) such body corporate, incorporated by any Act for the time being in force, as
the Central Government may, by notification, specify in this behalf, subject
to such exceptions, modifications or adaptation, as may be specified in the
notification.
Example 2: Food Corporation of India (FCI), National Highway Authority of India
(NHAI) etc.

Note: The term “except in so far as” shall mean excluding to the extent of i.e. if
any provision of the Companies Act is inconsistent with any of the provisions of
other Act (Insurance Act, Banking Regulation Act, Electricity Act, etc.) to which the
company is regulated than that company shall comply with the provisions of
respective Act/Acts to which it is governed and regulated by.
Companies Whole of India Section 1 1. Companies
Application
Title
Commencement
Extent
Act, 2013 came into 2. Insurance
force at once companies
and the
remaining 3. Banking
provisions on companies
different dates 4. Companies
through producing /
Notifications. supplying
electricity
5. Company
regulated by
special Act
6. Entities as
notified by
Central
Government
3. DEFINITIONS
Section 2 of the Companies Act, 2013 is a definition section. It provides various
terminologies used in the Act. Definitional Sections or Clauses, are known as
‘internal aids to construction’ and can be of immense help in interpreting or
construing the enactment or any of its parts.
Also, according to clause 95 of section 2, words and expressions used and not
defined in this Act but defined in the Securities Contracts (Regulation) Act, 1956
or the Securities and Exchange Board of India Act, 1992 or the Depositories Act,
1996 shall have the meanings respectively assigned to them in those Acts.
When a word or phrase is defined as having a particular meaning in the
enactment, it is that meaning alone which must be given to it while interpreting a

PRELIMINARY 1.5 a
Section of the Act unless there be anything repugnant in the context.

Section 21 states that- In this Act, unless the context otherwise requires, —
(1) Abridged prospectus means a memorandum containing
such salient features of a prospectus as may be
specified by the Securities and Exchange Board by making
regulations in this behalf;
(2) Accounting standards means the standards of accounting or any
addendum thereto for companies or class of companies referred to in
section 133;
Section 133 of the Act deals with the Central Government to Prescribe
Accounting Standards. As per the section, the Central Government may
prescribe the standards of accounting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India,
constituted under section 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by
the National Financial Reporting Authority.
Section 133 is to be read with Rule 7 of the Companies (Accounts) Rules,
2014. Accordingly,
(i) The standards of accounting as specified under the Companies Act,
1956 shall be deemed to be the accounting standards until accounting
standards are specified by the Central Government under section 133.
(ii) Till the National Financial Reporting Authority* is constituted under
section 132 of the Act, the Central Government may prescribe the
standards of accounting or any addendum thereto, as recommended
by the Institute of Chartered Accountants of India in consultation with
and after examination of the recommendations made by the National
Advisory Committee on Accounting Standards constituted under
section 210A of the Companies Act, 1956.
Further, in exercise of the powers conferred by section 133, the Central

Government in consultation with the National Advisory Committee on
Accounting Standards prescribed that Companies (Accounting Standards)
1
The number given in brackets i.e. ( ) at the start of definition, denotes the clauses to section 2.

Rules, 2006 and the Companies (Indian Accounting Standards) Rules, 2015
may be followed.
*The Central Government hereby appoints the 1 st October 2018 as the date
of constitution of National Financial Reporting Authority.
(3) Alter or Alteration includes the making of additions, omissions and
substitutions;
(5) Articles means-
 the articles of association of a company as originally framed, or
 as altered from time to time, or
 applied in pursuance of any previous company law, or
 applied in pursuance of this Act;

(6) Associate company, in relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.
Explanation. — For the purpose of this clause, —
(a) the expression "significant influence" means control of at least
twenty per cent. of total voting power, or control of or participation
in business decisions under an agreement;
(b) the expression "joint venture" means a joint arrangement whereby the
parties that have joint control of the arrangement have rights to the
net assets of the arrangement;
Vide Circular dated 25/06/2014 it has been clarified that the shares held by a
company in another company in a fiduciary capacity (a fiduciary is a person who
holds a legal or ethical relationship of trust with one of more parties (persons or
group of persons. Typically, a fiduciary prudently takes care of money or other
assets for another person) shall not be counted for the purpose of determining
the relationship of associate company.

PRELIMINARY 1.7 a
Note: Students may please note that the definition of Associate company as
defined under AS 23/ Ind AS 28 (Accounting for Investments in Associates in
Consolidated Financial Statements/ Investment in Associates and Joint Ventures)
is slightly different from the above definition as given in the Companies Act, 2013 .
(7) Auditing standards means the standards of auditing or any addendum

thereto for companies or class of companies referred to in sub-section (10)
of section 143.
Section 143 of the Companies Act, 2013 deals with the Powers and

Duties of Auditors and Auditing Standards. Sub-section (10) to section

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

operative societies; and
(ii) any other body corporate (not being a company as defined in this
Act), which the Central Government may, by notification, specify in this
behalf;

Just for information of the students

(12) Book and Paper and Book or Paper include books of account, deeds,
vouchers, writings, documents, minutes and registers maintained on paper
or in electronic form;
(13) “Books of account ” includes records maintained in
respect of—
(i) all sums of money received and expended by a
company and matters in relation to which the
receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 2 in the case
of a company which belongs to any class of companies specified
under that section;
Books of Account
In case of
companies specified Other Companies
under section 148
Items cost
(i) receipts and (ii) Sales and (iii) Assets and
specified u/s 148
expenditure Purchase Liabilties
and (i), (ii), (iii)
(14) Branch office , in relation to a company, means any establishment

described as such by the company;
(15) Called-up capital means such part of the capital, which has been called for
payment;
2
Section 148 of the Companies Act, 2013 authorises Central Government to Specify Audit
of Items of Cost in Respect of Certain Companies.

PRELIMINARY 1.9 a
(16) Charge means an interest or lien created on the property or assets of a

company or any of its undertakings or both as security and includes a
mortgage;
(17) Chartered Accountant means a chartered accountant as defined in clause
(b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949
who holds a valid certificate of practice under sub-section (1) of section 6 of
that Act;
(18) Chief Executive Officer (CEO) means an officer of a company, who has
been designated as such by it;
(19) Chief Financial Officer (CFO) means a person appointed as the Chief
Financial Officer of a company;
These definitions of CEO & CFO should be read with section 2(51) and 203
which deals with the definition and appointment of Key Managerial
Personnel (KMP) of the Companies Act, 2013.
(20) Company means a company incorporated under this Act or under any
previous company law;
Example 3: Reliance Industries Limited incorporated in year 1973, Tata Steel
Limited incorporated in year 1907, Infosys Limited incorporated in year
1981. Such companies are incorporated under Companies Act, 1956
(previous company law) are also included in the above definition for being
treated as a Company.
(21) Company limited by guarantee means a company having the liability of
its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in
the event of its being wound up;
(22) Company limited by shares means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them;
Example 4: A shareholder who has paid rupees 75 on a share of face value
rupees 100 can be called upon to pay the balance of rupees 25 only.
(26)) Contributory means a person liable to contribute towards the assets of the
company in the event of its being wound up

Explanation: For the purpose of this clause, it is hereby clarified that a

person holding fully paid-up shares in a company shall be considered as a
contributory.
(27) Control shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;
It is an inclusive definition and relevant for the provisions relating to
subsidiary and holding companies.
(30) Debenture includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of
the company or not;
Provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of
India Act, 1934; and
(b) such other instrument, as may be prescribed by the Central
Government in consultation with the Reserve Bank of India, issued by
a company,
shall not be treated as debenture;

(34) Director means a director appointed to the Board of a company;
(35)) Dividend includes any interim dividend;
(36) Document includes summons, notice, requisition, order, declaration, form

and register, whether issued, sent or kept in pursuance of this Act or under
any other law for the time being in force or otherwise, maintained on paper
or in electronic form;
(37) Employees’ stock option means the option given to the directors, officers
or employees of a company or of its holding company or subsidiary
company or companies, if any, which gives such directors, officers or
employees, the benefit or right to purchase, or to subscribe for, the shares
of the company at a future date at a pre-determined price;

PRELIMINARY 1.11 a
(38) Expert includes an engineer, a valuer, a Chartered Accountant, a Company

Secretary, a Cost Accountant and any other person who has the power or
authority to issue a certificate in pursuance of any law for the time being in
force;
(40) Financial statement in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on
any activity not for profit, an income and expenditure account for the
financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company,
small company and dormant company, may not include the cash flow
statement;
Exemptions
For private companies, the proviso to section 2(40) shall be read as follows:
“Provided that the financial statement, with respect to one person company,
small company, dormant company and private company (if such private
company is a start-up) may not include the cash flow statement;
Explanation. - For the purposes of this Act, the term “start-up” or “start-up
company” means a private company incorporated under the Companies Act,
2013 or the Companies Act, 1956 and recognised as start-up in accordance
with the notification issued by the Department of Industrial Policy and
Promotion, Ministry of Commerce and Industry.”
The exceptions, modifications and adaptations shall be applicable to a private
company which has not committed a default in filing its financial statements
under section 137 of the said Act or annual return under section 92 of the
said Act with the Registrar.

Note: Students may note that ‘Profit and Loss Account’ may also be
referred as ‘Statement of Profit and Loss’ under the Act at some places.
(41) Financial year, in relation to any company or body corporate, means the
period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of a year, the period ending
on the 31st day of March of the following year, in respect whereof financial
statement of the company or body corporate is made up: 3
Provided that where a company or body corporate, which is a holding
company or a subsidiary or associate company of a company incorporated
outside India and is required to follow a different financial year for
consolidation of its accounts outside India, the Central Government may, on
an application made by that company or body corporate in such form and
manner as may be prescribed, allow any period as its financial year, whether
or not that period is a year.4
Note: The term “company incorporated outside India” refers to Foreign

Company incorporated under any applicable laws for the constitution of
company outside India.
(43) Free reserves means such reserves which, as per the latest audited balance
sheet of a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or
revaluation of assets, whether shown as a reserve or otherwise, or
3
With respect to specified IFSC public company & specified IFSC Private company, a proviso
has been inserted vide notification dated 5th January, 2017 stating that above stated company
which is subsidiary of a foreign company, the financial year of the subsidiary may be same as
the financial year of its holding company & approval of Tribunal shall not be required.
4
Provided also that any application pending before the Tribunal as on the date of
commencement of the Companies (Amendment) Ordinance, 2019, shall be disposed of by
the Tribunal in accordance with the provisions applicable to it before such
commencement.
Provided also that a company or body corporate, existing on the commencement of this
Act, shall, within a period of two years from such commencement, align its financial year
as per the provisions of this clause. (this provision is not relevant now, however, it is still
forming part of the Act)

PRELIMINARY 1.13 a
(ii) any change in carrying amount of an asset or of a liability recognized

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

includes any body corporate.
For meaning of “subsidiary company” refer the definition given in section
2(87) of the Companies Act, 2013.
5
Inserted by Exemptions to Government Companies under section 462 of the CA 2013,
notification dated 02.03.2020 (Effective From 03rd March 2020)

(50) Issued capital means such capital as the company issues from time to time
for subscription;
(51) Key Managerial Personnel, in relation to a company, means—
(i) the Chief Executive Officer or the managing director

or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer;

(v) such other officer, not more than one level below the directors who is
in whole-time employment, designated as key managerial personnel
by the Board; and
(vi) such other officer as may be prescribed;
Note: However, till now no other officer has been prescribed.
CEO/ MD/ Manager
CS
WTD
KMP
Such other officer- not one below directors+ in whole time

employment+ designated as KMP
Other prescribed officer
(52) Listed company means a company which has any of its securities listed on
any recognised stock exchange;
Provided that such class of companies, which have listed or intend to list
such class of securities, as may be prescribed in consultation with the
Securities and Exchange Board, shall not be considered as listed companies.

PRELIMINARY 1.15 a
According to rule 2A of the Companies (Specification of definitions details)

Rules, 20146, the following classes of companies shall not be considered as
listed companies, namely:-
(a) Public companies which have not listed their equity shares on a
recognized stock exchange but have listed their –
(i) non-convertible debt securities issued on private placement
basis in terms of SEBI (Issue and Listing of Debt Securities)
Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private
placement basis in terms of SEBI (Issue and Listing of Non-
Convertible Redeemable Preference Shares) Regulations, 2013;
or
(iii) both categories of (i) and (ii) above.

(b) Private companies which have listed their non-convertible debt
securities on private placement basis on a recognized stock exchange
in terms of SEBI (Issue and Listing of Debt Securities) Regulations,
2008;
(c) Public companies which have not listed their equity shares on a
recognized stock exchange but whose equity shares are listed on a
stock exchange in a jurisdiction as specified in sub-section (3) of
section 23 of the Act.
(53) Manager means an individual who, subject to the superintendence, control
and direction of the Board of Directors, has the management of the whole,
or substantially the whole, of the affairs of a company, and includes a
director or any other person occupying the position of a manager, by
whatever name called, whether under a contract of service or not;
(54) Managing Director means a director who, by virtue of the articles of a
company or an agreement with the company or a resolution passed in its
general meeting, or by its Board of Directors, is entrusted with substantial
powers of management of the affairs of the company and includes a
6
As amended by the Companies (Specification of definitions details) Second Amendment
Rules, 2021

director occupying the position of managing director, by whatever name

called.
Explanation.— For the purposes of this clause, the power to do
administrative acts of a routine nature when so authorised by the Board
such as:
• the power to affix the common seal of the company to any document
or
• to draw and endorse any cheque on the account of the company in
any bank or
• to draw and endorse any negotiable instrument or

• to sign any certificate of share or to direct registration of transfer of
any share,
shall not be deemed to be included within the substantial powers of
management;
Explanation.- For any individual to be called as managing director, an
individual shall first be a director duly appointed by the Company under the
provisions of the Companies Act, 2013. This also implies that an individual
who is not a director in the company cannot be appointed as Managing
Director of that company.
(55) Member, in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be

deemed to have agreed to become member of the company, and on
its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of
the company and whose name is entered in the register of members
of the company;
(iii) every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository;
(56) Memorandum means the memorandum of association of a company as
originally framed or as altered from time to time in pursuance of any
previous company law or of this Act;

PRELIMINARY 1.17 a
(57) Net worth means the aggregate value of the paid-up share capital and all
reserves created out of the profits, securities premium account and debit or
credit balance of profit and loss account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation;
Example 6: The statutory auditors of a company were required to issue a
certificate on the net worth of the company as per the requirement of the
management as on 30 th September 2020 computed as per the provision of
section 2(57) of the Companies Act, 2013.
The company had fair valued its property, plant and equipment in the current
year which was mistakenly taken into retained earnings of the company in its
books of accounts. Advise whether this fair valuation would be covered in the net
worth of the company as per the legal requirements.
Note: As per sec 2(57) of the Companies Act 2013, any reserves created out of
revaluation of assets doesn’t form part of net worth. The company fair valued its
property, plant and equipment and took that to retained earnings.
Even if the company has taken the fair valuation to the retained earnings in its
books of accounts, the resultant credit in reserves (by whatever name called)
would be in the category of ‘reserves created out of revaluation of assets’ which is
specifically excluded in the definition of ‘net worth’ in section 2 (57) and hence
should be excluded by the company.
Further the auditors should also consider the matter related to accounting of this
reserve separately at the time of audit of books of accounts of the company.
(58)) Notification means a notification published in the Official Gazette and the
expression “notify” shall be construed accordingly;
(59) Officer includes any director, manager or key managerial personnel or any
person in accordance with whose directions or instructions the Board of
Directors or any one or more of the directors is or are accustomed to act;
(60) Officer who is in default , for the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any

penalty or punishment by way of imprisonment, fine or otherwise, means

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

PRELIMINARY 1.19 a
(62) One Person Company means a company which has only one person as a
member;
(63) Ordinary or special resolution means an ordinary resolution, or as the
case may be, special resolution referred to in section 114 (Ordinary and
Special Resolution);
(64) Paid-up share capital or share capital paid-up means such aggregate
amount of money credited as paid-up as is equivalent to the amount
received as paid-up in respect of shares issued and also includes any
amount credited as paid-up in respect of shares of the company, but does
not include any other amount received in respect of such shares, by
whatever name called;
(65) Postal ballot means voting by post or through any electronic mode;
This definition is related to section 110 to be read with Rule 22 of the

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

capital as may be prescribed 7, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in
a company jointly, they shall, for the purposes of this clause, be
treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
7
Since nothing has been prescribed so far, thus, there is no minimum paid up share capital to
form a private company.

(B) persons who, having been formerly in the employment of the

company, were members of the company while in that
employment and have continued to be members after the
employment ceased,
shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
The requirement of having a minimum paid up share capital shall not apply
to a section 8 company (Formation of companies with charitable objects,
etc.) vide notification dated 5th June 2015.
The above-mentioned exemption shall be applicable to a section 8 company
which has not committed a default in filing its financial statements under
section 137 of the Companies Act, 2013, or annual return under section 92
of the said Act with Registrar. [Vide amendment notification G.S.R. 584(E)
dated 13th June 2017.]
(69) Promoter means a person—
(a) who has been named as such in a prospectus or is identified by the

company in the annual return referred to in section 92, or
(b) who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is
acting merely in a professional capacity;
(70) Prospectus means any document described or issued as a prospectus and
includes a red herring prospectus or shelf prospectus or any notice, circular,
advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate;
(71) Public company means a company which—
(a) is not a private company; and

PRELIMINARY 1.21 a
(b) has a minimum paid-up share capital as may be prescribed 8:

Provided that a company which is a subsidiary of a company, not being a
private company, shall be deemed to be public company for the purposes of
this Act even where such subsidiary company continues to be a private
company in its articles;
Example 8: A Pvt. Ltd. is wholly owned subsidiary of AB Ltd., a public
company incorporated under the Companies Act, 2013. A Pvt. Ltd. wanted
to avail exemptions as provided to private companies. In this case, since A
Pvt. Ltd. is subsidiary of AB Ltd., which is a public company, therefore A Pvt.
Ltd. will be deemed to be a public company and will be not allowed to avail
exemptions provided to a private company.
The requirement of having a minimum paid up share capital shall not apply
to a section 8 company vide notification dated 5th June 2015.
(74) Register of companies means the register of companies

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

(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a
member or director;
(v) a public company in which a director or manager is a director and
holds along with his relatives, more than two per cent of its paid-up
share capital;
8
Since nothing has been prescribed so far, thus, there is no minimum paid up share capital to
form a public company.

(vi) any body corporate whose Board of Directors, managing director or

manager is accustomed to act in accordance with the advice,
directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or
manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the
advice, directions or instructions given in a professional capacity;
9
(viii) any body corporate which is-
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a

subsidiary; or
(C) an investing company or the venturer of the company;
Explanation.- For the purpose of this clause, “the investing company
or the venturer of a company” means a body corporate whose
investment in the company would result in the company becoming an
associate company of the body corporate.
Exemption - This Clause (viii) shall not apply with respect to section 188
(Related Party transactions) to a private company vide Notification No.
G.S.R. 464(E) dated 5th June, 2015.
(ix) such other person as may be prescribed;

As per Rule 3 given in the Companies (Specification of Definitions
Details) Rules, 2014, for the purposes of sub-clause (ix) of clause (76)
of section 2 of the Act, a director (other than an independent director)
or key managerial personnel of the holding company or his relative
with reference to a company, shall be deemed to be a related party.
Example 9: XYZ Pvt. Ltd. has two subsidiary companies, Y Pvt. Ltd. and
Z Pvt. Ltd. Here as per the section 2(76)(viii)(B), Y Pvt. Ltd and Z Pvt.
Ltd. are related parties. However, as per the Notification No. G.S.R.
464(E) dated 5th June, 2015, clause (viii) shall not apply with respect to
9
The above clause (viii) shall not apply with respect to section 188 to a Specified IFSC Public
company vide Notification no. G. S.R. 08(E) dated 4th January, 2017

PRELIMINARY 1.23 a
section 188 to a private company. Therefore Y Pvt. Ltd and Z Pvt. Ltd
are not related parties for the purpose of section 188. However, if Y
Pvt. Ltd and Z Pvt. Ltd. have common directors, then they will be
deemed to be related parties because of section 2(76)(iv).
Example 10: Now suppose, XYZ Ltd. a public company, has two
subsidiary companies, Y Pvt. Ltd and Z Pvt. Ltd. Here as per section
2(71), a private company which is a subsidiary of a public company will
be deemed to be a public company, so Y Pvt. Ltd and Z Pvt. Ltd will
not be eligible to avail exemption under the Notification No. G.S.R.
464(E) dated 5th June, 2015. Therefore, as per section 2(76)(viii)(B), Y
Pvt. Ltd and Z Pvt. Ltd are related parties. In addition, XYZ Ltd. will also
be related Party to Y Pvt. Ltd and Z Pvt. Ltd.
(77) Relative, with reference to any person, means anyone who is related to
another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be
prescribed;
Rule 4 given in the Companies (Specification of Definitions Details) Rules,
2014 provides of the List of Relatives in terms of Clause (77) of section 2.
Accordingly, a person shall be deemed to be the relative of another, if he or
she is related to another in the following manner, namely:-
(1) Father: Provided that the term “Father” includes step-father.
(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.

(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister.

(78)) Remuneration means any money or its equivalent given or passed to any
person for services rendered by him and includes perquisites as defined
under the Income Tax Act, 1961
(84) Share means a share in the share capital of a company and includes stock;
(85) Small company means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more
than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately
preceding financial year does not exceed two crore rupees or such
higher amount as may be prescribed which shall not be more than
one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.
As per the Companies (Specification of Definitions Details) Rules, 2014 10, for
the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not
exceed rupees four crore and rupees forty crore respectively.
Capital- ` 4 crores
Turnover- ` 40 crores
10
As amended by the Companies (Specification of definition details) Amendment Rules, 2022.

PRELIMINARY 1.25 a
Example 11: H Ltd. is the holding company of S Pvt. Ltd. As per the last
profit and loss account for the year ending 31 st March, 2023 of S Pvt. Ltd., its
turnover was to the extent of ` 1.50 crores; and paid up share capital was
` 40 lacs. Since S Pvt. Ltd., as per the turnover and paid up share capital
norms, qualifies for the status of a ‘small company’ it wants to be
categorized as ‘small company’. S Pvt. Ltd. cannot be categorized as a ‘small
company’ because it is the subsidiary of another company (H Ltd.). [Proviso
to section 2(85)].
(86) Subscribed capital means such part of the capital which is for the time
being subscribed by the members of a company;
Example 12: ABC Ltd. was registered with Registrar with an Authorised
capital of ` 2,00,00,000 where each share is of ` 10.
In response to the advertisements made by the company to buy shares in
the company, applications have been received for 10,00,000 shares but
company actually issued 700,000 shares where company has called for ` 8
per share.
All the calls have been met in full except three shareholders who still owe
for their 6000 shares in total.
Amount of various share capital

Authorized share capital = ` 2,00,00,000 (2 crores)
Subscribed capital = 10,00,000 x 10 = ` 1,00,00,000 (1 Crore)
Issued capital = 7,00,000 x 10 = ` 70,00,000

Called-up capital = 7,00,000 x 8 = ` 56,00,000
Paid-up capital = 56,00,000 – (6000 x ` 8) = ` 55,52,000
(87) Subsidiary company or Subsidiary, in relation to any other company (that
is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies:

Provided that such class or classes of holding companies as may be

prescribed shall not have layers of subsidiaries beyond such numbers as
may be prescribed.
Explanation—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the
holding company even if the control referred to in sub-clause (i) or
sub-clause (ii) is of another subsidiary company of the holding
company;
(b) the composition of a company’s Board of Directors shall be deemed to
be controlled by another company if that other company by exercise
of some power exercisable by it at its discretion can appoint or
remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or
subsidiaries;
As per the notification dated 27 th December 2013, Ministry clarified that the
shares held by a company or power exercisable by it in another company in
a fiduciary capacity shall not be counted for the purpose of determining the
holding –subsidiary relationship in terms of the provision of section 2(87) of
the Companies Act, 2013.
(88) Sweat equity shares means such equity shares as are issued by a company
to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name called;
(89) Total voting power , in relation to any matter, means the
total number of votes which may be cast in regard to that
matter on a poll at a meeting of a company if all the
members thereof or their proxies having a right to vote on
that matter are present at the meeting and cast their votes;
(90) Tribunal means the National Company Law Tribunal constituted under
section 408;

PRELIMINARY 1.27 a
(91) Turnover means the gross amount of revenue recognised in the profit and
loss account from the sale, supply, or distribution of goods or on account of
services rendered, or both, by a company during a financial year;
(92) Unlimited company means a company not having any limit on the liability
of its members;
(93) Voting right means the right of a member of a company to
vote in any meeting of the company or by means of postal
ballot.
TEST YOUR KNOWLEDGE

MCQ based Questions
1. Green Ltd. is incorporated on 3 rd January, 2022. As per the Companies Act,
2013, what will be the financial year for the company:
(a) 31st March, 2022
(b) 31st December, 2022
(c) 31st March, 2023

(d) 30th September, 2023
2. Roma along with her six friends has incorporated Roma Trading Ltd. in May
2021. The paid-up share capital of the company is ` 2 crore. Further, in April
2022, she noticed that in the last financial year, the turnover of the company
was well below ` 40 crore. Advise whether the company can be treated as a
‘small company’.
(a) Roma Trading Ltd. is definitely a ‘small company’ since its paid-up
capital is much below ` 4 crore and also its turnover has not exceeded
the threshold limit of ` 40 crore.
(b) The concept of ‘small company’ is applicable only in case of a private
limited company/OPC and therefore, despite meeting the criteria of
‘small company’ it being a public limited company it cannot enjoy
benefits of ‘small company’.

(c) Unlike a private limited company/OPC which automatically becomes a

‘small company’ as soon as it meets the criteria of ‘small company’,
Roma Trading Ltd. being a public limited company has to maintain the
norms applicable to a ‘small company’ continuously for two years so
that, thereafter, it will be treated as a ‘small company’.
(d) If all the shareholders of Roma Trading Ltd. give an undertaking to the
ROC stating that they will not let the paid-up share capital and also
turnover exceed the limits applicable to a ‘small company’ in the next
two years, then it can be treated as a ‘small company’.
3. Abhilasha and Amrita have incorporated a ‘not for profit’ private limited
company which is registered under Section 8 of the Companies Act, 2013. One
of their friends has informed them that their company can be categorized as a
‘small company’ because as per the last profit and loss account for the year
ending 31 st March, 2022, its turnover was less than ` 40 crore and its paid up
share capital was less than ` 4 crore. Advise.
(a) A section 8 company, which meets the criteria of ‘turnover’ and ‘paid -up
share capital’ in the last financial year, can avail the status of ‘small
company’ only if it acquires at least 5% stake in another ‘small
company’ within the immediately following financial year.
(b) If the acquisition of minimum 5% stake in another ‘small company’
materializes in the second financial year (and not in the immediately
following financial year) after meeting the criteria of ‘turnover’ and
‘paid-up share capital’ then with the written permission of concerned
ROC, it can acquire the status of ‘small company’.
(c) The status of ‘small company’ cannot be bestowed upon a ‘not for profit’
company which is registered under Section 8 of the Companies Act,
2013.
(d) A section 8 company, if incorporated as a private limited company (and

not as public limited company) can avail the status of ‘small company’
with the permission of concerned ROC, after it meets the criteria of
‘turnover’ and ‘paid-up share capital’.
4. Kaveri Goods Carriers Private Limited (KGCPL) issued 9% Non-convertible
Debentures worth ` 10 lakhs and thereafter, the directors contemplated to get

PRELIMINARY 1.29 a
them listed. After due formalities, these privately placed non-convertible

debentures of ` 10 lakhs were listed. Which of the following options is
applicable in the given situation:
(a) KGCPL shall be considered as a listed company.

(b) KGCPL shall not be considered as a listed company.
(c) KGCPL shall be considered as a listed company only when minimum
amount of listed privately placed non-convertible debentures is ` 15
lakhs.
(d) KGCPL shall be considered as a listed company only when minimum
amount of listed privately placed non-convertible debentures is
minimum ` 20 lakhs.
5. “Associate company”, in relation to another company, means a company in
which that other company has a significant influence, but which is not
a subsidiary company of the company having such influence and includes
a joint venture company. Here, the words ‘significant influence’ means:
(a) Control of at least 10% of total voting power
(b) Control of at least 15% of total voting power
(c) Control of at least 20% of total voting power
(d) Control of at least 25% of total voting power
Descriptive Questions
1. MNP Private Ltd. is a company registered under the Companies Act, 2013
with a paid-up share capital of ` 2 crore and turnover of ` 60 crore. Explain
the meaning of the “Small Company” and examine the following in
accordance with the provisions of the Companies Act, 2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is ` 30 crore?
2. Flora Fauna Limited was registered as a public company. There are 230
members in the company as noted below:

(a) Directors and their relatives 50
(b) Employees 15
(c) Ex-Employees (Shares were allotted when they were employees) 10
(d) 5 couples holding shares jointly in the name of husband and wife 10
(5*2)
(e) Others 145
The Board of Directors of the company propose to convert it into a private

company. Also advise whether reduction in the number of members is necessary.
ANSWERS
Answer to MCQ based Questions
1. (c) 31st March, 2023
2. (b) The concept of ‘small company’ is applicable only in case of a

private limited company/OPC and therefore, despite meeting
the criteria of ‘small company’ it being a public limited
company cannot enjoy benefits of ‘small company’.
3. (c) The status of ‘small company’ cannot be bestowed upon a ‘not

for profit’ company which is registered under Section 8 of the
4. (b) KGCPL shall not be considered as a listed company.
5. (c) Control of at least 20% of total voting power
Answer to Descriptive Questions

1. Small Company: According to Section 2(85) of the Companies Act, 2013,
Small Company means a company, other than a public company,—
(1) paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more
than ten crore rupees; and

PRELIMINARY 1.31 a
(2) turnover of which as per its last profit and loss account does not
exceed two crore rupees or such higher amount as may be prescribed
which shall not be more than one hundred crore rupees.
Nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
As per the Companies (Specification of Definitions Details) Rules, 2014, for
the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not
exceed rupees four crores and rupees forty crores respectively.
(i) In the present case, MNP Private Ltd., is a company registered under
the Companies Act, 2013 with a paid up share capital of ` 2 crore and
having turnover of ` 60 crore. Since only one criteria of share capital
not exceeding ` 4 crore is met, but the second criteria of turnover not
exceeding ` 40 crore is not met and the provisions require both the
criteria to be met in order to avail the status of a small company, MNP
Ltd. cannot avail the status of small company.
(ii) If the turnover of the company is ` 30 crore, then both the criteria will
be fulfilled and MNP Ltd. can avail the status of small company.
2. According to section 2(68) of the Companies Act, 2013, "Private company"
means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles, except in case of One Person Company,
limits the number of its members to two hundred.
However, where two or more persons hold one or more shares in a

company jointly, they shall, for the purposes of this clause, be treated as a
single member.
It is further provided that -
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that employment
and have continued to be members after the employment ceased,

shall not be included in the number of members.

In the instant case, Flora Fauna Limited may be converted* into a private
company only if the total members of the company are limited to 200. Total
Number of members
(i) Directors and their relatives 50
(ii) 5 Couples (5x1) 5
(iii) Others 145
Total 200
Therefore, there is no need for reduction in the number of members since

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

CHAPTER
2
INCORPORATION OF
COMPANY AND
MATTERS
INCIDENTAL THERETO
LEARNING OUTCOMES
♦ Explain the Formation & Incorporation of company (Private
Limited/ Public Limited), One person company (OPC) and the
formation of Not for Profit Organization (Section 8
Company).
♦ Identify the need for Memorandum of Association (MOA) and
Articles of Association (AOA) and changes incidental thereto.
♦ Know the effect of registration.
♦ Explain and identify the concepts related to registered office
of company.
♦ Understand how documents may be served and filing thereof.
♦ Know about Authentication of documents, proceedings and
contracts and Execution of bills of exchange, etc.

2.2 CORPORATE AND OTHER LAWS
CHAPTER OVERVIEW
This chapter will discuss in detail the provisions contained in Chapter II of the
Companies Act 2013 pertaining to the incorporation of companies and matters
incidental thereto. The scope of this chapter is shown in below figure;
Incorporation of company and related matters
Formation and Memorandum Other

Documents
Incorporation and Articles Provisions
Minimum
Memorandum Registered
members & Service (Sec 20)
(MOA) (Sec 4) Office (Sec 12)
OPC
(Sec 3 & 3A)
Article (AOA) Authentication Commencement

Documents of Business
(Sec 5) (Sec 21)
required (Sec (Sec 10A)
7)
Act to override
Execution Rectify Name
Not for profit MOA/AOA
(Sec 22) (Sec 16)
company (Sec (Sec 6)
8)
Changes in Convert
Effect of Memorandum Company
registration (Sec 13) (Sec 18)
(Sec 9)
Subsidiary
Changes in
Can't hold
Article (Sec 14)
shares in
holding
(Sec 19)
Updation of changes to be
noted in every copy of
MOA/AOA (Sec 15)
Give copy of MOA/AOA to

members (Sec 17)

INCORPORATION OF COMPANY & MATTERS 2.3
INCIDENTAL THERETO
1. INTRODUCTION TO INCORPORATION OF
COMPANIES & PROMOTOR
Chapter II Consists of sections 3 to 22 as well as the Companies
(Incorporation) Rules, 2014.
A company is a separate legal entity from its members. It has perpetual succession
and can be incorporated only for lawful purposes. Prior to incorporation, promotion
activities are essential. Promotion signifies a number of business operations familiar
to the commercial world by which a company is brought into existence 1
Persons who undertake promotion activities in order to incorporate the company

are generally known as promoters. The section 2(69) of Companies Act, 2013 2
(herein after referred to as ‘the Act’) defines the term “Promoter” (already
mentioned in chapter 1 of module; elaborated here). Promoter means a person;
a. Who has been named as promoter in a prospectus; or
b. Who is identified as promoter by the company in the annual return; or
c. Who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
d. In accordance with whose advice, directions or instructions the Board of

Directors of the company is accustomed to act, but shall not include a
person who is acting merely in a professional capacity such as attorney,
technical or functional experts.
Students are advised to take note that above definition serves the purpose to make
a person liable ‘in capacity of promoter’ for fraud through misstatement, but not
highlighting what actually promoters do. Hence, considering the judicial
pronouncements improves our understanding regarding role of promoter.
Promoter is one who undertakes to form a company with reference to a given

project, and to set it going, and who takes the necessary steps to accomplish that
1
Whaley Bridge Printing Co. v. Green (1880) 5 B.D. 109
2
Act 18 of 2013

purpose. 3 To be a promoter, one need not necessarily be associated with the initial
formation of the company; one who subsequently helps to arrange floating of its
capital will equally be regarded as a promoter. 4
Hence, “promoter” denotes any individual, association, partnership or a company

that takes all the necessary steps to incorporate (create and mould) 5 a company
and set it going, in a fiduciary position. 6
Illustration (True/False)
Statement – To be a promoter one necessarily be associated with the initial formation

of the company.
Answer - False, one who subsequently helps company to keep going, raise fund &
advice to board (other than in professional capacity) will equally be regarded as a
promoter.
2. FORMATION OF COMPANY [SECTION 3]

Earlier companies were granted rights by royal charter, but now a company may be
incorporated by either a special Act of the legislature or under the Companies Act,
2013. Accordingly, an incorporated company may be either Chartered Company,
Statutory Company, or Registered Company. Section 3 of the Act deals with
registered companies.
FORMS OF COMPANIES
The Companies are broadly classified into categories shown below in figure.
Definitions of many of these are already covered under chapter 1 of this module.
3
Twycross v. Grant (1877) 2 C.P.D. 469
4
Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch. 392.
5
Erlanger v New Sombrero Phosphate Co. (1878) 48 LJ Ch. 73
6
ibid

INCIDENTAL THERETO
Kind of Companies
Company
Incorporated Companies Un-incorporated
On the basis of mode of registration
Registered Statutory Chartered

Companies Companies Companies
On the basis of liabilty
Limited by Shares Limited by Guarantee Unlimited
Public Private with capital without capital with capital without capital
Public Private Public Private Public Private Public Private
Sub-section 1 to section 3 provides that for lawful purpose, by subscribing their

name to memorandum and complying with requirement of this Act;
a. A public company may be formed by seven (7) or more persons
b. A private company may be formed by two (2) or more persons
c. A one person company (as private company) may be formed by one (1)
person.
Further, sub-section 2 to section 3 provides that, company formed as specified

above may be incorporated either as;
a. Companies limited by shares; or
b. Companies limited by guarantee; or
c. Unlimited liability companies.

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

as shares.
Specified IFSC Public or Specified IFSC Private Company shall be formed only as a
company limited by shares. IFSC Company means a company licensed to set up
businesses in any International Financial Services Center in India, like in Gujarat
International Finance Tec-City.
ONE PERSON COMPANY (OPC)
The Companies Act, 2013 for the first time allowed the formation of company by
just one person with limited liability, called one person company; such a company
is described as a private company under section 3(1)(c). Further section 3(1) along
with rule 3 and 4 of the Companies (Incorporation) Rules, 2014, provides certain
provisions specifically applicable in case of One Person Company listed below;
Who can form one person company?
Only a natural person, other than minor; who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.
Resident in India means a person who has stayed in India for a period of not less
than one hundred and twenty days during the immediately preceding financial year.
OPC can’t be incorporated or converted into a company under section 8 of the Act.
Further, OPC can’t carry out Non-Banking Financial Investment activities including
investment in securities of any body-corporates.
Indicate Name & Consent Nominee
The memorandum of One Person Company shall also indicate the name of the
natural person, other than minor; who is an Indian citizen, whether resident in India
or otherwise (as nominee), along with his prior written consent in the Form No.
INC-3, who shall, in the event of the subscriber’s death or his incapacity to contract
become the member of the company.
Note: This provision is to ensure perpetual succession of legal existence of OPC.

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

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

becomes the member of such OPC.
The name of such nominated person in Form No. INC-32 (SPICe) along with
consent of such nominee obtained in Form No. INC-3 and fee as provided in the
Companies (Registration offices and fees) Rules, 2014 shall be filed with the
Registrar at the time of incorporation of the company along with its memorandum
and articles.
Note: A natural person shall not be member of more than a One Person Company
at any point of time and the said person shall not be a nominee of more than a
One Person Company
Where a natural person, being member in One Person Company in accordance with
this rule becomes a member in another such Company by virtue of his being a
nominee in that One Person Company, such person shall meet the above specified
criteria (can be member of only one OPC) within a period of one hundred and
eighty days.
Withdraw of Consent by Nominee
Such other person (nominee) may withdraw his consent by giving a notice in
writing to such sole member and to the One Person Company
In this case, the sole member shall nominate another person as nominee within
fifteen days of the receipt of the notice of withdrawal and shall send an intimation
of such nomination in writing to the Company, along with the written consent of
such other person so nominated in Form No. INC-3.
Note: Despite name of such other (old nominee) and another person (new
nominee) specified in memorandum, any such change in the name of the person
shall not be deemed to be an alteration of the memorandum.
Replacing Nominee with another one

The member may change the name of the person nominated by him at any time
for any reason including in case of death or incapacity to contract of nominee and
nominate another person (new nominee) after obtaining the prior consent of such
another person in Form No. INC-3.
Member can do so by intimation in writing to the company.

This is not specified, either in Act or rules whether intimation shall be prior to
making change or can be made afterward, but if we consider reasonable
construction the intimation shall be ‘Prior Intimation’.
Any such change in the name of the person shall not be deemed to be an alteration
of the memorandum.
Example - Rajesh has formed a ‘One Person Company (OPC), wherein his wife
Roopali is named as nominee. For the last two years, his wife Roopali is suffering
from terminal illness and due to this hard fact he wants to change her as nominee.
He has a trusted and experienced friend Ramnivas who could be made nominee or
his (Rajesh) son Rakshak who is of seventeen years of age. In the instant case, Rajesh
can appoint his friend Ramnivas as nominee in his OPC and not Rakshak because
Rakshak is a minor.
When Nominee become Member
Where the sole member ceases to be the member and nominee become new
member, then such new member shall nominate within fifteen days of becoming
member, a person (new nominee) who shall in the event of his death or his
incapacity to contract become the member of such company.
Notice of change to Registrar
In all the three case of change discussed above (Withdraw of Consent by Nominee,
Replacing Nominee with another one and When Nominee become Member) the
company within thirty days of receipt of notice of withdrawal of consent by
nominee, intimation of change of nominee from member, or cessation; shall file the
notice with the Registrar of such withdrawal of consent, change or cessation
respectively and intimate the name of such another person (new nominee) in Form
No. INC-4 along with the fee as provided in the Companies (Registration offices
and fees) Rules, 2014 along with the prior written consent of such another person
so nominated in Form No. INC-3.
Note: All the notices and intimations required above shall be in written only,
whether specific form provided or otherwise.
Statement – Even a Non-Resident Indian can form and become member of OPC.
Answer – True, Rule 3(1) of The Companies (Incorporation) Rules, 2014.

INCIDENTAL THERETO
Only a natural person, other than minor; who is an Indian citizen and whether
resident in India or otherwise shall be eligible to incorporate a One Person
Company.
Additional reading
Relaxations available to an OPC include:
♦ Not required to prepare a cash-flow statement with effect of section 2(40).

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

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

2. Such company carries on business for more than six months with reduced
number of members; and
3. Every such person who carries on business after those six months is
cognizant (aware) of the fact that business is carried reduced members
Such members are liable for the payment of the whole debts of the company
contracted during that time (after elapse of six months)
Example – Amar, Akbar, and Anthony along with five of their friends were member
of Harmony Limited. Amar and Akbar died on 18th August 2022, resultantly
members count reduced to 6 and every one aware about it. Harmony limited
continued its operation without increasing members. In March 2023, Company took
loan for business operations, and defaulted in payment thereof. The lender of such
loan can sue company, or Anthony or any of rest of five friends, because members
shall severally liable for said loan in given case.
Statement – Members who knowingly operating the company for more than six months
with less than the minimum number of members specified in Section 3(1) are severally
liable for the payment of all debts contracted by the company during the period since
the number of members was first reduced.
Answer – False, refer section 3A of the Act. Such members are liable severally for the
payment of the whole debts of the company contracted during that time (after elapse
of six months)
4. INCORPORATION OF COMPANY [SECTION 7]

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

INCIDENTAL THERETO
Steps for Incorporation
1. Determine the 2. Reservation of 3. Drafting and

nature of company name by filing an signing of MOA &
(private or public) apllication AOA
6. Submission of
5. Consent of 4. Submission of
statutory
persons nominated MOA and AOA to
declaration of
as directors ROC
compliances
7. Pay fees & 9. File declaration

8. Obtain certificate
amount of stamp about address of
of incorporation
duty Registered office
Note: Now, it is also required to submit a declaration that all the subscribers have
paid the value of shares agreed to be taken by him apart from filling of verification
of registered office before the commencement of business.
FILING OF THE DOCUMENTS AND INFORMATION WITH THE REGISTRAR

[SUB-SECTION 1]
An application for registration of a company shall be filed, with the Registrar within
whose jurisdiction the registered office of the company is proposed to be situated,
in SPICe+(Simplified Proforma for Incorporating company Electronically Plus: INC-
32) along with the fee as provided under the Companies (Registration offices and
fees) Rules, 2014 accompanied by following documents and information;
SPICe+ is an integrated Web form offering 10 services by 3 Central Govt. Ministries

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

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

association shall be signed by director, officer or employee of the body
corporate duly authorized in this behalf by a resolution of the board of
directors.
d. Where the subscriber is a Limited Liability Partnership, it shall be signed by
a partner of the Limited Liability Partnership, duly authorized by a resolution
approved by all the partners of the Limited Liability Partnership:
Note: In either case c or d stated above, the person so authorized shall not,
at the same time, be a subscriber to the memorandum and articles of
Association.
e. Where subscriber to the memorandum is a foreign national residing outside

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

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

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

Extracts from Memorandum of Association of Infosys Limited (Corporate
Identification Number: L85110KA1981PLC013115)

Declaration of Compliance by Professional & Director, Manager or Secretary

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

in practice who is engaged in the formation of the company and
b. a person named in the articles as director, manager or secretary of the

company.
Declaration by subscribers to the memorandum and persons named as the

first directors
A declaration in Form No. INC-9 from each of the subscribers to the memorandum
and from persons named as the first directors (if any) in the articles, stating that all
the documents filed with the Registrar for registration of the company contain
information that is correct and complete and true to the best of his knowledge
and belief
a. He is not convicted of any offence in connection with the promotion,

formation or management of any company, or
b. He has not been found guilty of any fraud or misfeasance or of any breach
of duty to any company under this Act or any previous company law during
the last five years,
Address for correspondence
The address for correspondence till its registered office is established.
Particulars of persons named as the first directors
The particulars i.e name, including surname or family name, the Director
Identification Number (DIN), residential address, nationality and such other
particulars including proof of identity of each person mentioned in the articles as
first director of the company and his interest in other firms or bodies corporate
along with his consent (Form No. DIR-2) to act as director of the company shall be

INCIDENTAL THERETO
filed in Form No. DIR-12 along with the fee as provided in the Companies
(Registration offices and fees) Rules, 2014.
Particulars of subscribers to the memorandum
The following particulars of every subscriber to the memorandum shall be filled;
a. Name (including surname or family name) and recent Photograph affixed
b. Father’s/Mother’s name
c. Nationality, Proof of nationality in case the subscriber is a foreign national
d. Date and Place of Birth (District and State)
e. Educational qualification and Occupation
f. Permanent Account Number
g. Email id and Phone number of Subscriber
h. Permanent residential address and also Present address
i. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile

Bill, provided that Bank statement Electricity bill, Telephone or Mobile bill
shall not be more than two months old
j. Proof of Identity (For Indian Nationals - Voter’s identity card, Passport copy,
Driving License copy, Unique Identification Number (UIN) & for Foreign
nationals and Non Resident Indians – Passport)
k. If the subscriber is already a director or promoter of a company(s), the

particulars relating to name of the company; Corporate Identity Number;
Whether interested as a director or promoter
Where the subscriber to the memorandum is a body corporate, then the following
particulars shall be filed with the Registrar
a. The name of the body corporate and Corporate Identity Number of the
Company or Registration number of the body corporate, if any
b. GLN, if any

c. The registered office address or principal place of business
d. E-mail Id
e. If the body corporate is a company, certified true copy of the board resolution
specifying inter-alia the authorization to subscribe to the MOA
f. If the body corporate is a limited liability partnership or partnership firm,

certified true copy of the resolution agreed to by all the partners specifying
inter alia the authorization to subscribe to the MOA
g. In case of foreign bodies corporate, the details relating to the copy of

certificate of incorporation of the foreign body corporate; & the registered
office address.
As per rule 12 of the Companies (Incorporation) Rules, 2014
In case any of the objects of a company requires registration or approval from

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

Government under Section 406 of the Act shall be obtained by the Nidhi before
commencing the business and a declaration in this behalf shall be submitted at the
stage of incorporation by the Company.
ISSUE OF CERTIFICATE OF INCORPORATION ON REGISTRATION
The Registrar on the basis of documents and information filed, shall register all the
documents and information in the register and issue a certificate of incorporation in
the Form No. INC-11 to the effect that the proposed company is incorporated under
this Act. Certificate of Incorporation shall mention permanent account number of the
company where if it is issued by the Income-tax Department.

INCIDENTAL THERETO
Practical Insight
Certificate of Incorporation
Students are advised to take note;

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

ALLOTMENT OF CORPORATE IDENTITY NUMBER (CIN)

On and from the date mentioned in the certificate of incorporation, the Registrar
shall allot to the company a corporate identity number, which shall be a distinct
identity for the company and which shall also be included in the certificate of
incorporation.
CIN is a 21 alpha-numeric digit based unique identification number, comprising

data sections/elements that reveals the basis aspects about company.
7
Example - Decode the CIN
CIN of Infosys Limited is L85110KA1981PLC013115

The first character – L (reveals listing status, L for listed and U for unlisted, for
instance Infosys is Listed one)
The next five digits – 85110

The next two letters – KA (reveals the Indian state where the company is registered,
for instance KA is for Karnataka)
The next four digits – 1981 (reveals the year of incorporation of a company)
The next three characters – PLC (reveals the company classification - PLC for public,
PTC for private, FTC for foreign, and GOI for government)
The last six digits – 013115 (reveals registration number with concerned ROC)
MAINTENANCE OF COPIES OF ALL DOCUMENTS AND INFORMATION
The company shall maintain and preserve copies of all the documents and
information as originally filed at its registered office, till its dissolution under this
Act.
FURNISHING OF FALSE OR INCORRECT INFORMATION OR SUPPRESSION
OF MATERIAL FACT AT THE TIME OF INCORPORATION (I.E. DURING
INCORPORATION PROCESS)
If any person furnishes any false or incorrect particulars of any information or
suppresses any material information, of which he is aware in any of the documents
filed with the Registrar in relation to the registration of a company, he shall be
liable for action for fraud under section 447.
7
This Example is only for understanding of the students.

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

and Allotment of securities.
COMPANY ALREADY INCORPORATED BY FURNISHING ANY FALSE OR

INCORRECT INFORMATION OR REPRESENTATION OR BY SUPPRESSING ANY
MATERIAL FACT (i.e. POST INCORPORATION)
Where, at any time after the incorporation of a company, it is proved that the company
has been got incorporated by
a. furnishing any false or incorrect information or representation or
b. by suppressing any material fact or information in any of the documents or

declaration filed or made for incorporating such company, or
c. by any fraudulent action,
Then, the promoters, the persons named as the first directors of the company and the
persons making declaration under this section shall each be liable for action for fraud
under section 447.
ORDER OF THE TRIBUNAL
Where a company has been got incorporated by
a. furnishing false or incorrect information or representation, or
b. by suppressing any material fact or information in any of the documents or

declaration filed or made for incorporating such company or
c. by any fraudulent action,
Then, the tribunal (NCLT) on being satisfied that the situation so warrants, in
response to an application made to it, may pass order as it may deem fit including;
a. regulation of the management of the company including changes, if any, in

its memorandum and articles, in public interest or in the interest of the
company and its members and creditors; or
b. direct that liability of the members shall be unlimited; or
c. direct removal of the name of the company from the register of companies; or
d. winding up of the company; or

Provided that before making any such order:
a. the company shall be given a reasonable opportunity of being heard in the

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

CHARITABLE OBJECTS, ETC. [SECTION 8]
The underlying purpose of formation of company is not always making profit
through operating economic activities, it may have charitable or social objects.
To illustrate, Tata Foundation (CIN U85191MH2014NPL253500) and Azim Premji
Foundation (CIN U93090KA2001NPL028740). Students are advised to take note
that 5th data section of both the CIN comprises of ‘NPL’, which signify Not-for-Profit
License Company.
Such companies are licensed by Central Government* under section 8 of the

Companies Act, 2013 8, relevant provisions of section 8 and applicable rules thereto
are described below.
Note: The power of *Central Government under section 8 delegated to:

(i) ROCs 9 to the extent and for purpose of:
8
Act 18 of 2013
9
S.O. 1353(E), dated 21st May, 2014

INCIDENTAL THERETO
● sub-section (1);
● clause (i) to sub-section (4), except for alteration of memorandum in
case of conversion into another kind of company; and
● sub-section (5)
(ii) Regional Directors 10 to the extent and for purpose of:
● clause (i) to sub-section (4), for alteration of memorandum in case of
conversion into another kind of company; and
● sub-section (6)
WHO CAN ISSUE AND GET THE LICENSE UNDER SECTION 8(1)?
As per section 8, the Central Government (ROC in its behalf) may grant such a
licence if it is proved to the satisfaction that a person or an association of persons
proposed to be registered under this Act as a limited company
a. has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any
such other object;
b. intends to apply its profits (if any) or other income in promoting its objects;
and
c. intends to prohibit payment of any dividend to its members.
Note: The use of the word ‘person’ appears to allow even a single person to form
a company for the objects specified. However, as discussed earlier also (under
heading ‘OPC’ of this chapter) that rule 3(5) of the Companies (Incorporation) Rules,
2014 prohibit the OPC to be incorporated or converted into a company under
section 8. Likewise, as per section 2(85), a small company cannot be incorporated
or converted into a section 8 company. A firm may be a member of the company
registered under section 8.
Despite, members liability is limited, the words ‘Limited’ or ‘Private Limited’ shall
not be added to its name. But on registration, the company shall enjoy same
privileges and obligations as of a limited company.
Licence issued may on such conditions as Central Government (ROC) deems fit.
10
S.O. 4090(E), dated 19th Dec, 2016

REGISTRATION OF COMPANY USING LICENSE

After granting licence, an application shall be made to registrar under section 8(1)
itself for registration of company in the manner specified in rule 19 of the
Companies (Incorporation) Rules 2014.
Application for registration
A person or an association of persons desirous of incorporating a company with
limited liability under section 8(1), shall make an application to registrar in Form
SPICe+ (Simplified Proforma for Incorporating company Electronically Plus: INC-
32) along with the fee as provided in the Companies (Registration offices and fees)
Rules, 2014.
Supporting document along with Application
The application furnished as specified above shall be accompanied by the following
documents;
a. The memorandum and articles of association of the proposed company in the
Form No. INC-13 and Form No. INC-31, respectively;
b. An estimate of the future annual income and expenditure of the company for
next three years, specifying the sources of the income and the objects of the
expenditure;
c. The declaration in by an Advocate, a Chartered Accountant, cost accountant
or Company Secretary in practice Form No. INC-14 and by each of the persons
making the application in Form No. INC-15, that;
♦ the memorandum and articles of association have been drawn up in
conformity with the provisions of section 8 and rules made thereunder
and
♦ all the requirements of the Act and the rules made thereunder relating
to registration of the company under section 8 and matters incidental
or supplemental thereto have been complied with;
ALTERATION OF MEMORANDUM AND ARTICLES REQUIRES PRIOR
PERMISSION OF GOVERNMENT
A company registered under this section requires prior permission from;
a. Central Government (power delegated to regional directors) for alteration
of its memorandum and
b. Central Government (power delegated to ROCs) for alteration of its articles.

INCIDENTAL THERETO
CONVERSION INTO ANY OTHER KIND OF COMPANY

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

company,
♦ Income Tax Officer who has jurisdiction over the company,
♦ the Charity Commissioner,
♦ the Chief Secretary of the State in which the registered office of the
company is situated,
♦ any organisation or Department of the Central Government or State

Government or other authority under whose jurisdiction the company
has been operating.
Note: If any of these authorities wish to make any representation to Regional

Director, it shall do so within sixty days of the receipt of the notice, after
giving an opportunity to the Company.
d. A copy of the application with annexures as filed with the Regional Director
shall also be filed with the Registrar.
e. The company shall, within a week from the date of submitting the application
to the Regional Director, publish a notice at its own expense, and a copy of

the notice, as published, shall be sent forthwith to the Regional Director and
the said notice shall be in Form No. INC-19 and shall be published;
♦ at least once in a vernacular newspaper in the principal vernacular
language of the district in which the registered office of the company is
situated, and having a wide circulation in that district, and at least once
in English language in an English newspaper having a wide circulation
in that district; and
♦ on the website of the company, if any, and as may be notified or
directed by the Central Government.
f. The company should have filed all its financial statements and Annual
Returns upto the financial year preceding the submission of the application
to the Regional Director and all other returns required to be filed under the
Act up to the date of submitting the application to the Regional Director
Note: In the event the application is made after the expiry of three months
from the date of preceding financial year to which the financial statement
has been filed, a statement of the financial position duly certified by
chartered accountant made up to a date not preceding thirty days of filing
the application shall be attached.
g. On receipt of the application, and on being satisfied , the Regional Director

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

INCIDENTAL THERETO
REVOCATION OF LICENSE
a. The Central Government (power delegated to regional director) may by order

revoke the licence of the company where;
♦ the company contravenes any of the requirements or the conditions of

this sections subject to which a licence is issued or
♦ the affairs of the company are conducted fraudulently, or in violation of

the objects of the company or prejudicial to public interest,
Note: On revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’

against the company’s name in the register.
Before such revocation a written notice must be served on such company and
opportunity to be heard in the matter shall be given.
b. Where a licence is revoked and the Central Government is satisfied, that it is

essential in the public interest; then after giving a reasonable opportunity of
being heard; by order it may direct that
♦ Company be wound up under this Act. Excess assets on the winding

up or dissolution, after the satisfaction of its debts and liabilities, may
be transferred to;
 Another company registered under this section and having

similar objects, subject to such conditions as the Tribunal may
impose, or
 May be sold and proceeds thereof credited to the Insolvency

and Bankruptcy Fund formed under section 224 of the
Insolvency and Bankruptcy Code, 2016.
♦ Company be amalgamated with another company registered under

this section and having similar objects. The Central Government
empowered with overriding effects to provide the said
amalgamation to form single entity with such constitution, properties,
powers, rights, interest, authorities and privileges and with such
liabilities, duties and obligations as may be specified in the order.

PENALTY/ PUNISHMENT IN CONTRAVENTION

Penalty for offences under section 8 are summarised below;
Offence Penalty
company makes any default company shall, be punishable with fine varying
in complying with any of the from ten lakh rupees to one crore rupees
requirements laid down in
directors and every officer of the company who is
this section
in default shall be punishable with fine varying
from twenty-five thousand rupees to twenty-five
lakh rupees
the affairs of the company every officer in default shall be liable for action
were conducted fraudulently under section 447
FIGURE- SUMMARY OF SUB-SECTION 6 TO 11 OF SECTION 8
Contravention
Licence revoked Punishment
Expression Amalgamate with Company with 10

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

INCIDENTAL THERETO
Additional reading
Relaxations available to a Section 8 Company include;
♦ Can call its general meeting by giving a clear 14 days’ notice instead of 21
days.
♦ Requirement of minimum number of directors, independent directors etc.

does not apply.
♦ Need not constitute Nomination and Remuneration Committee and

Shareholders Relationship Committee.
6. EFFECT OF REGISTRATION [SECTION 9]

Section 9 of the Act provides for the effect of registration of a company, it states;
From the date of incorporation specified in the certificate of incorporation, the

subscribers to the memorandum and all other persons, who may become members
of such company, shall be a body corporate by the name as contained in the
memorandum
Thereafter such body corporate, by the said name; shall be capable of;
a. Exercising all the functions of an incorporated company under this Act and
b. Having perpetual succession
c. Power to acquire, hold and dispose of property, both movable and

immovable, tangible and intangible,
d. To contract and to sue and be sued.

SUMMARY OF SECTION 9
Subscribers to the memorandum

and
All other persons,
who may from time to time, become members of the company
Registration (Certificate of Incorporation Granted)
From the date of incorporation

specified in the certificate of incorporation,
corporate by the name specified in memorandum
beceome body corporate,
Under said name
Exercising all the Power to

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

immovable intangible
7. MEMORANDUM OF ASSOCIATION – MOA

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

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

Section 4 of the Act along with relevant rules from the Companies (Incorporation)
Rules 2014, provides for the requirements with respect to memorandum.
NAME CLAUSE [SECTION 4 (1) (a) READ WITH SUB-SECTION 2 TO 5]

The name of the company with the last word “Limited” in the case of a public limited
company, or “Private Limited” in the case of a private limited company.
The above clause is not applicable in case of section 8 companies.

In case of Specified IFSC Public Company 11 & IFSC Private Company 12, name shall
have the suffix, “International Financial Service Company” or “IFSC”.
Application for reserving name for proposed company [sub-section 4]

A person may make an application in SPICe+ (Simplified Proforma for Incorporating
Company Electronically Plus: INC-32) accompanied by fee, as provided in the
Companies (Registration Offices and Fees) Rules, 2014, to the Registrar for
reservation of a name set out in the application as name of the proposed company.
Resubmission shall be allowed within 15 days, for rectification of defect, if any.
Application for reserving the name for the changing name of existing
company [sub-section 4]
A person may make an application, using web service RUN (Reserve Unique Name)
along with fee as provided in the Companies (Registration Offices and Fees) Rules,
2014, to the Registrar for the reservation of a name set out in the application as
the name to which the company proposes to change its name. Resubmission shall
be allowed within 15 days, for rectification of defect, if any.
11
GSR 08 (E) dated 04.01.2017
12
GSR 09 (E) dated 04.01.2017

Restriction regarding names and use of words & expressions therein [sub-
section 2 and 3]
Sub-section 2 states that the name mentioned in the memorandum shall not be;
a. Identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or
b. Such, use of which by the company will constitute an offence under any law
for the time being in force; or
c. Such, use of which by the company is undesirable in the opinion of the
Central Government (this power of Central Government has been delegated to
ROC) 13
Further, sub-section 3 provides, unless the previous approval of the Central
Government has been obtained; a company shall not be registered with that
name;
d. Which contains any word or expression that is likely to give the impression
that the company is in any way connected with, or having the patronage
of, the Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any State
Government under any law for the time being in force; or
e. Which includes words or expressions namely Board; Commission; Authority;
Undertaking; National; Union; Central; Federal; Republic; President;
Rashtrapati; Small Scale Industries; Khadi and Village Industries Corporation;
Financial Corporation and the like; Municipal;; Development Authority; Prime
Minister or Chief Minister; Minister; Nation; Forest corporation; Development
Scheme; Statute or Statutory; Court or Judiciary; Governor; Bureau; and the
use of word Scheme with the name of Government (s), State, India, Bharat or
any Government authority or in any manner resembling with the schemes
launched by Central, State or local Governments and authorities.
A name is said to ‘resemble’ when difference is only and only of

a. Plural or singular form of words in one or both names (Green Technology Ltd.
is same as Greens Technology Ltd. and Greens Technologies Ltd.)
13
S.O. 1353(E), dated 21st May, 2014.

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

Reservation of name [sub-section 5]

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

due care to ensure that the names are not in contravention of the provisions
of the Emblems and Names (Prevention of Improper Use) Act, 1950. It is
necessary that Registrars are fully familiar with the provisions of the said Act. 14
2. An application for extension of reservation of name under rule 9A of the
Companies (Incorporation) Rules 2014 can be made before expiry of 20 days;
a. For another 20 days (total of 40 days) with fee of ` 1000, which may be further
extend by another 20 day (total of 60 days) with fee of ` 2000.
Or
b. For another 40 days (total of 60 days) with fee of 3000
Cancellation of reserved name [sub-section 5]

Where after reservation of name, it is found that name was applied by furnishing
wrong or incorrect information, then
a. if the company has not been incorporated, the reserved name shall be
cancelled and the person who has made the application shall be liable to a
penalty which may extend to one lakh rupees;
b. if the company has been incorporated, the Registrar may, after giving the
company an opportunity of being heard;
♦ Either direct the company to change its name within a period of 3
months, after passing an ordinary resolution;
♦ Take action for striking off the name of the company from the register
of companies; or
♦ Make a petition for winding up of the company.
14
General Circular No. 29/2014, dated 11th July, 2014

INCIDENTAL THERETO
Example: Mr. Anil Desai, has applied for reservation of company name with a prefix
“Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark in his
name. Later on, it is found that the said prefix is not registered with Mr. Anil Desai,
however, he has formed company by giving incorrect documents/ information
while applying the name of the company. In such case, the Registrar shall take
action as per the provisions of the Act after giving opportunity of being heard.
SITUATION CLAUSE - SECTION 4 (1) (b)

Section 4(1)(b) requires, the memorandum of a company shall mention the name of
state, where registered office is proposed to be situated.
The situation (place) of registered office is important from perspective of;
a. Establishing the domicile of company for the purpose of determining
jurisdictions in context to compliance (ROC, RD etc.), judicial aspects (bench
of NCLT, high court etc.), fiscal aspects (taxation), and for many other
purposes.
b. Place at which the company’s statutory books must normally be kept (in case
of public company, general meeting also required to be conducted at
registered office or in the city where it is situated).
c. Act as the address to which notices and other communications can be sent.
A company shall, within thirty days of its incorporation and at all times thereafter,
have a registered office capable of receiving and acknowledging all
communications and notices as may be addressed to it.
OBJECT CLAUSE & DOCTRINE OF ULTRA VIRES

Section 4(1)(c), requires the memorandum of a company shall state the objects for
which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.
Specified IFSC Public Company & IFSC Private company shall state its objects to
do financial services activities as permitted under the Special Economic Zones
Act, 2005 read with SEZ Rules, 2006 and any matter considered necessary in
furtherance thereof in accordance with license to operate, from International
Financial Services Centre located in an approved multi services Special Economic
Zone, granted by the RBI, SEBI, or IRDA.

A company can’t depart away to do anything beyond or outside its objects stated
in memorandum and if any act done beyond that will be ultra vires and void, same
can’t be ratified even by the assent of the whole body of shareholders.
Note: Acts ultra-vires to the authority of the directors may be ratified by the
company.15 Articles provide for regulations inside scope established by MOA, hence
acts beyond (ultra-vires) the articles, can be ratified by the shareholders provided
the relevant provisions are not beyond the memorandum. To illustrate; One of the
director is authorised to issue cheque of ` 10000, but he issued for ` 12000; company
can ratify so.
It is worth noting here that Memorandum of company can be altered to widen the scope
of objects, but such alteration shall have prospective effect only; not the retrospective,
hence an act once ultra-vires remain so ever.
A company may do anything which is incidental to and consequential upon the
objects specified and such act will not be an ultra vires act. 16 To illustrate for trade
one have rent or own a building, issue invoices, make and receive payments.
Essence of the Doctrine of Ultra Vires
The Doctrine of Ultra Vires is meant to protect shareholders and the creditors of the
company or anyone who deals with the company.
Enunciation of Doctrine of Ultra Vires
The doctrine of ultra vires was first enunciated by the House of Lords in a classic case,
Ashbury Railway Carriage and Iron Co. Ltd. v. Riche. 17
The memorandum of the company in the said case defined its objects thus: “The
objects for which the company is established are to make and sell, or lend or hire,
railway plants to carry on the business of mechanical engineers and general
contractors…….”
The company entered into a contract with M/s. Riche, a firm of railway contractors to
finance the construction of a railway line in Belgium. On subsequent repudiation of
this contract by the company on the ground of its being ultra vires, Riche brought a
case for damages on the ground of breach of contract, as according to him the words
15
Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)
16
Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473
17
(1878) L.R. 7 H.L. 653

INCIDENTAL THERETO
“general contractors” in the objects clause gave power to the company to enter into
such a contract and, therefore, it was within the powers of the company. More so
because the contract was ratified by a majority of shareholders.
The House of Lords held that the contract was ultra vires the company and,
therefore, null and void. The term “general contractor” was interpreted to indicate
as the making generally of such contracts as are connected with the business of
mechanical engineers. The Court held that if every shareholder of the company had
been in the room and had said, “That is a contract which we desire to make, which
we authorise the directors to make”, still it would be ultra vires. The shareholders
cannot ratify such a contract, as the contract was ultra vires the objects clause,
which by Act of Parliament, they were prohibited from doing.
Effects of Doctrine of Ultra Vires
The key effect will be as under;
a. Whenever an ultra vires act has been or is about to be undertaken, any
member of the company can get an injunction to restrain it from proceeding
with it. 18
b. Neither party (even outsider) can sue for enforcement or specific performance
of such agreement. Reason explained under heading Constructive Notice
LIABILITY CLAUSE
Section 4(1)(d) requires, the memorandum of a company shall state;
a. In the case of a company limited by shares the liability of its members is
limited to the amount unpaid, if any, on the shares held by them; and
b. In the case of a company limited by guarantee, the amount up to which
each member undertakes to contribute:
♦ to the assets of the company in the event of its being wound-up while
he is a member or within one year after he ceases to be a member, for
payment of the debts and liabilities of the company or of such debts and
liabilities as may have been contracted before he ceases to be a member,
as the case may be; and
♦ to the costs, charges and expenses of winding-up and
for adjustment of the rights of the contributories among themselves
18
Attorney-General v. Great Eastern Rly Co (1880) 5 AC 473

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

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

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

The memorandum of a company shall be in respective forms specified in Tables A,
B, C, D and E in Schedule I to the Act, as the case shown in figure;
Forms of MOA
Table A
Memorandum of
association of a
company limited by
shares
Table B
Table E
Memorandum of
Memorandum of
association of a
association of an
company limited by
unlimited company
guarantee and not
and having share
having a share
capital
Forms of MOA capital
Table C
Table D
Memorandum of
Memorandum of
association of a
association of an
company limited by
unlimited company
guarantee and
and not having
having a share
share capital
capital
1. As per section 399 of the Act, a memorandum is a public document.

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

8. ARTICLES OF ASSOCIATION – AOA [SECTION 5]

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

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

entrenchment makes it more difficult to change the articles, in manner specified ahead;
19
Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422

INCIDENTAL THERETO
Article may contain provisions for entrenchment [Sub-section 3]
The articles may provide that specified provisions contained in it may be altered
only if conditions that are more restrictive and harder than those applicable in the
case of a special resolution, are met or complied with.
Manner of inclusion of the entrenchment provision [Sub-section 4]

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

Summary of Section 5(4)
At Formation
Timing of
Entrenchment Private Co. - All members
After coming
in existence
Public Co. - Special Resolution
Notice to the registrar of the entrenchment provision [Sub-section 5 read with

Rule 10 of the Companies (Incorporation) Rules, 2014]
The company shall give notice to the Registrar of entrenchment provisions included
in article
a. In the SPICe+(Simplified Proforma for Incorporating company Electronically
Plus: INC-32), along with the fee as provided in the Companies (Registration
offices and fees) Rules, 2014 at the time of incorporation of the company, and
b. In case of existing companies, in Form No. MGT-14 within thirty days from
the date of entrenchment of the articles, along with the fee as provided in the
Companies (Registration offices and fees) Rules, 2014.

Summary of Section 5(5) and Rule 10
At Formation - In the SPICe+

Notice of
Entrenchment After coming in existence - Form No.
MGT-14 within thirty days
MODEL FORMS OF ARTICLES [SUB-SECTION 6 TO 8]

Sub-section 6 provides that the articles of a company shall be in respective forms
specified in Tables, F, G, H, I and J in Schedule I to the Act as specified in figure.
Such forms are called model forms.
Further, sub-section 7 provides leeway to company, in adopting all or any of the
regulations contained in the model articles applicable to such company.
Forms of AOA
Table F
Articles of
association of a
company limited
by shares
Table J Table G
Articles of Articles of
association of an association of a
unlimited company limited
company and not by guarantee and
having share Model forms of having a share
capital AOA capital
Table I Table H
Articles of Articles of
association of an association of a
unlimited company limited
company and by guarantee and
having share not having a
capital share capital

INCIDENTAL THERETO
Students are advised to take note:

Sub-section 8 provides that in case of any company, which is registered after the
commencement of this Act, in so far as the registered articles of such company do
not exclude or modify the regulations contained in the model articles applicable to
such company, those regulations shall, so far as applicable, be the regulations of
that company in the same manner and to the extent as if they were contained in
the duly registered articles of the company – Either exclude or modify expressly
or else it applies what stated in model applicable to company.
Sub-section 9 restricts the scope of section to the articles either registered or
amended under this Act - Hence no provision of this section (section 5) shall be
applicable to articles registered under previous company law; provided not
amended under this Act.
Illustration – Question & Answer
Question – Highlight differences between the MOA and AOA
Answer - The key differences between the MOA and AOA includes;
1. Content - The memorandum contains the fundamental conditions as basis of

incorporation. It lays down the parameters that define relation of company with
outsiders. The Articles contain internal regulations of the company; hence regulate
the relationship between company and the members and members inter se.
2. Supremacy - Memorandum cannot include any clause that is contrary to the

provisions of the law, whereas the articles shall be subordinate to both the law and
memorandum. Therefore, in case on conflict among the two, the MOA shall
prevail.
3. Scope -Memorandum lays down the scope beyond which the activities of the
company cannot go. An act done by a company beyond the scope of the
memorandum are ultra vires and void. They cannot be ratified even by all the
shareholders. Articles provide for regulations inside scope established by MOA,
hence acts beyond the articles can be ratified by the shareholders provided the
relevant provisions are not beyond the memorandum.

9. DOCTRINE OF CONSTRUCTIVE NOTICE AND

DOCTRINE OF INDOOR MANAGEMENT
Both the doctrines carries the counter effect to each other, doctrine of constructive
notice put onus on outsider to be aware of what is stated in MOA and AOA; whereas
doctrine of indoor management protects such outsider from internal irregularities.
DOCTRINE OF CONSTRUCTIVE NOTICE
Essence of Doctrine of Constructive Notice
All those who are dealing with company deemed to be aware of what is stated in
its MOA and AOA, in its true perspective, because both this documents are public
documents.
Section 399* provides that the Memorandum and Articles when registered with
Registrar of Companies ‘become public documents’ and then they can be inspected
by any one by electronic means on payment of the prescribed fee.
Further, Section 17 provides that a company shall on payment of the prescribed
fee send a copy of each of the following documents to a member within seven days
of the request being made by him
a. Memorandum;
b. Articles;
c. Every agreement and every resolution referred to in sub-section (1) of section
117, if and so far as they have not been embodied in the memorandum and
articles.
Any failure will make the company as well as every officer in default liable to a fine
of one thousand rupee for each day during which default continues or one lac
rupee whichever is less.
*Section 399 is not part of syllabus, but essential to develop understanding.

Enunciation of Doctrine of Constructive Notice
The doctrine of constructive notice is based on the rule laid down in Ernest v Nicholls. 20
It was held for the first time that any person who is dealing with the company is deemed
20
(1857) 6 HL Cas 401

INCIDENTAL THERETO
to be familiar with the contents of all the public documents of the company. The
memorandum and the articles of association of every company are registered with the
Registrar of Companies. The office of the Registrar is a public office. Hence, the
memorandum and the articles of association become public documents. It is therefore
the duty of person dealing with a company to inspect its public documents and make
sure that his contract is in conformity with their provisions.
As observed by Lord Hatherley whether a person actually reads them or not, he is to be
in the same position as if he had read them.
Effect of Doctrine of Constructive Notice
Every person (dealing with company) shall be presumed to know the contents of the
documents and understood them in their true perspective.
Absence of notice of MOA and AOA cannot be an excuse to claim relief for
outsiders. 21 Even if the party dealing with the company does not have actual notice
of the contents of these documents, it is presumed that he has an implied
(constructive) notice of them.
Example - One of the articles of a Modern Furniture Limited provides that a cheque
below ` 1 lacs may be signed by single director but if above ` 1 lac shall be signed
by at-least two directors. Similar instructions issued to bank with which MFL have
account, as well. M/s Sagwan Wood Works, a vendor accepts a cheque of
` 2.20 lacs, signed only by single director. Considering Doctrine of Constructive
Notice, the M/s Sagwan Wood Works (payee) has no right to claim, when cheque
will be returned without payment by bank.
Criticism of Doctrine of Constructive Notice
The ‘Doctrine of Constructive Notice’ is an unreal doctrine. People know a company
through its officers and not through its documents. Since it does not take notice of
the realities of business life, hence caused inconvenient for business transaction.
To illustrate, where the directors or other officers of the company were
empowered under the articles to exercise certain powers subject only to certain
prior approvals or sanctions of the shareholders, it is difficult for an outsider to
ascertain whether necessary sanctions and approvals have been obtained before a
certain officer exercises his powers or not.
21
Kotla Venkataswamy v. Chinta Ramamurthy. AIR (1934) Mad 579

Therefore, to mitigate such a situation, those dealing with the company can assume
that if the directors or other officers are entering into those transactions, they
would have obtained the necessary sanctions. This is known as the ‘Doctrine of
Indoor Management’ or Turquand’s Rule, and act as an exception to the
constructive notice.
The Europe Communities Act, 1972 has abrogated this doctrine through effect of
its section 9. Even in India also the Calcutta High Court 22 enforced a security which
was not signed in accordance with the company’s articles.
DOCTRINE OF INDOOR MANAGEMENT
Essence of Doctrine of Indoor Management
The people who are dealing with company are entitled to presume that internal
proceedings and requirements has been duly met.
Enunciation of Doctrine of Indoor Management
The Doctrine of Indoor Management was first laid down in the case of Royal British
Bank v. Turquand 23
The directors of a company were authorised by the articles to borrow on bonds

such sums of money as should from time to time, by a resolution of the company
in general meeting, be authorised to be borrowed. The directors gave a bond to
Turquand without the authority of any such resolution. The question arose whether
the company was liable on the bond. Held, the company was liable on the bond, as
Turquand was entitled to assume that the resolution of the company in general
meeting had been passed.
Rationale of Doctrine of Indoor Management
What happens internally in a company is not a matter of public knowledge. An

outsider can only presume the intentions of a company, but not know the
information he/she is not privy to.
If not for the doctrine, the company could escape creditors by denying the authority
of officials to act on its behalf.
22
Charnock Collieries Co Ltd v. Bholanath Dhar. ILR (1912) 39 Cal 810.
23
(1856) 6 E & B 327

INCIDENTAL THERETO
Exceptions to Doctrine of Indoor Management
Relief on the ground of ‘indoor management’ cannot be claimed by an outsider

dealing with the company in the following circumstances;
a. Knowledge of irregularity - In case this ‘outsider’ has actual knowledge of

irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.
b. Negligence: If with a minimum of effort, the irregularities within a company

could be discovered, the benefit of the rule of indoor management would not
apply. The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.
c. Forgery: The rule does not apply where a person relies upon a document that
turns out to be forged since nothing can validate forgery. A company can
never be held bound for forgeries committed by its officers.
d. Where the question is in regard to the very existence of an agency.
e. Where a pre-condition is required to be fulfilled before company itself can

exercise a particular power. In other words, the act done is not merely ultra
vires the directors/officers but ultra vires the company itself.
Illustration
The doctrine of indoor management is considered to be ______ to the doctrine of

constructive notice.
a. Exception
b. Extension
c. Alternative
d. Not related
Answer – a. Exception

10. ACT TO OVERRIDE MEMORANDUM,

ARTICLES, ETC. [SECTION 6]
The provisions of this Act shall have overriding effect to the provisions contained in;
a. Memorandum of company; or
b. Articles of company; or
c. Any agreement executed by it; or
d. Any resolution passed by the company in general meeting or by its Board of
Directors
Whether the same be registered, executed or passed, as the case may be, before
or after the commencement of this Act
Any provision contained in the memorandum, articles, agreement or resolution, to
the extent in conflict to the provisions of the Act; shall be void.
Example - Section 123 declares that no dividend shall be paid by a company except
out of profits. The force of this section cannot be undone by any provision in the
articles of association, because the articles cannot sanction something which is
forbidden by the Act. Even still it attempts then shall be void.
Note: This section starts with saving clause i.e. “Save as otherwise ….”, means if any
other section of the Act says that provisions contained in the memorandum,
articles, agreement or resolution is superior then we will treat it accordingly.
Example - Section 47 of the Act deals with voting power of members. A notification
dated 5th June, 2015 says that section 47 is applicable to a private company subject
to its Article of Association (AOA). Now if AOA of a private company says that
section 47 is not applicable to it then, in this case AOA will become superior and
section 47 of the Act will not be applicable.
11. EFFECT OF MEMORANDUM AND ARTICLES

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

INCIDENTAL THERETO
a. Members to the company;

b. Company to the members;
c. Members to the members;
To observe all the provisions of the memorandum and of the articles, as signatory
thereof.
Example (Member to the Company)
The articles of association of the Steel Bros & Co Ltd contained clauses to the effect
that on the bankruptcy of a member his shares would be sold to a person and at a
price fixed by the directors. Borland, a shareholder, was adjudicated bankrupt. His
trustee in bankruptcy claimed that he (Borland) was not bound by these provisions
and should be at liberty to sell the shares at their true value. But it was held that
contracts contained in the articles of association is one of the original incidents of
the shares. Shares having been purchased on those terms and conditions, it is
impossible to say that those terms and conditions are not to be observed. 24
Example (Company to the Member)
The articles of the Odessa Waterworks Co provided that "the directors may, with
the sanction of the company at general meeting, declare a dividend to be paid to
the members". Instead of paying the dividend in cash to the shareholders a
resolution was passed to give them debenture bonds. In an action by Mr. Wood, a
member to restrain the directors from acting on the resolution, it was held that
"The question is whether that which is proposed to be done in the present case is
in accordance with the articles of association of the company. Those articles provide
that the directors may, with the sanction of a general meeting, declare a dividend
to be paid to shareholders. Prima facie that means to be paid in cash. The debenture
bonds proposed to be issued are not a payment in cash." 25
Example (Member to the Member)
Mr. Rayfield was a shareholder in a company. Clause 11 of the articles of company

required him to inform the directors of his intention to transfer his shares in the
company and which provided that the directors will take the said shares equally
between them at a fair value. In accordance with this provision the Mr. Rayfield so
24
Borland's Trustee v Steel Bros & Co Ltd (1901) 1 Ch 279
25
Wood v Odessa Waterworks Co (1889) 42Ch D 636

notified the directors (who are members as well), who contended that they were
not bound to take and pay for the shares. They said, articles could not impose such
obligation upon them in their capacity as directors. Their argument was set aside
by the court by treating those directors as members. Accordingly, the directors
(being members) were compelled to take the Mr. Rayfield’s shares at a fair value. 26
Students are advised to take Note;
1. Articles bind the members to the company and the company to the members.
But neither of them is bound to an outsider to give effect to the articles. "No Article
can constitute a contract between the company and a third person."
Example - The articles of association of a company, La Trinidad contained a clause

to the effect that Browne should be a director and should not be removable till
after 1888. He was, however, removed earlier and had brought an action to restrain
the company from excluding him. It was held that there was no contract between
Browne and the company. No outsider can enforce articles against the Company
even if they purport to give him certain rights. 27
2. Further sub-section 2 to section 10 provides, all monies payable by any member

to the company under the memorandum or articles shall be a debt due from him
to the company.
Example - A company can recover calls in arrear from a member as forcefully as it

is recovering loan due.
12. ALTERATION OF MEMORANDUM [SECTION 13]

PROCEDURE OF ALTERATION OF MEMORANDUM
Alteration includes the making of additions, omissions and substitutions. Section

13 of the Act along with Rules 29 to 32 of the Companies (Incorporation) Rules,
2014 provides the provisions that deals with the alteration of the memorandum,
detailed below;
26
Rayfield v Hands (1958) 2 WLR 851
27
Browne v La Trinidad (1887)37 Ch D 1

INCIDENTAL THERETO
Alteration by special resolution [Sub-section 1]

Company may alter the provisions of its memorandum with the approval of the
members by a special resolution. Further, as per section 13(6) (a) company shall file
with the Registrar, such special resolution.
Name change of the company [Sub-section 2 and 3]
As per sub-section 1, any change in the name of a company shall be effected only
with the approval of the Central Government (power delegated to ROC by Central
Government) 28 in writing in Form No. INC-24 along with fee.
However, no such approval shall be necessary where the change in the name of the
company is only the addition/deletion of the word “Private”, on the conversion of
any one class of companies to another class in accordance with the provisions of
the Act.
The change of name shall not be allowed to a company which has not filed annual
returns or financial statements due for filing with the Registrar or which has failed
to pay or repay matured deposits or debentures or interest thereon. Once the
necessary documents filled or payment or repayment made then change shall be
allowed.
As per clause (b) to sub-section 6 to section 13, the approval from the Central
Government, shall be filed with registrar by the company. Practically importance of
provision is demeaned as power of central government is already delegated to
ROC.
Further, as per sub-section 2, on any change in the name of a company, the
Registrar shall enter the new name in the register of companies in place of the
old name and issue a fresh certificate of incorporation in the Form No. INC-25
with the new name and the change in the name shall be complete and effective
only on the issue of such a certificate.
Example – Tata Sky Limited changed its Name to Tata Play Limited (CIN
U92120MH2001PLC130365).
Industrial Insight
On August 24, 1910, a company was registered in India under the name Imperial
Tobacco Company of India Limited. As the Company's ownership progressively
28
Notification S.O. 1353(E), dated 21st May, 2014

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

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

Where Central Government (power of Central Government under this section
conferred (delegated) upon Regional Directors by section 458 of the Act) 29 is of
opinion that name (original or revised/new) of company is identical with or too nearly
resembles to the name by which a company in existence;
a. On its own or
b. On an application by a proprietor of already registered trade mark under the
Trade Marks Act, 1999
Then it may direct the company to change its name;
The company shall change its name or new name, as the case may be, within a period
of three months from the issue of such direction, after adopting an ordinary
resolution for the purpose.
Note - Application by a proprietor of registered trade mark shall be made within three
years of incorporation or registration or change of name of the company
Further, the company, after changing its name or obtains a new name shall give notice
of the change to the Registrar along with the order of the Central Government
(Regional Directors) within a period of fifteen days from the date of such change.
Registrar on receipt of notice shall carry out necessary changes in the certificate of
incorporation and the memorandum.
29
S.O. 4090(E), dated 19th December, 2016

INCIDENTAL THERETO
If a company makes default in complying with any directions for rectification;
a. company shall be punishable with fine of ` 1,000 for every day during which the
default continues and
b. every officer who is in default shall be punishable with fine which shall not be
less than ` 5000 but which may extend to ` 1,00,000.
Change in the registered office [Sub-section 4, 5, and 7]
Application [sub-section 4]
The alteration of the memorandum relating to the place of the registered office
from one State to another shall not have any effect unless it is approved by the
Central Government (power delegated to Regional Director by Central
Government) 30 on an application in Form No. INC-23 along with the fee and shall
be accompanied by the following documents, namely;
a. Copy of Memorandum of Association, with proposed alterations;
b. Copy of the minutes of the general meeting at which the resolution
authorising such alteration was passed, giving details of the number of votes
cast in favour or against the resolution;
c. Copy of Board Resolution or Power of Attorney or the executed vakalatnama,
as the case may be.
d. List of creditors and debenture holders
e. Acknowledgment of service of a copy of the application with complete
annexures to the Registrar and Chief Secretary of the State Government or
Union territory where the registered office is situated at the time of filing the
application.
Advertisement in Newspapers
The Company not more than thirty days before the date of filing the above
application, shall advertise in the Form No. INC-26 in the vernacular newspaper in
the principal vernacular language in the district and in English language in an
English newspaper with wide circulation in the state in which the registered office
of the company is situated.
30
Notification S.O. 4090(E), dated 19th December, 2016

Dispose of the application by central government [sub-section 5]
The Central Government (power delegated to Regional Director by Central

Government) shall dispose of the application of change of place of the registered
office within a period of 60 days. Before passing of order, Central Government may
satisfy itself that-
a. the alteration has the consent of the creditors, debenture-holders and other
persons concerned with the company, or
b. the sufficient provision has been made by the company either for the due
discharge of all its debts and obligations, or
c. adequate security has been provided for such discharge.
Filing of the certified copy of the order with the registrar [sub-section 7]
Where an alteration of the memorandum results in the transfer of the registered
office of a company from one State to another, a certified copy of the order of the
Central Government approving the alteration shall be filed by the company with
the Registrar of each of the States in Form No. INC-28 along with the fee within
thirty days from the date of receipt of certified copy of the order, who shall register
the same.
Issue of fresh certificate of incorporation [sub-section 7]
The Registrar of the State where the registered office is being shifted to, shall issue
a fresh certificate of incorporation indicating the alteration.
Change in the object of the company [Sub-section 8 and 9]
Who can make change in object clause & How? [Sub-section 8]
Where the company has raised money from public through prospectus and has any
un-utilised amount out of the money so raised, can change the objects for which the
money so raised is to be applied only after passing a special resolution through
postal ballot and the notice in respect of the resolution for altering the objects shall
contain the following particulars, namely;
a. Total money received;
b. Total money utilized for the objects stated in the prospectus;

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

INCIDENTAL THERETO
d. Particulars of the proposed alteration or change in the objects;
e. Justification for the alteration or change in the objects;

f. Amount proposed to be utilised for the new objects;
g. Estimated financial impact of the proposed alteration on the earnings and cash
flow of the company;
h. Other relevant information which is necessary for the members to take an
informed decision on the proposed resolution;
i. Place from where any interested person may obtain a copy of the notice of
resolution to be passed.
Advertisement [Sub-section 8]
The advertisement giving details of each resolution to be passed for change in
objects, simultaneously to the dispatch of postal ballot notices to shareholders; shall
be:
a. Published in the newspapers (one in English and one in vernacular language)
which is in circulation at the place where the registered office of the company
is situated and
b. Hosted on the website of the company, if any.
Dissenting shareholders to change of object [Sub-section 8]
The dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with regulations to be
specified by the Securities and Exchange Board of India.
Registrar to certify the registration on alteration of the objects [sub-section 9]
The Registrar shall register any alteration of the memorandum with respect to the
objects of the company and certify the registration within a period of 30 days from the
date of filing of the special resolution under clause (a) to sub-section 6 of this section.
Sub-section 10 provides that alteration made under this section (section 13) shall
have effect only after it has been registered in accordance with provisions of
section.
Sub-section 11 states any alteration of the memorandum, in the case of a company

limited by guarantee and not having a share capital, intending to give any person

a right to participate in the divisible profits of the company otherwise than as a

member, shall be void. This provision is confirming and extending provision to
Section 4(7).
13. ALTERATION OF ARTICLES [SECTION 14]

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

proposed alterations;
b. Copy of the minutes of the general meeting at which the special resolution
authorising such alteration was passed together with details of votes cast in
favour and or against with names of dissenters;
c. Copy of Board resolution or Power of Attorney dated not earlier than thirty
days, as the case may be, authorising to file application for such conversion;
d. Declaration by a key managerial personnel regarding the compliance under
difference section of the Act and rules made there under;
31
Andrews vs. Gas Meter Co. (1897) 1 Ch. 161

INCIDENTAL THERETO
In case of a private company, where post alteration the articles no longer include
the restrictions and limitations which are required to be included in the articles of
a private company under this Act, then such company shall cease to be a private
company, from the date of such alteration.
FILING OF ALTERATION WITH THE REGISTRAR [SUB-SECTION 2]

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

ARTICLES TO BE NOTED IN EVERY COPY
[SECTION 15]
Section 15 of the Act requires that every alteration made in memorandum and
articles of a company shall be noted in every copy. Be it issued in electronic form
or otherwise; because MOA and AOA considered to be public document under
section 399.
If a company makes any default in complying with the stated provisions, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every copy of the articles issued without such alteration.
15. REGISTERED OFFICE OF COMPANY [SECTION 12]

A company is considered to be a separate legal entity from the members. Once a
company gets incorporated, it is required to maintain a registered office. This is a
physical office where the corporation will receive service of legal documents from
ROC or in case of a lawsuit, etc.
This address cannot be a P.O. Box but must be a physical location where someone
is present, to receive service of legal documents during normal business hours. It
could be different from a Head Office or Corporate office.

Section 12 of the Companies Act, 2013 seeks to provide for the registered office of
the companies for the communication and serving of necessary documents,
notices, letters etc. The domicile and the nationality of a company is determined by
the place of its registered officer. This is also important for determining the
jurisdiction of the court.
REGISTERED OFFICE & VERIFICATION THEREOF [SUB-SECTION 1 & 2]
As per sub-section 1, a company shall, within thirty days of its incorporation and
at all times thereafter, have a registered office capable of receiving and
acknowledging all communications and notices as may be addressed to it.
Further, sub-section 2 requires the company shall furnish to the Registrar verification
of its registered office within a period of thirty days of its incorporation.
With the respected specified IFSC public & IFSC private companies, they shall have its
registered office at the IFSC located in the approved multiservice SEZ set up under the
SEZ Act, 2005 read with SEZ Rules, 2006. 32
In case of specified IFSC public & IFSC private company word “thirty days” will be
read as “sixty days”. 33
LABELING OF COMPANY [SUB-SECTION 3]

Every company shall;
a. Paint or affix its name, and the address of its registered office, and keep
the same painted or affixed, on the outside of every office or place in which
its business is carried on, in a conspicuous position, in legible letters, and if
the characters employed are not those of the language/s in general use in
that locality, then also in the characters of that language/s.
b. Have its name engraved in legible characters on its seal, if any;
c. Get its name, address of its registered office and the Corporate Identity
Number along with telephone number, fax number, if any, e-mail and website
addresses, if any, printed in all its business letters, billheads, letter papers and
in all its notices and other official publications; and
d. Have its name printed on hundies, promissory notes, bills of exchange and
such other documents as may be prescribed:
32
G.S.R. 08 (E) dated 4th January, 2017
33
ibid

INCIDENTAL THERETO
Note:
Where a company has changed its name(s) during the last two years, it shall
paint or affix or print, both or all such names in case of point a as well as c above.
In case of One person company, the words ‘‘One Person Company’’ shall be
mentioned in brackets below the name of such company, wherever its name is
printed, affixed or engraved.
NOTICE OF CHANGE & VERIFICATION TO REGISTRAR [SUB-SECTION 4]
Notice of every change of the situation of the registered office after the date of
incorporation of the company, verified in the Form No. INC-22, along with fee as
prescribed shall be given to the Registrar within 30 days of the change, who shall
record the same.
In case of specified IFSC public & IFSC private company word “thirty days” will be read
as “sixty days”. 34
APPROVAL/CONFIRMATION OF CHANGE [SUB-SETION 5]
Change by passing of special resolution
The registered office of the company shall be changed only by passing of special
resolution by a company, outside the local limits of any city, town or village where
such office is situated or where it may be situated later by virtue of a special
resolution passed by the company.
Change of registered office outside the jurisdiction of registrar
Where a company changes the place of its registered office from the jurisdiction of
one Registrar to the jurisdiction of another Registrar within the same State, there
such change is to be confirmed by the Regional Director on an application made
by the company. Application shall be made in Form No. INC-23 along with fee.
In case of specified IFSC public & IFSC private company Board resolution will sufficient,
provided that such Company shall not change the place of its registered office to any
other place outside the said International Financial Services Centre. 35
34
35

COMMUNICATION AND FILING OF CONFIRMATION [SUB-SECTION 6]
The confirmation of change of registered office from jurisdiction of one registrar

to another registrar within the same state, shall be:
a. Communicated within 30 days from the date of receipt of application by

the Regional Director to the company, and
b. The company shall file the confirmation with the Registrar within a period
of 60 days of the date of confirmation who shall register the same, and
c. Certify the registration within a period of thirty days from the date of filing
of such confirmation.
The certificate so issued by registrar shall be conclusive evidence that all the
requirements of this Act with respect to change of registered office have been
complied with and the change shall take effect from the date of the certificate.
If the Registrar has reasonable cause to believe that the company is not carrying
on any business or operations, he may cause a physical verification of the registered
office of the company in such manner as may be prescribed and if any default is
found to be made in complying with the requirements of sub-section (1), he may
without prejudice to the provisions contained in this section regarding the
penalties, initiate action for the removal of the name of the company from the
register of companies under Chapter XVIII.
PENALTIES IN CASE OF DEFAULTS [SUB-SECTION 8]
If any default is made in complying with the requirements of this section, the
company and every officer who is in default shall be liable to a penalty of one
thousand rupees for every day during which the default continues but not
exceeding one lakh rupees.

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

office
Change in Place of Registered office
Within a state Within a State From One State

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

Resolution Resolution Resolution resolution
Notice to Permission Approval of

Notice to of
ROC ROC Central
(30 days) Regional Government
(30 days) Director
30/60/30 60/30
RD/Co./ROC CG/CO.
Conclusive Fresh Certificate

Evidence of Incorporation
16. COMMENCEMENT OF BUSINESS ETC.

[SECTION 10A]
CONDITIONS FOR COMMENCEMENT OF BUSINESS
A company incorporated
a. After the commencement of the Companies (Amendment) Ordinance, 2019

and
b. Having a share capital
Shall commence any business or exercise any borrowing powers only if;
a. The company has filed with the Registrar a verification of its registered
office as provided in sub-section (2) of section 12, and

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

days of the date of incorporation of the company, in Form No. INC-20A, duly
verified by a Company Secretary or a Chartered Accountant or a Cost
Accountant, in practice, along with prescribed fee; that every subscriber to
the memorandum has paid the value of the shares agreed to be taken by
him on the date of making of such declaration
Note:
1. Section 12(2) i.e. Verification of registered office with registrar, discussed earlier
heading i.e. 15 in this chapter.
2. In the case of a company pursuing objects requiring registration or approval from
any sectoral regulators such as the Reserve Bank of India, Securities and Exchange
Board of India, etc., the registration or approval, as the case may be from such
regulator shall also be obtained and attached with the declaration.
OUTCOME WHERE CONDITIONS ARE NOT SATISFIED

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

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

INCIDENTAL THERETO
Example – Modern Furniture incorporated on 27th June 2022, its directors filled a
declaration regarding receipt of payment i.e. value of share (against share
subscribed by subscriber) to registrar on 30th January 2023. The company shall be
charged with penalty of ` 50,000, while penalty of its officers (officers who are in
default) shall be ` 34000 (for 34 days i.e. 4 days of December 2022 and 30 days of
January 2023).
17. CONVERSION OF COMPANIES ALREADY

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

company before conversion and such debts, liabilities, obligations and contracts
may be enforced in the manner as if such registration had not been done.
To put in more simple way, the company remains the same entity as it was before
in respect of its debts and liabilities, obligations or contracts.
18. SUBSIDIARY COMPANY NOT TO HOLD

SHARES IN ITS HOLDING COMPANY
[SECTION 19]
As per section 19 of the Act, a subsidiary company is not allowed to hold shares of
its holding company. The prohibition also extends up to the nominees of the
subsidiary company.
Consequently, any allotment or transfer of shares in a holding company to its
subsidiary shall be void. If the holding company is a guarantee or unlimited
company, not having a share capital the above restriction will apply on holding the
interest, whatever be the form of interest.
The prohibition does not apply to the following cases:

a. Where the subsidiary is concerned as a legal representative of a deceased
member of the holding company; or
b. Where the subsidiary holds such shares as a trustee; or
c. Where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.
Note:
a. Right to vote at a meeting of the holding company only in respect of the
shares held by it as a legal representative or as a trustee
b. The prohibition does not apply to the case of a subsidiary company which
already had shares in its holding company at the commencement of the Act
c. A subsidiary can buy shares in its holding company where it is a part of a
scheme of amalgamation sanctioned by the court/tribunal. 36
36
Himachal Telematics Ltd v Himachal Futuristic Communications Ltd, (1996) 37 DRJ 476

INCIDENTAL THERETO
Example - RPIP Ltd. has invested 51% in the shares of SSP Pvt. Ltd. on 31st March
2019. SSP Pvt. Ltd. have been holding 2% equity of RPIP Ltd. since 2013. SSP Pvt.
Ltd. cannot increase its equity beyond that 2% on or after 31st March 2019.
However, it could continue to hold or reduce its initial 2% stake.
19. SERVICE OF DOCUMENTS [SECTION 20]

Section 20 of the Companies Act, 2013 read with Rule 35 (Service of Documents) of
Companies (Incorporation) Rules, 2014, provides the mode in which documents may
be served on the company, on the members and also on the registrars. Law with
respect to the service of documents is as follows-
SERVING OF DOCUMENT TO COMPANY OR AN OFFICER THEREOF
A document may be served on a company or an officer thereof by sending it to the
company or the officer at the registered office of the company by-
a. registered post, or
b. speed post, or
c. courier service, or
d. leaving it at its registered office, or
e. means of such electronic or other mode as may be prescribed
However, where securities are held with a depository, the records of the beneficial
ownership may be served by such depository on the company by means of
electronic or other mode.
SERVING OF DOCUMENT TO REGISTRAR OR MEMBERS

Save as provided in this Act or the rules made thereunder for filing of documents
with the Registrar in electronic mode, a document may be served on Registrar or
any member by sending it to him by—
a. Post, or
b. registered post, or
c. speed post, or
d. courier, or
e. by delivering at his office or address, or
f. by such electronic or other mode as may be prescribed.

However, a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company in
its annual general meeting.
For the purposes of this section, the term “courier” means a person or agency which
delivers the document and provides proof of its delivery.
The term “electronic transmission” means a communication that creates a record

that is capable of retention, retrieval (recovery) and review, and which may
thereafter be rendered into clearly legible tangible form. It may be made by
♦ Facsimile telecommunication (fax) or electronic mail (email), which the

company or the officer has provided from time to time for sending
communications,
♦ Posting of an electronic message board or network that the Registrar or the

member has designated for those communications, and which transmission
shall be validly delivered upon the posting, or
♦ Other means of electronic communication, in respect of which the company

or the officer has put in place reasonable systems to verify that the sender is
the person purporting to send the transmission.
Further sub-section 2 provides, in case of delivery by post, such service shall be

deemed to have been effected:
a. In the case of a notice of a meeting, at the expiration of 48 hours after the
letter containing the same is posted; and
b. In any other case, at the time at which the letter would be delivered in the
ordinary course of post.
Section 20 (2) shall apply to a Nidhi Company, subject to the modification; that
a. The document may be served only on members who hold shares of more
than ` 1,000 in face value or more than 1% of the total paid-up share capital;
whichever is less.
b. For other shareholders, document may be served by a public notice in
newspaper circulated in the district where the Registered Office of the Nidhi
is situated; and publication of the same on the notice board of the Nidhi.

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

PROCEEDINGS AND CONTRACTS [SECTION 21]
As per section 21 of the Act:
a. A document or proceeding requiring authentication by a company or
b. Contracts made by or on behalf of a company

May be signed by:
a. Any key managerial personnel 37, or
b. An officer or employee of the company duly authorized by the Board in this

behalf.
In the case of specified IFSC public company and IFSC private company, for the
word “An officer” read as “An officer or any other person”. 38
21. EXECUTION OF BILLS OF EXCHANGE, ETC.

[SECTION 22]
Sub-section 1 provides, a bill of exchange, hundi or promissory note shall be
deemed to have been made, accepted, drawn or endorsed on behalf of a
company if made, accepted, drawn, or endorsed in the name of, or on behalf of
or on account of, the company by any person acting under its authority.
Authority can be either express or implied.
37
Who all are included in key managerial person under section 2 (51) already discussed in
chapter 1 of this module
38

Formal deeds can be executed only through a power of attorney. Therefore sub-
section 2 and 3 together provides;
a. A company may, by writing under
 Its common seal, if any,
 Where in case a company does not have a common seal, then

authorized by 2 directors or by a director and the Company Secretary,
wherever the company has appointed a Company Secretary.
b. Authorize any person,
c. Either generally or in respect of any specified matters,
d. As its attorney to execute other deeds on its behalf
e. In any place either in or outside India.
f. Deed signed by such an attorney on behalf of the company and under his
seal shall bind the company.
Summary of sub-section 2
Co. having
common seal
Yes No
*In writing authorise any person Authorisation

(generally or in respect of any shall be made
specified matters) as attorney by:
In India, or 2 directors, or Where the Co. has a

Company Secretary
outside India.
A director
alongwith
Company Secretary

INCIDENTAL THERETO
Note: It can be observed from above that a company may or may not have a
common seal. If company decides to have a common seal then it has to affix the
same for specified matters, execution of deeds on behalf of the company.
The seal is a method of making a physical impression upon the documents of the
company, of its name, etc.
Section 22 comes into play when a person wants to enforce obligations against a
company arising out of a contract and the company denies the contract or disputes
its liability. The section cannot be used where the proceeding is by the company.
SUMMARY
♦ Once an association becomes incorporated it acquires a legal status, it
becomes a legal entity in its own right, separate from the individual
members. It will have perpetual succession i.e. not affected by the death,
insanity, or insolvency of an individual member.
♦ Earlier, the certificate of incorporation considered as conclusive proof, but

as per the Companies Act, 2013, certificate of Incorporation is not conclusive
proof of everything prior to incorporation being in order.
♦ CIN is a 21 alpha-numeric digit based unique identification number,

comprising data sections/elements that reveals the basis aspects about
company
♦ The memorandum of association (MOA) is the document that sets up the

company and the articles of association (AOA) set out how the company is
run, governed and owned. These documents can be altered.
♦ As per Doctrine of Ultra Vires, acts outside the powers conferred under MOA
are ultra-vires. Such acts and resulting agreements are void.
♦ Doctrine of Constructive Notice put onus on those who delas with company
to be aware of what is stated in MOA and AOA, while Doctrine of Indoor
Management protects outsider as an exception to earlier specified doctrine.
♦ A company of any class may convert itself as a company of other class by

alteration of its MOA and AOA.
♦ Certain relaxations are provided in case of specified IFSC companies

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

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. Entrenchment enhance the protection. Modern Furniture Limited, an existing
private company willing to insert the provisions for entrenchment; it
(a) Can amend the article by passing an ordinary resolution

(b) Can amend the article by passing a special resolution
(c) Can amend the article agreed by all the members
(d) Can’t amend article to made the provisions for entrenchment
2. Today, it’s May 2023. Mr. Nilanjan Chattopadhyay a 24 years old Indian youngster,
who returned back to India in January month of 2023 after completing his
education in bio-nutrient and willing to form an OPC; but not sure about the
requirements or pre-conditions regarding eligibility. He read some articles on
provisions related to OPC and concluded;
(i) OPC can be formed by Indian Citizen only
(ii) He can’t form OPC because in immediate previous year he was not resident
in India
(a) Both the conclusions are valid

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

INCIDENTAL THERETO
4. Modern Furniture incorporated on 30th June 2022, its directors filled a declaration
under section 10A (1)(a) regarding receipt of payment i.e. value of share (against
share subscribed by subscriber) to registrar on 18th April 2023. The company and
its officers (officers who are in default) shall be charged with penalty of:
(a) ` 1,11,000 and ` 1,11,000 respectively
(b) ` 50,000 and ` 1,11,000 respectively
(c) ` 1,11,000 and ` 50,000 respectively
(d) ` 50,000 and ` 1,00,000 respectively
5. I.T.C limited changed its name to ITC limited. Company and officers thereat made
default by failing to make alteration in every issued copy of memorandums and
articles. In this context you are required to pick incorrect statements out of
followings
(i) Alternation shall be made to every copy of MOA/AOA because these are
considered as public document.
(ii) Alternation shall be made to every copy be it in electronic form or otherwise.
(iii) Penalty shall be rupees one thousand for every copy of the articles issued
without such alteration.
(a) (ii) only
(b) (iii) only
(c) (ii) and (iii) only
(d) None of (i), (ii) and (iii)
1. Yadav dairy products Private limited has registered its articles along with
memorandum at the time of registration of company in December, 2019. Now
directors of the company are of the view that provisions of articles regarding
forfeiture of shares should not be changed except by a resolution of 90% majority.
While as per section 14 of the Companies Act, 2013 articles may be changed by
passing a special resolution only. One of the directors said that they cannot make
a provision against the Companies Act. You are required to advise the company
on this matter.

2. A group of individuals intend to form a club namely 'Budding Pilots Flying Club'
as limited liability company to impart class room teaching and aircraft flight
training to trainee pilots. It was decided to form a limited liability company for
charitable purpose under Section 8 of the Companies Act, 2013 for a period of
ten years and thereafter the club will be dissolved and the surplus of assets over
the liabilities, if any, will be distributed amongst the members as a usual
procedure allowed under the Companies Act.
Examine the feasibility of the proposal and advise the promoters considering
the provisions of the Companies Act, 2013.
3. Alfa school started imparting education on 1st April, 2010, with the sole
objective of providing education to children of weaker society either free of cost
or at a very nominal fee depending upon the financial condition of their
parents. However, on 30th March 2020, it came to the knowledge of the Central
Government that the said school was operating by violating the objects of its
objective clause due to which it was granted the status of a section 8 company
under the Companies Act, 2013. Describe what powers can be exercised by the
Central Government against the Alfa School, in such a case?
4. XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For
better administrative conveniences the company wants to shift its registered
office from Mumbai to Pune (within the State of Maharashtra, but from Mumbai
ROC to Pune ROC). What formalities the company has to comply with under
the provisions of the Companies Act, 2013 for shifting its registered office as
stated above? Explain.
5. Anushka security equipments limited is a manufacturer of CCTV cameras. It has
raised ` 100 crores through public issue of its equity shares for starting one more
unit of CCTV camera manufacturing. It has utilized 10 crores rupees and then it
realized that its existing business has no potential for expansion because
government has reduced customs duty on import of CCTV camera. Hence imported
cameras from China are cheaper than its own manufacturing. Now it wants to
utilize remaining amount in mobile app development business by adding a new
object in its memorandum of association.
Does the Companies Act allow such change of object? If not, then what advise
will you give to company. If yes, then give steps to be followed.

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

it to carry on real-estate business and any other business that is allied to it.
Due to a downward trend in real-estate business, the management of the
company has decided to take up the business of Food processing activity. The
company wants to alter its Memorandum, so as to include the Food Processing
Business in its objects clause. Examine whether the company can make such
change as per the provisions of the Companies Act, 2013?
7. The persons (not being members) dealing with the company are always
protected by the doctrine of indoor management. Explain. Also, explain when
doctrine of Constructive Notice will apply.
8. Manglu and friends got registered a company in the name of Taxmann advisory
private limited. Taxmann is a registered trademark. After 5 years when the
owner of trademark came to know about the same, it filed an application with
relevant authority. Can the company be compelled to change its name by the
owner of trademark? Can the owner of registered trademark request the
company and then company changes its name at its discretion?
9. Explain in the light of the provisions of the Companies Act, 2013, the
circumstances under which a subsidiary company can become a member of its
holding company.
10. Shri Laxmi Electricals Ltd. (S) is a company in which Hanuman power suppliers
Limited (H) is holding 60% of its paid up share capital. One of the shareholder
of H made a charitable trust and donated his 10% shares in H and ` 50 crores
to the trust. He appoint S as the trustee. All the assets of the trust are held in
the name of S. Can a subsidiary hold shares in its holding company in this way?
11. Explain the provisions of the Companies Act, 2013 relating to the ‘Service of
Documents’ on a company and the members of the company.
12. Ashok, a director of Gama Electricals Ltd. gave in writing to the company that
the notice for any general meeting and of the Board of Directors' meeting be
sent to him only by registered post at his residential address at Kanpur for
which he deposited sufficient money. The company sent notice to him by
ordinary mail under certificate of posting. Ashok did not receive this notice and
could not attend the meeting and contended that the notice was improper.

Decide:
(i) Whether the contention of Ashok is valid.

(ii) Will your answer be the same if Ashok remains in U.S.A. for one month
during the notice of the meeting and the meeting held?
13. Parag Constructions Limited is a leading infrastructure company. One of the directors
of the company Mr. Parag has been signing all construction contracts on behalf of
company for many years. All the parties who ever deal with the company know Mr.
Parag very well. Company has got a very important construction contract from a
renowned software company. Parag constructions will do construction for this site in
partnership with a local contractor Firozbhai. Mr. Parag signed partnership deed with
Firozbhai on behalf of company because he has an implied authority. Later in a
dispute company denied to accept liability as a partner. Can the company deny its
liability as a partner?
ANSWERS
1. (c) Can amend the article agreed by all the members
2. (d) Second conclusion is invalid

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

1. As per section 5 of the Companies Act, 2013 the article may contain provisions
for entrenchment to the effect that specified provisions of the articles may be
altered only if more restrictive conditions than a special resolution, are met.
The provisions for entrenchment shall only be made either on formation of a
company, or by an amendment in the articles agreed to by all the members
of the company in the case of a private company and by a special resolution
in the case of a public company.

INCIDENTAL THERETO
Where the articles contain provisions for entrenchment, whether made on

formation or by amendment, the company shall give notice to the Registrar
of such provisions in prescribed manner.
In the present case, Yadav dairy products Private Limited is a private company
and wants to protect provisions of articles regarding forfeiture of shares. It
means it wants to make entrenchment of articles, which is allowed. But the
company will have to pass a resolution taking permission of all the members
and it should also give notice to ROC regarding entrenchment of articles.
2. According to section 8(1) of the Companies Act, 2013, where it is proved to
the satisfaction of the Central Government that a person or an association of
persons proposed to be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its
objects; and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or
association of persons to be registered as a limited liability company.
In the instant case, the decision of the group of individuals to form a limited
liability company for charitable purpose under section 8 for a period of ten
years and thereafter to dissolve the club and to distribute the surplus of assets
over the liabilities, if any, amongst the members will not hold good, since
there is a restriction as pointed out in point (b) above regarding application
of its profits or other income only in promoting its objects.
Further, there is restriction in the application of the surplus assets of such a
company in the event of winding up or dissolution of the company as
provided in sub-section (9) of Section 8 of the Companies Act, 2013.
Therefore, the proposal is not feasible.
3. Section 8 of the Companies Act, 2013 deals with the formation of companies
which are formed to promote the charitable objects of commerce, art, science,
education, sports etc. Such company intends to apply its profit in promoting
its objects. Section 8 companies are registered by the Registrar only when a

license is issued by the Central Government to them. Since, Alfa School was
a Section 8 company and it had started violating the objects of its objective
clause, hence in such a situation the following powers can be exercised by
the Central Government:
(i) The Central Government may by order revoke the licence of the
company where the company contravenes any of the requirements or
the conditions of this sections subject to which a licence is issued or
where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public interest,
and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’
against the company’s name in the register. But before such revocation,
the Central Government must give it a written notice of its intention to
revoke the licence and opportunity to be heard in the matter.
(ii) Where a licence is revoked, the Central Government may, by order, if it

is satisfied that it is essential in the public interest, direct that the
company be wound up under this Act or amalgamated with another
company registered under this section. However, no such order shall be
made unless the company is given a reasonable opportunity of being
heard.
(iii) Where a licence is revoked and where the Central Government is

satisfied that it is essential in the public interest that the company
registered under this section should be amalgamated with another
company registered under this section and having similar objects, then,
notwithstanding anything to the contrary contained in this Act, the
Central Government may, by order, provide for such amalgamation to
form a single company with such constitution, properties, powers,
rights, interest, authorities and privileges and with such liabilities, duties
and obligations as may be specified in the order.
4. The Companies Act, 2013 under section 13 provides for the process of altering
the Memorandum of a company. Since the location or Registered Office clause
in the Memorandum only names the state in which its registered office is
situated, a change in address from Mumbai to Pune, does not result in the
alteration of the Memorandum and hence the provisions of section 13 (and its
sub sections) do not apply in this case.

INCIDENTAL THERETO
However, under section 12 (5) of the Act which deals with the registered office
of company, the change in registered office from one town or city to another
in the same state, must be approved by a special resolution of the company.
Further, registered office is shifted from one ROC to another, therefore
company will have to seek approval of Regional director.
5. According to section 13 of the Companies Act, 2013 a company, which has
raised money from public through prospectus and still has any unutilised
amount out of the money so raised, shall not change its objects for which it
raised the money through prospectus unless a special resolution is passed by
the company and—
(i) the details in respect of such resolution shall also be published in the
newspapers (one in English and one in vernacular language) which is in
circulation at the place where the registered office of the company is
situated and shall also be placed on the website of the company, if any,
indicating therein the justification for such change;
(ii) the dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with SEBI
regulations.
Company will have to file copy of special resolution with ROC and he will
certify the registration within a period of thirty days. Alteration will be
effective only after this certificate by ROC.
Looking at the above provision we can say that company can add the object
of mobile app development in its memorandum and divert public money into
that business. But for that it will have to comply with above requirements.
6. Alteration of Objects Clause of Memorandum
The Companies Act, 2013 has made alteration of the memorandum simpler
and more flexible. Under section 13(1) of the Act, a company may, by a special
resolution after complying with the procedure specified in this section, alter
the provisions of its Memorandum.
In the case of alteration to the objects clause, section 13(6) requires the filing
of the Special Resolution by the company with the Registrar. Section 13 (9)
states that the Registrar shall register any alteration to the Memorandum with
respect to the objects of the company and certify the registration within a

period of thirty days from the date of filing of the special resolution by the
company.
Section 13 (10) further stipulates that no alteration in the Memorandum shall
take effect unless it has been registered with the Registrar as above.
Hence, the Companies Act, 2013 permits any alteration to the objects clause
with ease. Vivek Industries Limited can make the required changes in the
object clause of its Memorandum of Association.
7. Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not
inquire whether internal proceedings relating to the contract are followed
correctly, once they are satisfied that the transaction is in accordance with
the memorandum and articles of association.
Stakeholders need not enquire whether the necessary meeting was convened
and held properly or whether necessary resolution was passed properly. They
are entitled to take it for granted that the company had gone through all
these proceedings in a regular manner.
The doctrine helps to protect external members from the company and states
that the people are entitled to presume that internal proceedings are as per
documents submitted with the Registrar of Companies.
The doctrine of indoor management is opposite to the doctrine of
constructive notice. Whereas the doctrine of constructive notice protects a
company against outsiders, the doctrine of indoor management protects
outsiders against the actions of a company.
This doctrine also is a safeguard against the possibility of abusing the
doctrine of constructive notice.
Exceptions to Doctrine of Indoor Management (Applicability of doctrine

of constructive notice)
(i) Knowledge of irregularity: In case an ‘outsider’ has actual knowledge
of irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.

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

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

which a company had been previously registered, it may direct the
company to change its name. Then the company shall by passing an
ordinary resolution change its name within 3 months.
♦ is identical with a registered trade mark and owner of that trade mark apply
to the Central Government within three years of incorporation of
registration of the company, it may direct the company to change its name.
Then the company shall change its name by passing an ordinary resolution
within 6 months.
Company shall give notice to ROC along with the order of Central
Government within 15 days of change. In case of default company and
defaulting officer are punishable.
In the given case, owner of registered trade-mark is filing objection after 5
years of registration of company with a wrong name. While it should have filed
the same within 3 years. Therefore, the company cannot be compelled to
change its name.
As per section 13, company can anytime change its name by passing a special
resolution and taking approval of Central Government. Therefore, if owner of
registered trademark request the company for change of its name and the
company accepts the same then it can change its name voluntarily by
following the provisions of section 13.

9. In accordance with the provisions of Section 19 of the Companies Act, 2013,

a subsidiary company cannot either by itself or through its nominees hold
any shares in its holding company and no holding company shall allot or
transfer its shares to any subsidiary companies. Any such allotment or transfer
of shares in a company to its subsidiary is void. The section however does not
apply where:
(1) the subsidiary company holds shares in its holding company as the legal
representative of a deceased member of the holding company,
(2) the subsidiary company holds such shares as a trustee, or
(3) the subsidiary company was a shareholder in the holding company even
before it became its subsidiary.
10. According to section 19 of the Companies Act, 2013 a company shall not hold
any shares in its holding company either by itself or through its nominees.
Also, holding company shall not allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.
Following are the exceptions to the above rule;

(a) Where the subsidiary company holds such shares as the legal
representative of a deceased member of the holding company; or
(b) Where the subsidiary company holds such shares as a trustee; or

(c) Where the subsidiary company is a shareholder even before it became
a subsidiary company of the holding company, but in this case, it will
not have a right to vote in the meeting of holding company.
In the given case, one of the shareholders of holding company has transferred
his shares in the holding company to a trust where the shares will be held by
subsidiary company. It means now subsidiary will hold shares in the holding
company. But it will hold shares in the capacity of a trustee. Therefore, we can
conclude that in the given situation S can hold shares in H.
11. Under section 20 of the Companies Act, 2013 a document may be served on
a company or an officer thereof by sending it to the company or the officer
at the registered office of the company by registered post or by speed post
or by courier service or by leaving it at its registered office or by means of

INCIDENTAL THERETO
such electronic or other mode as may be prescribed. However, in case where

securities are held with a depository, the records of the beneficial ownership
may be served by such depository on the company by means of electronic or
other mode.
Under section 20 (2), save as provided in the Act or the rule thereunder for
filing of documents with the registrar in electronic mode, a document may be
served on Registrar or any member by sending it to him by post or by
registered post or by speed post or by courier or by delivering at his office or
address, or by such electronic or other mode as may be prescribed. However,
a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company
in its annual general meeting.
12. According to section 20(2) of the Companies Act, 2013, a document may be
served on Registrar or any member by sending it to him by post or by
registered post or by speed post or by courier or by delivering at his office or
address, or by such electronic or other mode as may be prescribed.
Provided that a member may request for delivery of any document through
a particular mode, for which he shall pay such fees as may be determined by
the company in its annual general meeting.
Thus, if a member wants the notice to be served on him only by registered
post at his residential address at Kanpur for which he has deposited sufficient
money, the notice must be served accordingly, otherwise service will not be
deemed to have been effected.
Accordingly, the questions as asked may be answered as under:
(i) The contention of Ashok shall be tenable, for the reason that the notice
was not properly served.
(ii) In the given circumstances, the company is bound to serve a valid notice
to Ashok by registered post at his residential address at Kanpur and not
outside India.
13. As per section 22 of the Companies Act, 2013 a company may authorise any
person as its attorney to execute deeds on its behalf in any place either in or
outside India. But common seal should be affixed on his authority letter or
the authority letter should be signed by two directors of the company or it

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

CHAPTER
3
PROSPECTUS
AND ALLOTMENT
OF SECURITIES
LEARNING OUTCOMES

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

♦
CHAPTER OVERVIEW
This chapter explains the provisions of Chapter III of the Companies Act, 2013 1
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 23 to
42 dealing with the prospectus and allotment of securities. Due to the inherent
differences between the nature of public and private companies in addition to
restrictions on the later, Chapter III of the Act contained the provisions for issue
of securities under two distinct headings (parts):
Part I - Public offer (Section 23-41);
Part II - Private placement (Section 42).
The provisions contained in Part I and part II are supplemented by the Companies
(Prospectus and Allotment of Securities) Rules, 2014.
Following diagram depicts the arrangement of relevant sections:
Issue of Prospectus and related

matters [Sec. 23, 26, 29, 31, 32,
25, 28, 27 & 40]
Allotment of securities [Sec. 39]

Prospectus and Allotment of
securities [Sec. 23-42]
Penalties [Sec. 34, 35, 36, 37 &

447*]
In a Public In a Private
company company
Private Placement [Sec. 42]
* Section 447 contains provisions relating to ‘punishment for fraud’.
1
Act 18 of 2013

PROSPECTUS AND ALLOTMENT OF SECURITIES 3.3
1. INTRODUCTION
Chapter III Consists of sections 23 to 42 as well as the Companies
(Prospectus and Allotment of Securities) Rules, 2014.
One of the advantages that a company has over other forms of business is its
ability to raise capital, either from the public at large or from a set of identified
persons. When the capital is raised from the public at large, it is done through a
‘Public Offer’ and when it is raised from a selected group of identified persons it
is carried out through a ‘Private Placement’ of securities. Where the capital is
raised from the public at large through ‘Public Offer’, an advertisement shall be
issued in accordance with applicable provisions to protect the prospective
investors from fraud. Securities are allotted against those applications that are
received in full and in accordance with the advertisement issued. Such securities
may be listed on an appropriate segment of a recognised stock exchange.
This chapter will explain the provisions relating to raising of capital i.e. issue of
prospectus, allotment of securities, and other matters incidental thereto.
2. PUBLIC OFFER AND PRIVATE PLACEMENT

[SECTION 23]
As per Section 23 (1), a public company may issue securities;
a. To public through prospectus (herein referred to as “public offer”) by
complying with the provisions specified in Section 23 to Section 41 of the
Act; or
b. Through private placement by complying with the provisions specified in
section 42 of the Act; or
c. Through a rights issue or a bonus issue in accordance with the provisions of
the Act and in case of a listed company or a company which intends to get
its securities listed also with the provisions of the Securities and Exchange
Board of India Act, 1992 2 and the rules and regulations made thereunder.
2
Act 15 of 1992

Public offer includes initial public offer (IPO) or further public offer (FPO) of
securities to the public by a company, or an offer for sale of securities (OFS) to the
public by an existing shareholder, through issue of a prospectus.
Students are advised to note; that Further Public Offer also known as Fellow-on
Public Offer, whereas OFS is sometimes called deemed Public Offer.
As per Section 23(2), a private company may issue securities;

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

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

Right Issue
Public Offer Placement Issue Placement
IPO
Right Issue
FPO
Bonus
OFS Issue

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

Meaning of Securities
As per section 2 (81), the term ‘securities’ means the securities as defined in
clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 3. The
definition given thereunder provides, “Securities” include;
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
(ia) Derivative;
(ib) Units or any other instrument issued by any collective investment scheme to
the investors in such schemes;
(ic) Security receipt as defined in clause (zg) of section 2 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 4.
(id) Units or any other such instrument issued to the investors under any mutual
fund scheme.
Explanation - For the removal of doubts, it is hereby declared that
“Securities” shall not include any unit linked insurance policy or scrips or any
such instrument or unit, by whatever name called, which provides a
combined benefit risk on the life of the persons and investment by such
persons and issued by an insurer referred to in clause (9) of section 2 of the
Insurance Act, 1938 5.
(ie) Any certificate or instrument (by whatever name called), issued to an investor
by any issuer being a special purpose distinct entity which possesses any
debt or receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be;
(ii) Government securities;
(iia) Such other instruments as may be declared by the Central Government to
be securities; and
(iii) Rights or interests in securities.
3
Act 42 of 1956
4
Act 54 of 2002
5
Act 4 of 1938

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

23 of the Act inserted vide, the Companies (Amendment) Act, 2020 6 (enforced
w.e.f 28th September 2020)
Prior to Amendments of 2020, Indian companies can access the overseas equity
markets only through depository receipts (e.g. American Depository Receipts
(ADRs) or Global Depository Receipts (GDRs) or by listing their debt securities
(such as, foreign currency convertible bonds, masala bonds, etc.) on foreign
markets.
Since more and more businesses are going global & capital raised from across the
border is cost effective, hence section 23(3) is inserted to open ways of overseas
direct listing for notified class of public companies by allowing them to issue
notified securities for the purpose of listing on permitted stock exchanges in
permissible foreign jurisdictions or such other jurisdictions as may be prescribed.
Note: How overseas direct listing is different from ADRs/GRDs?

In a direct listing, a domestic company can enlist itself with the stock exchanges
of other countries without an intermediary. Unlike American Depositary Receipts
(ADRs) and Global Depositary Receipts (GDRs), the Indian company can directly
offer their shares in foreign markets instead of giving them to a foreign depository
bank. Direct listing excludes intermediaries, decreases the overall transaction cost,
and increases transparency.
Section 23(4) of the Act empowers the Central Government to exempt any class
or classes of public companies from complying with the provisions of Chapter III
(Prospectus and Allotment of Securities), Chapter IV (Share Capital and
Debentures), section 89 (Declaration in respect of a beneficial interest in any
share), section 90 (Register of significant beneficial owners in a company) or
section 127 (Punishment for failure to distribute dividends) of the Act, by issuing
notification.
Illustration (MCQ)
Which of following shall be considered as securities for purpose of section 23 of the
Act;
(i) Unit linked insurance policy
6
Act 29 of 2020

(ii) Actionable claim regarding mortgaged debt
(iii) Securities issued by National Asset Reconstruction Ltd

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

(c) Both (ii) and (iii) only
(d) None of the (i), (ii), and (iii)
Answer – (c) (Refer section 2(h) of the Securities Contracts (Regulation) Act, 1956 7)
3. REGULATION OF ISSUE AND TRANSFER OF

SECURITIES ETC. [SECTION 24]
Securities and Exchange Board of India is empower to administer those provisions
under chapter III and IV of the Act, which pertains to issue & transfer of securities
and non-payment of dividend; by listed companies or those companies which
intend to get their securities listed on any recognised stock exchange in India,
by making regulations in this behalf.
Additional Reading
Being capital market regulator, the power is conferred upon Securities and
Exchange Board of India under section 11, 11A, 11B and 11D of the Securities and
Exchange Board of India Act 1992 8
All other matters (including matters relating to prospectus, return of allotment,

redemption of preference shares) specifically provided in this Act, shall be administered
by the Central Government, Tribunal or the Registrar, as the case may be.
Statement – The powers to administer the matters pertaining to redemption of preference

share by listed company vested with the Securities and Exchange Board of India.
Answer – False (Refer Section 24(1)(a)
7
Act 42 of 1956
8
Act 15 of 1992

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

Shelf Red herring
described or advertisement or other
prospectus prospectus
issued as a document inviting
(section 31) (section 32)
prospectus offers from the public
Out of four constituents of prospectus definition, first three are quite clear; but
the fourth one i.e. document inviting offer from the public (considered as
deemed prospectus or prospectus by implication) need to be decoded further
that too in context to section 25 and landmark judicial pronouncements
(elaborated later).
Other elements are also explained/elaborated at relevant place in this chapter.
DEEMED PROSPECTUS [SECTION 25] - THE DOCUMENTS CONTAINING

OFFER OF SECURITIES FOR SALE
Deemed Prospectus
Sub-section 1 provides, where a company allots or agrees to allot any of its
securities with a view that those securities (all or any part thereof) being offered

for sale to the public, any document by which the offer is made; shall deemed
to be a prospectus (issued by the company) for all purposes.
All the enactments and rules of law containing provisions pertaining to prospectus,
matters to be stated, liability for misstatement shall apply to such deemed
prospectus; subject to section 25(3) and 25(4).
The purpose of deeming provision is to protect gullible investors from various

fraudulent practices.
Presumption of view (intent to offer securities for sale to public) under sub-
section 1
As per sub-section 2, the allotment is presumed to have been made with a view
of offering them to the public where either of following conditions fulfilled;
a. Securities are offered to the public within six months of allotment, or
b. Where the full consideration has not been received by the company at the
date of offer to the public.
It means, in case if any of above two conditions met; then issuing document shall
deemed to be Prospectus under sub-section 1.
Sub-section 1 and 2 to section 25 are not exhaustive in nature, there may be

certain other situations when issuing document may construe as deemed
prospectus.
SEBI v Kunnamkulam Paper Mills Ltd 9
Where a rights issue is made to existing members with a right to renounce in
favour of others, if the number of such others exceeds fifty, it also becomes a
deemed prospectus.
Requirements in case of Deemed Prospectus

Matters to be stated additionally
As per Sub-section 3, following matters need to be stated (in the deemed
prospectus i.e. the document through which offer of securities to public is made
under sub-section 1) in addition to those required under section 26;
a. A statement of the net amount received or to be received as consideration
for the securities to which the offer relates.
9
(2013)178 Comp Cas 371 (Ker)

b. The time and place at which the underlying contract for allotment may be
inspected.
c. The persons making the offer were named in the prospectus as directors
of the company.
Signing of deemed prospectus (on behalf of company)
Further, as per Sub-section 4, it is sufficient, if the document (deemed
prospectus i.e. through which offer of securities to public is made under sub-
section 1) on behalf of the company is signed by its two directors.
Statement – The matters specified under section 25(3) need to be stated in substitution
of matters stated under section 26.
Answer – False [Section 25(3) provides three matters that need to be stated in
addition to matters required to be stated in prospectus under section 26.]
Additional Reading – For better understanding only

Since the provisions of the Act relating to prospectus and the penal provisions are
attracted only when the prospectus (including deemed prospectus) has been
issued. "Issued" means issued to the public.
Hence In context of ‘Invitation to Public’ ‘Inviting offer from the Public’ or ‘Offer
of securities for sale to Public’ two valid questions arise here:
1. What constitute as ‘Public’? Does only ‘Public at large’ constitute as Public?
The term public is not restricted to the public at large. It includes any section of
the public, it is immaterial howsoever such section is selected.
Public connotes persons not personally known to the promoter as distinguished
from his own friends, relatives, connections and acquaintances.
Re, South of England Natural Gas and Petroleum Co. Ltd 10
Facts – 3000 copies of a document which was offered for subscription of shares in
a company and which was headed “For Private Circulation only,” circulated to the
members of certain number of gas companies only.
Legal Question – Was this a prospectus? Should it contain the particulars required
by the Act?
10
(1911) 1 Ch. 573 | 104 LT 378

Decision – It was decided that though the offer was only to limited class, it was
not less than an offer to the public in any sense, because those persons from
limited class were nonetheless the public. Hence, the distribution of a document
entitled, “For Private Circulation only” offering the company shares was an offer to
the public and their document was a prospectus. Therefore, it must contain the
particulars required by the Act.
2. Whether a single private communication tantamount to issue; can it be
construe to a prospectus to attract the provisions of the Act?
The term "issue" is not satisfied by a single private communication. There must
be some measure of publicity, however modest. A private communication is not
thus open and does not construe to be a prospectus, hence not attracting the
provisions of the Act.
Nash Vs Lynde 11
Facts – Nash applied for certain shares in a company on the basis of a document
sent to him by Lynde, the managing director of the company. The document was
marked ‘strictly private and confidential’. The document did not contain all the
material facts required by the Act to be disclosed. Nash filed a suit for
compensation for loss suffered by him by reason of the Omissions.
Decision – Suit was dismissed.
Viscount Summer’s landmark dictum in this case is worth to consider here as

basis of above answer. “The public in the definition is of course a general word, no
particular number are prescribed. Anything from two to infinity may serve, perhaps
even one if he is intended to be the first of a series of subscribers but made further
proceedings needless by himself subscribing the whole. The point is that the offer
is such as to be opened to anyone who brings his money and applies in due from,
whether the prospectus was addressed to him on behalf of the company or not. A
private communication is not thus open and does not construe to be a
prospectus.”
Illustration (Q&A)
Company's prospectus was given to a solicitor of the company and he forwarded it
to one of his clients despite it was marked strictly private, who applied for share
11
(1929) AC 158 | 140 LT 146 (HL)

based upon same. Later filed suit for damages. Will this communication amount to
an issue to the public and whether the provisions of the Act are attracted?
Answer - No, this did not amount to an issue to the public and accordingly the
provisions of the Act relating to liability for omissions, etc. not attracted here.
(Refer Nash Vs Lynde 12)
MATTERS TO BE STATED IN PROSPECTUS [SECTION 26] – CONTENTS &

REQUIREMENTS AS TO PROSPECTUS
Requirements as regards to date, sign, and contents to be included [Sub-
section 1]
Prospectus shall be dated and signed and shall state such information and set
out such reports on financial information as may be specified by the Securities
and Exchange Board of India (SEBI) in consultation with the Central Government.
Proviso to sub-section 1 says the regulations made by SEBI in respect of such
financial information or reports on financial information shall apply until the SEBI
specifies the information and reports on financial information u/s 26(1).
A declaration shall be made affirming the compliance of the provisions of this
Act (the Companies Act 2013 13)
A statement shall also include to the effect that nothing in the prospectus is
contrary to the provisions of;
a. The Companies Act, 2013 14
b. Securities Contract (Regulation) Act, 1956 15
c. Securities and Exchange Board of India Act, 1992 16

d. Rules and Regulations made under above three statutes.
The provisions of Section 26(1) shall not apply [Sub-section 2]
a. If prospectus issued to existing members or debenture-holders of a

company;
12
(1929) AC 158 | 140 LT 146 (HL)
13
Act 18 of 2013
14
ibid
15
Act 42 of 1956
16
Act 15 of 1992

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

uniform with shares or debentures previously issued and for the time being
dealt in or quoted on a recognised stock exchange.
Date of publication of prospectus [Explanation to Sub-section 3]
The date indicated in the prospectus shall be deemed to be the date of its
publication.
Filing of signed copy with Registrar [Sub-section 4]
A prospectus shall not be issued unless a signed copy of such prospectus has
been delivered to the Registrar for filing.
Such copy shall be signed by every person who is named as either director or
proposed director in such prospectus. Duly authorised attorney can sign in
representative capacity.
Example – Ms. Sarika, executive director of leading Fintech Company has to fly to
Davos to attend World Economic Forum meet.
While company secretary of the company intended to file a copy of prospectus

with registrar upcoming, Ms. Sarika authorised in writing, Mr. Gautam for signing
of such copy on her behalf.
Date of filing copy of prospectus with registrar is important in context of concept

of validity of prospectus for issue, discussed under section 26(8)
Conditions in regard to Experts’ statement [Sub-section 5]
A prospectus issued under section 26(1) shall not include a statement purporting
to be made by an expert, if any of following condition met;
a. If he is engaged or interested in the formation or promotion or management
of the company, or
b. If the expert has not given written consent to the issue of the prospectus, or
c. If he has withdrawn the consent before the delivery of a copy of the
prospectus to the Registrar for filing

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

included) shall also be included in the prospectus.
Purpose of sub-section 5 is to ensure independence of expert to protect the

financial interest of prospective investor who may invest in company after relaying
upon the statement of such expert.
Expert as per Section 2(38) of the Act, includes an engineer, a valuer, a Chartered
Accountant, a Company Secretary, a Cost Accountant and any other person who
has the power or authority to issue a certificate in pursuance of any law for the
time being in force.
Disclosure on the face of prospectus [Sub-section 6]

Prospectus issued under sub-section (1) shall, on the face of it, state/specify;
a. That a copy has been delivered for filing to the Registrar under sub-section
(4);
b. Documents required by this section to be attached to the copy so delivered
or refer to statements included in the prospectus which specify these
documents.
Validity of Prospectus for issue [Sub-section 8]
A prospectus is considered to be valid for issue, only if 90 days has not been
lapsed from the date on which a copy thereof is delivered to the Registrar under
section 25(4).
The date of issue is important for many reasons, one of them being the value of
securities keeps changing.
If 90 days have expired after filling of prospectus, it is better to send a fresh copy
of prospectus to registrar under section 26(4); to avoid the penalties imposed
under section 26(9)
Validity of Prospectus for issue [Sub-section 9]
If a prospectus is issued in contravention of the provisions of section 26 the

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

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

to the public by issuing a prospectus that is not filed with the Registrar of
Companies.
In this regard, it is to be noted that a public company can issue securities to the
public only by issuing a prospectus, under section 23(1)(a) of the Act.
Further section 26(4) requires that no prospectus shall be issued unless, a duly
signed copy of the prospectus forwarded to Registrar for filing.
In the given case, the company has issued the prospectus in violation of the
provisions of section 26. Hence, company as well as the person who is knowingly
a party to this, will be punishable with penalty under section 26 (9) of the Act.
Statement – The copy of prospectus submitted with registrar for filling need to be duly
signed by majority of directors.
Answer – False
Under section 26(4) of the Act, the copy of prospectus submitted with registrar for filing
shall be signed by every person who is named as either director or proposed director
in such prospectus. Duly authorised attorney can sign in representative capacity.
VARIATION IN TERMS OF CONTRACT OR OBJECTS STATED IN

PROSPECTUS [SECTION 27]
Sub-section 1 provides, the terms of a contract referred to in the prospectus or

objects for which the prospectus has been issued can be varied, but only with
the authority of the company given by it in general meeting by way of special
resolution.
First proviso to sub-section 1 requires that prescribed details of the notice which has
to be given to the shareholders are to be published in newspapers (one in English
and one in vernacular language) circulating in the city where the registered office of
the company is situated indicating clearly the justification for such variation.
The second proviso to sub-section (1) also prescribes that such company is not
to use any amount raised by it through the prospectus for buying, trading or
otherwise dealing in equity shares of any other listed company.

Sub-section (2) provides that the dissenting shareholders (i.e. those who did not
agree to the variation) are to be given an exit offer by promoters or controlling
shareholders at such exit price and in such manner and conditions as may be
specified by SEBI by making regulations for this purpose.
Example – Ind-swift pharma limited after issue of prospectus, willing to make

variation in object of issue of prospectus (due to change in industry brought by
covid-19 among other dynamics of pharma industry). What is your piece of advice
to Ind-swift pharma limited?
In given case, Ind-swift should authorise the changes through special resolution
passed at general meeting and copy of notice that is given to shareholder for such
variation shall be published in newspaper along with justification of variation.
If any shareholder shows dissent then exit option shall be provided in accordance
with guideline issued in this regards by SEBI.
Once funds are raised through a given prospectus, the principle of “doctrine of
ultra vires” (mutatis mutandis) comes into play i.e., the company has to use the
funds strictly in accordance with the prospectus.
But if in any case variation need to made, then such deviations are required to be
pre-approved by the investors and ‘recall option’ needs to be given to the
dissenting investors. Deviation regarding use of proceeds of issue for buying,
trading or otherwise dealing in equity shares of any other listed company is not
permitted in any case.
Procedural Aspects
Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Sub-rule 1, provides for Special Resolution to be passed through Postal Ballot
and Contents to be included in Notice.
Further Sub-rule 2, provides the advertisement of the notice (for getting the
resolution passed) shall be in Form PAS-1 and such advertisement shall be
published simultaneously with dispatch of Postal Ballot Notices to Shareholders.
According to Sub-rule 3, the notice shall also be placed on the website of the
company, if any.

Illustration (MCQ)
In case of variation in terms of contract or objects in prospectus, which of the
followings statement are not true;
(i) Ordinary resolution shall be passed at general meeting
(ii) Notice given to shareholder shall also be published in two newspapers
(iii) Amount so raised can be invested only in equity share of prescribed class of
companies.
Options
(a) (i) only
(b) Both (i) and (ii) only
(c) Both (i) and (iii) only
(d) Both (ii) and (iii) only
Answer – (c)
OFFER OF SALE OF SHARES BY CERTAIN MEMBERS OF COMPANY

[SECTION 28]
Sub-section 1 provides that, member or members of a company, in consultation
with board of directors, may offer whole or part of their holding of shares to
the public, in accordance with the provisions of the law for the time being in force.
Further sub-section 2 provides that the document by which the offer of sale to the
public is made shall be treated as prospectus issued by company. Hence, all
provisions apply accordingly.
At last sub-section 3 highlights the members' responsibility in the matter of sale
under sub-section 1. It provides, the members whether individual or bodies
corporate or both, whose shares are proposed to be offered to the public, shall
collectively to authorise the company to take all actions on their behalf for
carrying out the transaction. They also have to reimburse the company for all
expenses made by it on this matter.
Procedural Aspects
According to Rule 8 (1) the provisions of section 23 to 41 of this Act and rules

made thereunder shall be applicable to an offer of sale referred to in section 28

except for the provisions relating to;
a. minimum subscription
b. minimum application value
c. any statement to be made by the Board of directors in respect of the
utilization of money; and
d. information which cannot be compiled or gathered by the offer or, with
detailed justifications for not being able to comply with such provisions.
Further, Rules 8 (2) requires that the prospectus issued under section 28 shall
disclose the name of the person or persons or entity bearing the cost of making
the offer of sale along with reasons.
Illustration (Q&A)
In case of Super-Fix-it Limited, some of members of a company offer part of their
holding of shares to the public (in consultation with board of directors), wherein
company took all actions on their behalf for carrying out the transaction.
Company incur the expense of ` 3.2 lakh for carrying out such transactions, can
company recover the amount so incurred in full from such members?
Answer – Yes, members who offer whole or part of their holding of shares to the
public, in consultation with board of directors, shall authorise the company to take all
actions on their behalf for carrying out the transaction, and bound to reimburse the
company for all expenses made by it on this matter (Refer section 28(3).
PUBLIC OFFER OF SECURITIES TO BE IN DEMATERIALISED FORM

[SECTION 29]
Sub-section 1 has overriding effect to any other provision of this Act. It provides
that every company making a public offer and such other class or classes of
companies as may be prescribed, have to issue their securities only in
dematerialised form by complying with the provisions of the Depositories Act,
1996 17 and regulations made under it.
17
Act 22 of 1996

Sub-section 1A inserted in 2019, provides that in case of prescribed class/classes

of unlisted companies, the securities shall be held or transferred only in
dematerialised form by complying with the provisions of the Depositories Act,
1996 18 and regulations made under it.
Further sub-section 2 provides, any other company may;
a. Convert its securities into demateriaiised form;
b. Issue its securities in physical form in accordance with the provisions of this
Act;
c. Issue its securities in dematerialised form in accordance with the provisions
of the Depositories Act, 1996 19 and the regulations made thereunder.
Rule 9 (Dematerialisation of securities) and 9A (Issue of securities in dematerialised

form by unlisted public companies; inserted vide Companies (Prospectus and
Allotment of Securities) Third Amendment Rules, 2018) of Companies (Prospectus
and Allotment of Securities) Rules, 2014 is relevant for procedural aspects
pertaining to Public Offer of Securities to be in Dematerialised Form
ADVERTISEMENT OF PROSPECTUS [SECTION 30]

Where an advertisement of any prospectus of a company is published in any
manner, it shall be necessary to specify therein the contents of its memorandum
as regards the following:
a. Objects,
b. Liability of members and the amount of share capital of the company,
c. Names of the signatories to the memorandum,
d. Number of shares subscribed for by the signatories, and
e. Capital structure of the company.
18
ibid
19
ibid

SHELF PROSPECTUS [SECTION 31]

Meaning of Shelf Prospectus [explanation to section 31]
The expression “shelf prospectus” means a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus.
Need of Shelf Prospectus
A company is required to issue a prospectus each time it accesses the capital
market. It leads to unnecessary repetition for a company which makes more than
one offer of securities in a year to mobile funds from the public. A way out is
shelf prospectus which remains valid (on the shelf) for a specified time period
during which offers for securities may be made by a company to the public without
going through the arduous exercise of issuing fresh prospectus every time.
Filing of shelf prospectus with the Registrar [Sub-section 1]
Shelf prospectus may be filled with the Registrar at the stage of first offer of
securities, by class or classes of companies as the Securities and Exchange Board
of India may provide by regulations in this behalf.
It has to indicate a period not exceeding one year as the period of validity of
such shelf prospectus.
The period of validity is to commence from the date of opening of the first offer
of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued during
the period of validity of such prospectus, no further prospectus is required.
Filing of ‘Information Memorandum’ with the Shelf Prospectus [Sub-section 2]
A company filing a shelf prospectus shall be required to file an information
memorandum with the Registrar within the prescribed time, prior to the issue of a
second or subsequent offer of securities under the shelf prospectus containing;
a. All material facts relating to new charges created,
b. Changes in the financial position of the company as have occurred between
the first offer of securities or the previous offer of securities and the
succeeding offer of securities, and
c. Such other changes as may be prescribed,

Proviso to Sub-section 2, provides a safeguard (in case of changes) to

applicants who made payment in advance. It is provided that where a company
or any other person has received applications for the allotment of securities along
with advance payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants and if they
express a desire to withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen days thereof.
Procedural Aspects
The information memorandum shall be prepared in Form PAS-2.
It shall be filed with the Registrar along with the fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within one month prior to the issue
of a second or subsequent offer of securities under the shelf prospectus.
Information Memorandum together with Shelf Prospectus is deemed

Prospectus [Sub-section 3]
Where an information memorandum is filed, every time an offer of securities is
made under sub-section (2), such memorandum together with the shelf
prospectus shall be deemed to be a prospectus.
Illustration (MCQ)
An applicant who made application for allotment along with advance payment of
subscription, if he expresses a desire to withdraw his application after changes
reported in information memorandum came to his knowledge. The company;
Options
a. May refund the monies at discretion of Board of Directors
b. Shall refund the monies after deducting the administrative charges within
fifteen days
c. Shall refund all the monies received as subscription within fifteen days
d. Shall refund the monies after deducting the administrative charges within 30
days

Answer – c [Refer proviso to section 31(2). It is provided that where a company or

any other person has received applications for the allotment of securities along
with advance payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants and if they
express a desire to withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen days thereof].
RED HERRING PROSPECTUS [SECTION 32]
Meaning of Red Herring Prospectus (explanation to section 32)
The expression "red herring" means a prospectus which does not include
complete particulars of the quantum or price of the securities.
Need of Red Herring Prospectus

Developments taking place in the financial markets from time to time allow
innovative methods of raising funds so as to avail the most of favourable market
conditions. Timing the issue and book building of issue are facilitated by the
concept of red herring prospectus whereby the price per security and number
of securities are left open to be decided post closure of the issue.
Timing of issue the Red Herring Prospectus [Sub-section 1]
A company proposing to make an offer of securities may issue a red herring
prospectus prior to the issue of a prospectus.
Filing of Red Herring Prospectus with the registrar [Sub-section 2]
A company proposing to issue a red herring prospectus shall file it with the
Registrar at least three days prior to the opening of the subscription list and
the offer.
Obligations under Red Herring Prospectus vis-à-vis Prospectus [Sub-section 3]
A red herring prospectus shall carry the same obligations as are applicable to a
prospectus and any variation between the red herring prospectus and a
prospectus shall be highlighted as variations in the prospectus.
Filing with Registrar and SEBI upon closing of Offer [Sub-section 4]
Upon the closing of the offer of securities under this section, the prospectus
stating therein the total capital raised, whether by way of debt or share capital,
and the closing price of the securities and any other details as are not included

in the red herring prospectus shall be filed with the Registrar and the Securities
and Exchange Board.
Book Building is actually a price discovery method. In this method, the company
doesn't fix up a particular price for the shares, but instead gives a price range.
An underwriter builds a book by accepting orders from fund managers, indicating
the number of shares they desire and the price they are willing to pay.
CONCEPT OF ABRIDGED PROSPECTUS - ISSUE OF APPLICATION FORMS

FOR SECURITIES [SECTION 33]
Meaning of Abridged Prospectus [Section 2(1)]
Abridged Prospectus means a memorandum containing such salient features of
a prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.
Need of Abridged Prospectus
In fact, ‘Abridged Prospectus’ is a summarized form of actual prospectus,
containing the salient features of a prospectus to cut the cost involved in the
publication of large number of prospectus which has to accompany the
application forms for shares or debentures in case of public offer.
Abridged Prospectus accompany the application form [Sub-section 1]
Section 33(1) provides that every application form for shares or debentures has to
be accompanied with the abridged prospectus.
Proviso to sub-section 1 provides exceptions, when the requirement of abridged

prospectus does not apply;
a. When application form is issued in connection with a bona fide invitation to

a person to enter into an underwriting agreement with respect to shares or
debentures:
b. In relation to shares or debentures which were not offered to the public; or
c. Where offer is made only to existing members of the company

Right to receive prospectus [Sub-section 2]
Sub-section 2 provides that a prospectus (full prospectus) is to be made available

to any person who request for it before the closing of the subscription list and the
offer.
Penalty [Sub-section 3]
A company who makes any default in complying with the provisions of section 33,
shall be liable to a penalty of fifty thousand rupees for each default.
5. MIS-STATEMENTS IN PROSPECTUS
A contract of shares in a company is a contract of Uberrimae fides (Latin), which
means ‘utmost good faith’. The legal doctrine of Uberrimae fides provides that all
parties to contract must deal in good faith, making a full declaration of all material
facts. The intending purchasers of shares are entitled to true and correct disclosures
of all the facts in the prospectus.
Hence, a prospectus must make all statements with scrupulous accuracy and not
state facts which are not strictly correct. Neither any information which the law
requires to be disclosed to the public be concealed or omitted to be stated from the
prospectus nor should the information given be false and misleading.
Mis- statements in prospectus is a serious offence which attracts the provisions of

section 34 (criminal liability) and / or section 35 (civil liability) of the Act. In this section
we will learn about misleading prospectus, remedies for misrepresentation in the
prospectus.
WHAT CONSTRUE AS MIS-STATEMENT AND MISLEADING PROSPECTUS

A prospectus is said to be misleading, if it includes any mis- statement. In common
parlance, mis-statement is the act of stating anything that is false (or not accurate).
A statement become false statement, if it produces a wrong impression of actual
facts. It could either be due to commission or omission or both.
As per section 34, a statement included in a prospectus shall be deemed to be untrue;
a. if the statement is misleading in the form and context in which it is included: or
b. where any inclusion or omission of any matter is likely to mislead

Some of landmark judicial pronouncements - only for reference and better

understanding
Mislead through false Statement (prima-facie of facts) - Henderson v. Lacon 20
It was stated in the prospectus, ‘the directors and their friends have subscribed a
large portion of the capital and they now offer to the public the remaining shares.’
Whereas, in actually each of director had subscribed only 10 shares. It was held
that such a statement is misleading one.
Misled by hiding truth through superficial statement - Rex v. Kylsant 21
In the prospectus, it is stated that the company had regularly paid dividends, in
actual, company has been incurring substantial losses during all those years.
Company used to write back some of the past provisions to the credit of the profit
and loss account. It was held that the prospectus did not disclose the true picture
of the company.
Misled through ambiguous statement - Smith v. Chadwick 22
The prospectus of a manufacturing company contain, ‘the present value of
turnover is £1million sterling per annum,’ the statement was true only if
production capacity is considered but untrue if it meant the present production
level (capacity in utilisation). It was held that, such a statement which director knew
may bear multiple meaning out of which any can be false to their knowledge,
considered to be furnishing of misleading statement.
EFFECT OF MISLEADING PROSPECTUS – REMEDIES OF MISREPRESENTATION

The fear of heavy liability and criminal sanctions have controlled the directors'
tendency of "using extravagant terms and flattering description".
But if the prospectus contains a misleading or false statement or omits to disclose a
material fact which amounts to misrepresentation, the aggrieved shareholder has the
remedies. The law allows the following remedies for misrepresentation:
20
C 16/276/H211 (1865 - Cause number: 1865 H211)
21
Harvard Law Review Vol. 45, No. 6 (Apr., 1932), pp. 1078-1083 (available at
https://doi.org/10.2307/1332145)
22
HL 18 Feb 1884

Remedies for
Misrepresentation in
Prospectus
Against Against the Against the persons

the Company & authorised to issue
Company others prospectus
Civil Liability Criminal Damages

Rescission Damages
(Compensation) Liability for Deceit
Remedy of Rescission, Damages and Deceit are not specified under this Act, they
are available under the Indian Contract Act 1872 23 read with relevant provisions of
Specific Relief Act 1963 24. Whereas Criminal and Civil Liability is provided under
section 34 and 35 respectively of this Act.
Since remedies specified above are alternative courses, hence all of these remedies
are not available simultaneously, whereas appropriate combination of these can
be claimed.
To illustrate, claim for compensation under section 35 (civil liability) of this Act
(being special statute where jurisdictional power is vested in NCLT) shall not be
moved simultaneously with claim for Damages (under general provisions).
RIGHT OF RESCISSION
When to seek rescission?
A person who has purchased shares from the company on the basis of the prospectus
containing untrue and misleading statement of material facts is entitled to apply to
the court for the rescission of the contract, under the relevant provisions of the Indian
Contract Act 1872 25.
Effect of rescission
The agreement to take up shares is voidable at the option of the subscriber to the
shares, it will remain valid unless he actually rescinds it.
23
Act 9 of 1872
24
Act 47 of 1963
25
Act 9 of 1872

If the court accepts his application for the repudiation of the contract, company will
remove his name from the register of members and return his money with interest
and other incidental cost.
Entitlement to compensation for any damages which he sustained through the non-
fulfilment of the contract arises under section 75 of the Indian Contract Act 1872 26.
Exceptions – When right of rescission is not available?
a. Right to rescind allotment of shares will not be available to the subsequent
purchasers of shares from the market.
b. A subscriber to the Memorandum of Association cannot also seek any relief, as
the company cannot be considered to be in existence at the time when he
appended his signatures to the Memorandum of Association. He cannot be
said to have been influenced by any statement in the prospectus.
Illustration (Q&A)
All the statements contained in a prospectus issued by a company were literally true.
It was also stated in the prospectus that the company had paid dividends for a
number of years but there was no disclosure regarding the fact that the dividends
were paid out of realised capital profits and not out of trading profits. An allottee of
shares wants to avoid the contract on the ground that the prospectus was false in
material particulars.
Answer – The non-disclosure of the fact that dividends were paid out of capital
profits is a concealment of material fact as a company is normally required to
distribute dividend only from trading or revenue profits and under exceptional
circumstances it can pay dividend out of capital profits. Hence, a material
misrepresentation has been made.
Accordingly, in the given case the allottee can avoid the contract of allotment of shares.
RIGHT OF ACTION FOR DAMAGES
When to evoke?
In the cases where mis- statement amounts to fraud, aggrieved investor also gets a
right of action for damages against the company. This right is available even after the
company has gone into liquidation.
26
ibid

Pre-requisite to claim for damages
a. Misrepresentation (fraudulent) was there in the prospectus and it is of material

fact
b. Person is intended to act upon it
c. Person suffered the damages as consequences of acting upon such fraudulent

misrepresentation.
CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS [SECTION 35]
Offence under section 35
Loss or damage to subscriber of securities, as a consequence of acting on basis of

inclusion or omission of any matter in the prospectus; which is misleading the
subscriber/s.
Who shall be held liable?
a. Company; and
b. Every person who is/has;
i. A director of the company at the time of the issue of the prospectus;
ii. Authorised himself to be named and is named in the prospectus as a

director of the company, or has agreed to become such director, either
immediately or after an interval of time;
iii. A promoter of the company;
iv. Authorised the issue of the prospectus; and
v. An expert referred to in sub-section (5) of section 26,
Liability for an offence under section 35
A person found guilty under section 35, in addition to any punishment under
section 36, a company and every other person shall also be liable to pay
compensation to every person who has sustained loss or damage.
Exception to liability for guilty/offence under section 35 [Sub-section 2]
Sub-section 2, provides the instances when a person shall not be held guilty under
section 35 of this Act, if he proves;

a. He withdrew his consent to be a director of company and prospectus

issued without his consent and authority.
b. He has given reasonable public notice to effect, that prospectus was issued
without his knowledge and consent.
c. He made the statement on the authority of an expert whom he believed to

be competent and that the expert had given his consent and had not
withdrawn it.
d. He had reasonable ground for believing the statement to be true and

that he did believe it to be true up to the time of allotment.
e. The statement was a correct copy of some extract from an official

document and that he had in fact believed.
Personal Liability when intend to defraud [Sub-section 3]
Every person referred under sub-section 1 shall be personally responsible,

without any limitation of liability;
− For all or any of the losses or damages that may have been incurred by any
person who subscribed to the securities on the basis of such prospectus;
Where it is proved that a prospectus has been issued with intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent
purpose.
Illustration (Q&A)
A prospectus issued by a company contained certain mis-statements. On becoming
aware of the fact regarding mis-statements in the prospectus, one of the experts
Anilesh who had earlier given his consent, forthwith gave a reasonable public notice
stating that the prospectus was issued without his knowledge and consent. Is it
possible for Anilesh to escape liability for mis-statement in the prospectus?
Answer – Section 35 (2) of the Companies Act, 2013 states that no person shall be
liable under Sub-section (1) if he proves that the prospectus was issued without
his knowledge or consent, and that on becoming aware of its issue, he forthwith
gave a reasonable public notice that it was issued without his knowledge or
consent.

The case of Anilesh is covered under the above exception provided by Sub-section
(2) and therefore, he will escape liability for mis-statement in the prospectus.
CRIMINAL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS
[SECTION 34]
Offence under section 34?
Where a prospectus is issued, circulated or distributed that includes;
a. Any statement which is untrue or misleading in form or context in which it is
included or
b. Where any inclusion or omission of any matter is likely to mislead.
Who shall be held liable?
Every person who authorises the issue of such prospectus

Liability for an offence under section 34
Such persons found guilty under section 34 shall be liable for punishment under
section 447 of this Act,
Exception to liability for guilty/offence under section 34 [Proviso to section
34]
Proviso to section 34 provides the instances when a person shall not be held guilty
under section 34 of this Act, if he proves that;
a. Such mis-statement or omission was immaterial, or
b. He had reasonable grounds to believe, and did up to the time of issue of the
prospectus believe, that the statement was true or the inclusion or omission
was necessary.
Note
a. Loss from mis-statement is not essential, to held a person guilty under
section 34.
b. Liability for offence under section 34, is strict liability, hence it is immaterial
where the omission is intentional or unintentional, in both case person will
be held guilty under section 34 and liable for punishment under section 447
of this Act.

Summary of section 34 and 35.

Liability for Mistatement
Criminal Liability Civil Liabilty
Company, director, proposed director, promoter,

Every person who authorised for issue of prospectus
Expert, one who authorised for issue of prospectus
Punishable u/s 447 Pay compensation to Investors
Defenses Defenses
Believed on Issued without his

Immaterial Reasonable Withdrew its consent
consent u/s knowledge, Public
ground to believe to be a director
26(5) Notice
Illustration (Q&A)
An allottee of shares in a company brought action against a director in respect of
false statements made in the prospectus. The director contended that the statements
were prepared by the promoters and he simply relied on them. Is the director liable
under the circumstances?
Answer – Yes, the Director shall be held liable for the false statements made in
the prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas
section 34 imposes a criminal punishment on every person who authorises the
issue of such prospectus, section 35 more particularly includes a director of the
company in the imposition of liability for such mis-statements.
Certain situations when a director will not incur any liability for mis-statements in
a prospectus are covered under exceptions provided by Section 35 (2) but no such
exception specifies that relying on the statements prepared by the promoters of
the company is a valid ground for a director to escape liability for mis-statement.
DAMAGES FOR DECEIT
When remedy of damages for deceit is available?
Persons responsible for the issue of prospectus can also be held liable in an action
for deceit, under general law as provided by section 19 of the Indian Contract Act.
This remedy shall be available even where the remedy by way of rescission as
against the company is lost either through latches or negligence or even if the
company goes into liquidation.

Prerequisite to claim damages for deceit is available

a. There was a fraudulent mis-statement related to some existing material facts.
b. He is original allottee and had seen the prospectus.
c. He has been actually deceived.
Peek v. Gurney
Gurney issued a fraudulent prospectus on behalf of a company. No shares were
purchased by Peek at that time. Several months afterwards, Peek purchased 2,000
shares of the company from the stock exchange. He brought an action against the
directors for deceit (on the basis of prospectus). Court held, the directors were not
liable as the shares were not purchased on the basis of prospectus.
6. PUNISHMENT FOR FRAUDULENTLY

INDUCING PERSONS TO INVEST MONEY
[SECTION 36]
Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any
material facts, to induce another person to enter into, or to offer to enter into:
a. any agreement for, or with a view to, acquiring, disposing of, subscribing for,
or underwriting securities; or
b. any agreement, the purpose or the pretended purpose of which is to secure
a profit to any of the parties from the yield of securities or by reference to
fluctuations in the value of securities; or
c. any agreement for, or with a view to obtaining credit facilities from any bank
or financial institution,
shall be liable for action under section 447.
Example – A huge sums of money were collected under a document described as
"project overview" by NRIs but shares not allotted in the proposed joint venture
company instead the money was diverted to some off-shore companies controlled
by the accused persons. Prima-facie offence under section 36 made-out.

7. ACTION BY AFFECTED PERSONS [SECTION 37]

A suit may be filed or any other action may be taken under section 34 or section
35 or section 36 by:
a. Any person,
b. Group of persons or
c. Any association of persons
If affected by any misleading statement or the inclusion or omission of any
matter in the prospectus.
Illustration
M applies for equity shares of a company on the basis of a prospectus which contains
mis–statement. The shares are allotted to him, who afterwards transfers them to N.
Whether N can bring an action for a rescission on the ground of mis-statement
under section 37 of the Companies Act, 2013?
Answer – No. N cannot bring an action for rescission of the contract for buying
shares from M on the ground of mis-statement made in the prospectus. Section
37 of the Companies Act, 2013 does not become applicable in such a situation.
It is noteworthy that according to Section 37, a suit may be filed or any other
action may be taken under section 34 or section 35 or section 36 only by any
person, group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus. Therefore,
only M is eligible to file a suit.
Section 37 has paved way for class action

Class action suit is for a group of people filing a suit against a defendant who has
caused common harm to the entire group or class. This is not like a common
litigation method where one defendant files a case against another defendant
while both the parties are available in court. In the case of class action suit, the
class or the group of people filing the case need not be present in the court and
can be represented by one petitioner. The benefit of these type of suits is that if
several people have been injured by one defendant, each of the injured person
need not to file a case separately but all the people can file one single case
together against the defendant.

8. PUNISHMENT FOR PERSONATION FOR

ACQUISITION, ETC., OF SECURITIES
[SECTION 38]
The purpose of the section is to prevent allotment of shares in fictitious names.
Sub-section 1 provides, any person shall be liable for punishment under section
447, if:
a. He makes or abets the making of an application in a fictitious name to a
company for acquiring, or subscribing for, its securities; or
b. He makes or abets the making of multiple applications in different names or
different combinations of his name or surname for acquiring or subscribing for
its securities; or
c. otherwise induces, directly or indirectly a company to allot or register any
transfer of any securities to him or to any other person in a fictitious name.
Sub-section 2, provides that every company which issues a prospectus is required
to reproduce prominently the provisions of the sub- section (1) in the prospectus
and every form of application for securities.
Note:
A person who gets shares allotted in a fictitious name becomes liable as a
shareholder. Thus, where a person carried on business under an assumed name
and took shares in that name, his trustee in bankruptcy of the said person, could
not avoid liability.
Sub-section 3 provides, where a person has been convicted under the section, the
court may order disgorgement of any gain made by such person. The order may
also include seizure and disposal of securities which may be found in his
possession.
The amount received through disgorgement or disposal of securities under sub-
section (3), is to be credited to the Investor Education and Protection Fund. [Sub
section (4)]

9. PUNISHMENT FOR FRAUD [SECTION 447]

Amount and Fine Imprisonment
nature of fraud Minimum Maximum Minimum Maximum
Fraud involving less
than 10 lakh rupees
or 1% of turnover, Up to ` 50 Up to 5
- or/and -
whichever is lower lakh years
(public interest not
involved)
Fraud involving at
least 10 lakh rupees
Equal to 3 times of
or 1% of turnover,
amount amount of and 6 Months 10 Years
whichever is lower
of fraud fraud
(public interest not
involved)
Fraud in question Equal to 3 times of
involves public amount amount of and 3 Years 10 Years
interest of fraud fraud
Section 447 provides three explanations, read as:

(i) “fraud” in relation to affairs of a company or any body corporate, includes
any act, omission, concealment of any fact or abuse of position committed
by any person or any other person with the connivance in any manner, with
intent to deceive, to gain undue advantage from, or to injure the interests
of, the company or its shareholders or its creditors or any other person,
whether or not there is any wrongful gain or wrongful loss.
(ii) “wrongful gain” means the gain by unlawful means of property to which
the person gaining is not legally entitled.
(iii) “wrongful loss” means the loss by unlawful means of property to which
the person losing is legally entitled.

Fraud, in relation to affairs of a company or body coprate
Includes
Committed by With intent to
Any act, Whether or
Any person Deceive, not there is
Omission,
or Gain undue any
Concealment advantage,
of the facts, Any other Wrongful gain
person with the or or
and/or
connivance in Injure the
Abuse of Wrongful loss;
any manner; interests;
position;
of the company or
its shareholders or
its creditors or
any other person,
Illustration
Mr. Raju one of prospective investor under section 37 of this Act, sue the persons
who authorise the issue of prospectus for the fraudulent misstatements they made
in the prospectus. Mr. Raju also filed a complaint under section 420 of the IPC, 1860
and section 447 of this Act.
Mr. Angad one of the authorised persons, plead that Mr. Raju did not took any share,
hence he has not borne any sort of loss, therefore he cannot seek the remedies, for
what he is asking for and they are not punishable under section 447, because fraud
is not committed against Mr. Raju. Whether the persons who authorised the issue of
prospectus punishable under section 447?
Answer
In this case, the persons who authorised the issue of prospectus shall be
punishable under section 447 for the fraudulent misstatement, despite the fact
that Mr. Raju had not borne any loss. Because wrongful gain or loss is not essential
constituent of fraud under section 447.

10. ALLOTMENT OF SECURITIES BY COMPANY

[SECTION 39]
MEANING OF ALLOTMENT
Offers for shares are made on application forms supplied by the company. When
an application is accepted, it is an allotment
Hence, in general sense 'allotment' is neither more nor less than the acceptance
by the company of the offer to take shares.
In technical context, it is an appropriation out of the previously unappropriated
capital of a company.
Note
Where forfeited shares are re-issued, it is not the same thing as an allotment.
A valid allotment has to comply with the requirements of the Act and principles of
the law of contract relating to acceptance of offers.
Section 39 of the Act and the Companies (Prospectus and Allotment of Securities)
Rules, 2014 contains provisions in respect of allotment of securities when there is
a public offer.
MINIMUM SUBSCRIPTION IS A MUST [SUB-SECTION 1]

The first requisite of a valid allotment is that of minimum subscription.
Hence, when shares are offered to the public, the amount of minimum subscription
has to be stated in the prospectus.
No shares can be allotted unless:
a. At least so much amount (which is stated as minimum subscription) has been
subscribed and
b. The sums payable on application for the amount so stated have been paid
to and received by the company by cheque or other instrument from the
subscribers or investors at the time of making application.

Note:
As per the regulation 45(1) of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018 27, the minimum
subscription is 90% of the entire issue.
Any means by which money can be remitted may be used, but remittances must
be cleared and actual cash received by the company before proceeding to
allotment. An application for shares, if not accompanied by any such payment,
does not constitute a valid offer.
QUANTUM OF AMOUNT PAYABLE ON APPLICATION [SUB-SECTION 2]

The amount payable on application shall not be less than:
a. 5% of the nominal amount of the security or
b. Such other percentage or amount, as may be specified by the Securities
and Exchange Board by making regulations in this behalf.
Here, it is important to note that as per the regulation 47(4) of the 28Securities and
Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, the minimum sum payable on application per specified security
shall be at least twenty five percent of the issue price.
Further, proviso to regulation 47(4) provides that in case of an offer for sale,
the full issue price for each specified security shall be payable at the time of
application.
Example - If listed company offer the shares with nominal value of ` 10 then
application money shall be at least ` 2.5 and if nominal value is ` 100 then shall
be at least ` 25.
CONSEQUENCES IF MINIMUM AMOUNT IS NOT SUBSCRIBED [SUB-SECTION
3]– RETURN OF APPLICATION MONEY
If the stated minimum amount has not been subscribed and the sum payable on
27
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 are not a part of
syllabus at Intermediate Level. However, it is necessary to build the understanding of the
students.
28
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 are not a part of
syllabus at Intermediate Level. However, it is necessary to build the understanding of the
students.

application is not received within a period of 30 days (or any other period as
prescribed by SEBI) from the date of issue of the prospectus, the amount received
from applicants shall be returned.
Time period for return of application money
As per rule 11(1) of the Companies (Prospectus and Allotment of Securities) Rules,
2014, such refund shall be made within a period of 15 days from the closure of
such issue.
Default in return of application money
As per rule 11(1) of the Companies (Prospectus and Allotment of Securities) Rules,
2014, in case of default in refund within that period, directors and other officers
responsible for default shall be jointly and severally liable to repay that money
with interest at the rate of 15% pa.
Source for return of application money
According to Rule 11 (2), the application money to be refunded shall be credited
only to the bank account from which the subscription was remitted.
Section 40(3) and Rule 11(2) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 are confirming provisions regarding return of application
money, in case where allotment is not done.
RETURN OF ALLOTMENT [SUB-SECTION 4]

Whenever a company having a share capital makes any allotment of securities,
it shall file with the Registrar a return of allotment in manner as prescribed in the
Companies (Prospectus and Allotment of Securities) Rules, 2014.
Time Limit for filing Return of Allotment
According to Rule 12 (1) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014, the company shall file a return of allotment with Registrar
in Form PAS-3 within 30 days along with the fee as specified in the Companies
(Registration Offices and Fees) Rules, 2014.
Attachments to Form PAS-3
According to Rule 12 (2) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014, lists of following particulars (duly certified by the signatory
of the Form PAS-3 for completeness and correctness) shall accompany:

a. A list of allottees stating their names, address, occupation, if any, and
b. Number of securities allotted to each of the allottees.

Additional attachments to Form PAS-3 – In case share issued for
consideration other than cash.
Rule 12 (3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
provides, in the case of securities (not being bonus shares) allotted as fully or
partly paid up for consideration other than cash, then following documents shall
also be attached;
a. A copy of the contract, duly stamped, pursuant to which the securities have
been allotted
b. Any contract of sale if relating to a property or an asset, or a contract for
services or other consideration.
Further Rule 12 (4) states that where a contract referred above is not reduced to
writing, the company shall furnish complete particulars of the contract stamped
with the same stamp duty as would have been payable if the contract had been
reduced to writing and same shall deemed to be an instrument within the meaning
of the Indian Stamp Act, 1899.
Rule 12 (5), requires a report of a registered valuer in respect of valuation of the
consideration if either of rule 12(3) or 12(4) applicable.
Attachments to Form PAS-3 – In case share issued in pursuance of Section
62(1)(c)
states that in case the shares have been issued in pursuance of clause (c) of sub-
section (1) of section 62 by a company other than a listed company whose equity
shares or convertible preference shares are listed on any recognised stock
exchange, there shall be attached to Form PAS-3, the valuation report of the
registered valuer.
PUNISHMENT FOR DEFAULT [SUB-SECTION 5]
In case of any default under sub-section (3) or sub-section (4), the company and
its officer who is in default shall be liable to a penalty, for each default, of one
thousand rupees for each day during which such default continues or one lakh
rupees, whichever is less.

Illustration
After having received 80% of the minimum subscription as stated in the prospectus,
Raksha Detective Instruments Limited, before finalisation of the allotment, withdrew
50% of the said amount from the bank for the purchase of certain assets. Thereafter,
it started allotting the shares to the subscribers. Rashmi, one of the subscribers, was
allotted 1000 equity shares. She, however, refused to accept the allotment on the
ground that such allotment was violative of the provisions of the Companies Act,
2013.
Answer
According to the above example, Raksha Detective Instruments Limited has
received only 80% of the minimum subscription as stated in the prospectus. Since
minimum amount has not been received in full, the allotment is in contravention
of section 39 (1) of the Companies Act, 2013 which prohibits a company from
making any allotment of securities until it has received the amount of minimum
subscription stated in the prospectus. Further, under section 39 (3), such company
is required to refund the application money received (i.e. 80% of the minimum
subscription) to the applicants.
Therefore, in the present case, Rashmi is within her rights to refuse the allotment
of shares which has been illegally made by the company.
11. SECURITIES TO BE DEALT WITH IN STOCK

EXCHANGES [SECTION 40]
FILING OF AN APPLICATION WITH RECOGNISED STOCK EXCHANGE
[SUB-SECTION 1]
Before making public offer, every company shall make an application to one or
more recognised stock exchange or exchanges and obtain permission for the
securities to be dealt with in such stock exchange or exchanges.
PROSPECTUS TO STATE NAME OF STOCK EXCHANGE [SUB-SECTION 2]
Name or names of the stock exchange in which the securities shall be dealt with,
must be stated in the prospectus.

MAINTAINING OF SEPARATE BANK ACCOUNT [SUB-SECTION 3]

All monies received on application from the public for subscription to the
securities shall be kept in a separate bank account in a scheduled bank and shall
not be utilised for any purpose other than:
a. For adjustment against allotment of securities where the securities have
been permitted to be dealt with in the stock exchange or stock exchanges
specified in the prospectus; or
b. For the repayment of monies within the time specified by the Securities
and Exchange Board, received from applicants in pursuance of the
prospectus, where the company is for any other reason unable to allot
securities.
Note: Section 40(3) and Rule 11(2) of the Companies (Prospectus and Allotment
of Securities) Rules, 2014 are confirming provisions regarding return of
application money; in case where allotment is not done.
Rule 11(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
is already discussed before in the chapter.
CONDITION PURPORTING TO WAIVE COMPLIANCE SHALL BE VOID
[SUB-SECTION 4]
Any condition purporting to require or bind any applicant for securities to waive
compliance with any of the requirements of this section shall be void.
DEFAULT IN COMPLYING WITH PROVISIONS [SUB-SECTION 5]
If a default is made in complying with the provisions of this section, the company
shall be punishable with a fine which shall not be less than five lakh rupees but
which may extend to fifty lakh rupees and every officer of the company who is in
default shall be punishable with fine which shall not be less than fifty thousand
rupees but which may extend to three lakh rupees.
Penalty provisions provided under sub-section 5 can be summarized as:
Defaulter Minimum Fine Maximum Fine

Company 5,00,000 50,00,000
Defaulting Officer 50,000 3,00,000

PAYMENT OF COMMISSION [SUB-SECTION 6]

A company may pay commission to any person in connection with the subscription
to its securities subject to rule 13 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014.
Note- No commission shall be paid to any underwriter on securities, which are not
offered to the public for subscription.
Authorisation and Source
The payment of such commission shall be authorized in the company’s Articles of

Association. The commission may be paid out of;
a. proceeds of the issue, or
b. the profit of the company, or
c. both
Rate of commission
Security Rate
Should not exceed;
5% of the price at which the shares are issued
Shares
Or
Any less rate/amount authorised by articles
Should not exceed;
2.5% of the price at which the debentures are issued
Debentures
Or
Any less rate/amount authorised by articles
Hence students are advised to note;

Maximum rate of commission can be 5% and 2.5% in case of shares and
debentures respectively subject to rate authorised by article.
Example – Ind-swift Pharma Labs Limited issued the shares to raise capital. Article
of Ind-swift authorised payment of commission at rate of 2%. Since rate of
commission should not exceed 5% of the price at which the shares are issued or

any less rate/amount authorised by articles Hence, cap for payment of commission
under section 40(6) of the Act is 2%.
Disclosure of the particulars in prospectus regarding underwriting
The prospectus of the company shall disclose the following particulars:
a. the name of the underwriters;

b. the rate and amount of the commission payable to the underwriter; and
c. the number of securities which is to be underwritten or subscribed by the
underwriter absolutely or conditionally.
Copy of payment of commission to be delivered to Registrar
A copy of the contract for the payment of commission is delivered to the Registrar
at the time of delivery of the prospectus for filling.
Illustration Q&A
The Board of Directors of a company decide to pay 5% of the issue price of shares
as underwriting commission to the underwriters. However, the Articles of Association
of the company permit only 3% commission. The Board of Directors further decide
to pay the commission out of the proceeds of the share capital. Are the decisions
taken by the Board of Directors valid under the Companies Act, 2013?
Answer – Under Rule 13 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 the rate of commission paid or agreed to be paid shall not
exceed, in case of shares, five percent (5%) of the price at which the shares are
issued or a rate authorised by the articles, whichever is less.
The same rule allows the commission to be paid out of proceeds of the issue or
the profit of the company or both.
Therefore, the decision of the Board of Directors to pay 5% commission to the
underwriters is invalid since the same cannot exceed the rate which is permitted
by the Articles. However, the decision to pay commission out of the proceeds of
the share issue is valid provided it is paid at the rate authorised by the Articles.

12. GLOBAL DEPOSITORY RECEIPT [SECTION 41]

A global depository receipt is a general name for a depository receipt where a
certificate issued by a depository bank, which purchases shares of foreign
companies, creates a security on a local exchange backed by those shares.
GDR as per section 2(44) of this Act means any instrument in the form of a
depository receipt, by whatever name called , created by a foreign depository
outside India & authorized by a company making an issue of such depository
receipts.
Section 41 provides, company may issue depository receipts in any foreign

country after passing a special resolution in its general meeting and subject to
such conditions as may be prescribed in the Companies (Issue of Global
Depository Receipts) Rules, 2014 (as further amended in 2020).
HOW GDR OPERATES?
MANNER AND FORM OF DEPOSITORY RECEIPTS

The depository receipts can be issued by way of public offering or private
placement or in any other manner prevalent in the concerned jurisdiction and may
be listed or traded on the listing or trading platform in the concerned jurisdiction.
The depository receipts may be issued against issue of new shares or may be
sponsored against shares held by shareholders of the company in accordance with

such conditions as the Central Government or Reserve Bank of India may prescribe
or specify from time to time.
The underlying shares shall be allotted in the name of the overseas depository
bank and against such shares, the depository receipts shall be issued by the
overseas depository bank.
VOTING RIGHT
A holder of depository receipts may become a member of the company and shall
be entitled to vote as such only on conversion of the depository receipts into
underlying shares after following the procedure provided in the Scheme and the
provisions of this Act.
Until the conversion of depository receipts, the overseas depository shall be
entitled to vote on behalf of the holders of depository receipts in accordance with
the provisions of the agreement entered into between the depository, holders of
depository receipts and the company in this regard.
13. PRIVATE PLACEMENT [SECTION 42]

Provisions relating to the ‘private placement’ are contained in Part II of Chapter III
of the Act, which consist of only one section i.e. section 42 – Issue of shares on
private placement basis.
A company may make private placement of securities subject to provisions of
section 42 of this Act in supplement with those stated under rule 14 of the
Companies (Prospectus and Allotment of securities) Rules, 2014.
MEANING OF PRIVATE PLACEMENT [EXPLANATION I TO SECTION 42(3)]
Private placement means any offer or invitation to subscribe or issue of securities
to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions
specified in section 42.
OFFER TO BE MADE ONLY TO A SELECT GROUP OF PERSONS [SUB-SECTION 2]
A private placement shall be made only to a select group of not more than two
hundred (200) persons in a financial year, who have been identified by the Board,
after passing as special resolution in this regard.

Note:
1. These select group of persons is referred to as "identified persons"
2. While computing threshold limit of 200, following shall be excluded;
a. qualified institutional buyers and,
b. employees of the company being offered securities under a scheme of
employees stock option under section 62(1)(b)
3. As per Explanation II to sub-section 3, the term "qualified institutional
buyer" means the qualified institutional buyer as defined in the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
4. Section 42(2) originally contains ‘fifty (50) or such higher number as may
be prescribed’. Since Rule 14 (2) of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 (as amended through Companies
(Prospectus and Allotment of Securities) Second Amendment Rules, 2018)
prescribed ‘an offer or invitation to subscribe securities under private
placement shall not be made to persons more than two hundred (200)
in the aggregate in a financial year’, hence limit of identified persons
under section 42(2) shall be read as two hundred (200).
5. The aforesaid restrictions would be reckoned individually for each kind of
security that is equity share, preference share or debenture.
6. Non-banking financial companies (NBFCs) which are registered with the
Reserve Bank of India; and housing finance companies (HFCs) which are
registered with the National Housing Bank; if they are complying with any
regulations made by the Reserve Bank of India or the National Housing Bank in
respect of offer or invitation to be issued on private placement basis, then need
not to comply with rule 14(2) stated above.
PRIVATE PLACEMENT SHALL BE DEEMED TO BE AN OFFER TO THE PUBLIC

[EXPLANATION III TO SECTION 42(3) READ WITH SUB-SECTION 11 TO
SECTION 42)]
As per explanation III to section 42(3), if a company, listed or unlisted, makes an
offer to allot or invites subscription, or allots, or enters into an agreement to allot,
securities to more than 200 identified persons, whether the payment for the

securities has been received or not or whether the company intends to list its
securities or not on any recognised stock exchange in or outside India, the same
shall be deemed to be an offer to the public and provisions contained in section
23 to 41 shall apply.
Further section 42(11) provides, in such case all the provisions of this Act and the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board
of India Act, 1992 shall be applicable.
Though penalty under sub-section 9 and 10 to section 42 of this Act, still can be
imposed.
MANNER OF ISSUING PRIVATE PLACEMENT OFFER AND APPLICATION [SUB-
SECTION 3]
A company making private placement shall issue private placement offer and
application to identified persons (whose names and addresses are recorded by
the company) in the form and manner prescribed below.
Note: Private placement offer and application shall not carry any right of
renunciation.
Resolution for the Private Placement Offers

requires prior approval of the shareholders of the company, by a special
resolution for each of the private placement offers or invitations. The
explanatory statement annexed to the notice for shareholders' approval, must
disclose the following;
a. Particulars of the offer including date of passing of Board resolution;
b. Kinds of securities offered and the price at which security is being offered;
c. Basis or justification for the price (including premium, if any) at which the
offer or invitation is being made;
d. Name and address of valuer who performed valuation;
e. Amount which the company intends to raise by way of such securities;
f. Material terms of raising such securities, proposed time schedule, purposes
or objects of offer, contribution being made by the promoters or directors
either as part of the offer or separately in furtherance of objects; principle
terms of assets charged as securities.

Students are advised to take note of certain exceptions above rule;

Board resolution under section 179(3)(c) shall be adequate in case of offer or
invitation for non-convertible debentures, where the proposed amount to be
raised does not exceed the limit as specified in section 180(1)(c). But if amount
is above the said limit, it shall be sufficient if the company passes a previous
special resolution only once in a year for all the offers or invitations for such
debentures during the year.
Even for issue of securities to QIBs, it shall be sufficient to pass a previous special
resolution only once in a year for all the offers or invitations for all the allotments
to such buyers during the year.
Filing of Resolution with Registrar

Copy of resolutions passed above shall be moved to registrar prior to issue of
private placement offer cum application letter.
Note: Vide Companies (Prospectus and Allotment of Securities) Amendment

Rules, 2022 the principal rules of 2014 further amended to insert a proviso to Rule
14(1) which deals with Private Placement.
The proviso states that when a company makes an offer or invitation to subscribe
to securities, no offer or invitation of any securities shall be made to a body
corporate incorporated in, or a national of, a country which shares a land border
with India, unless such body corporate or the national, as the case may be, have
obtained Government approval under the FEMA 29 Rules, 2019 and attached the
same with the private placement offer cum application letter.
This means that companies will now have to obtain government approval under
the FEMA Rules before inviting subscription to securities or offering securities to
any entity from a country that shares a land border with India i.e. China, Bhutan,
Nepal, Pakistan, Bangladesh, and Myanmar.
Applicable Application Form

provides a private placement offer cum application letter shall be;
29
FEM (Non-debt Instruments) Rules, 2019

a. Issued in form PAS-4
b. Serially numbered
c. Addressed specifically to the person to whom the offer is made
d. Sent either in writing or in electronic mode
e. Sent within thirty days of recording the name of such person pursuant to
section 42 (3).
Note:
1. No person other than the person so addressed in offer-cum-application
letter, allowed to apply through such application form.
2. Any application not conforming to this condition shall be treated as invalid.
Maintaining Complete Records

requires the company to maintain a complete record of private placement offers
in Form PAS-5.
MANNER OF SUBSCRIBING TO THE PRIVATE PLACEMENT ISSUE
[SUB-SECTION 4]
Person who is identified and provided with private placement application cum
letter, if willing to subscribe securities in the private placement, then may apply in
through same letter along with subscription money.
Note:
1. Subscription money shall be paid either by cheque or demand draft or other
banking channel, but not by cash.
2. Rule 14(5) of the Companies (Prospectus and Allotment of Securities) Rules,
2014, Payment shall be made from the bank account of the person
subscribing to such securities and the company shall keep the record of the
bank account from where such payment for subscription has been received.
3. First proviso to rule 14(5) state above, provides that; in case of joint holders,
monies payable on subscription to securities shall be paid from the bank
account of the person whose name appears first in the application.

4. Company shall not utilise monies raised through private placement unless
allotment is made and the return of allotment is filed with the Registrar in
accordance with sub-section (8) of Section 42.
Illustration Q&A
Ruhi and her brother Sohit were offered jointly 1000 equity shares of ` 100 each by
Soumya Software Private Limited under the issue of shares on private placement
basis. Offer-cum-application letter addressed to both containing their names as “Ms.
Ruhi, Mr. Sohit”. From whose account the company is required to take subscription
money for 1000 equity shares?
Answer – According to the first Proviso of Rule 14 (5) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014, monies payable on
subscription to securities to be held by joint holders shall be paid from the bank
account of the person whose name appears first in the application. Since Ruhi’s
name appears first in the application, therefore the subscription of ` 1,00,000 shall
be payable by her from her account. It is obligatory for the company to ensure
that the money is paid from her bank account and not from the bank account of
her brother Sohit.
LIMIT ON FRESH OFFER [SUB-SECTION 5]
No fresh offer or invitation under this section shall be made unless the allotments
with respect to any offer or invitation made earlier have been completed or that
offer or invitation has been withdrawn or abandoned by the company.
Proviso to sub-section 5 read as, subject to the maximum number of identified
persons (i.e. 200), a company may, at any time, make more than one issue of
securities to such class of identified persons as may be prescribed.
TIME LIMIT FOR ALLOTMENT OF SECURITIES [SUB-SECTION 6]
A company making an offer or invitation under this section shall allot its securities
within sixty days from the date of receipt of the application money.
1. If company fails to make allotment within 60 days, then repayment of the

application money to the subscribers shall be made within fifteen days from
the expiry of sixty days
2. If the company further fails to repay the application money within the 60
days, then it shall be liable to repay that money with interest at the rate of
twelve percent per annum from the expiry of the sixtieth day.

It is provided that the monies received on application under this section shall be
kept in a separate bank account in a scheduled bank and shall not be utilised for
any purpose other than;
a. For adjustment against allotment of securities; or
b. For the repayment of monies where the company is unable to allot securities.
PROHIBITION ON PUBLIC ADVERTISEMENT [SUB-SECTION 7]
No company shall release any public advertisements or utilise any media,
marketing or distribution channels or agents to inform the public at large about
issue under section 42.
FILING OF RETURN OF ALLOTMENT [SUB-SECTION 8]
Section 42(8) read with Rule 14 (6) of the Companies (Prospectus and Allotment
of Securities) Rules, 2014 provides, a return of allotment in form PAS-3 (along-with
the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014)
shall be filed with the Registrar within fifteen days from the date of the allotment
under section 42, with a complete list of all the allottees containing;
a. the full name, address, Permanent Account Number and E-mail ID of such
security holder;
b. the class of security held;
c. the date of allotment of security;
d. the number of securities held, nominal value and amount paid on such
securities, and particulars of consideration received if the securities were
issued for consideration other than cash.
DEFAULT IN FILING THE RETURN OF ALLOTMENT [SUB-SECTION 9]
For defaults in filing the return of allotment, the company, its promoters and
directors shall be liable to a penalty for each default of one thousand rupees for
each day during which such default continues but not exceeding twenty-five lakh
rupees.
Example – An allotment of security under private placement (section 42) was
completed on 9th November 2022. Return of allotment in Form PAS-3 filed on 28th
November 2022. Therefore, a penalty of ` 4000 shall be imposed on company, its
promoter and directors.

PUNISHMENT FOR CONTRAVENING THE PRIVATE PLACEMENT

PROVISIONS [SUB-SECTION 10]
For making offer or accepting money in contravention to section 42, liability will
be:
Liable Nature of Description
penalty
Promoters and Fine Amount raised through the private placement
Directors or
two crore rupees,
whichever is lower
Company Refund All monies along-with interest (as specified in
sub-section 6) to subscribers within a period
of thirty days of the order
SUMMARY
♦ Securities can be offered to public at large (public offer) or through private
placement. However, a private company is prohibited from resorting to
public offer.
♦ SEBI has power to deal with matters relating to listed or proposed to be
listed securities. Central Government (through MCA represented by Regional
Directors and ROCs) has power to deal with matters relating to unlisted
securities.
♦ Prospectus, deemed prospectus, abridged prospectus, red-herring
prospectus, shelf prospectus, information memorandum need to comply
with the minimum information requirements as prescribed in the Companies
Act, 2013 and the applicable Rules.
♦ Existing holders of securities could offload their stake through required
compliances for an offer for sale of securities to the public (OFS route).
♦ Fraudulent omission or commission in the prospectus attracts civil as well as
criminal liability.
♦ Issue of securities (shares, debentures or hybrid securities) through public
offer is to be made only in demat form by the companies which are not
exempted.

♦ Provision related to timelines, pre-requisites for allotment and listing

wherever applicable needs to strictly adhered to avoid any penal provision.
♦ Private placements have somewhat diluted disclosure requirements as public
exposure is not there.
TEST YOUR KNOWLEDGE

1. Trident Limited is in process of making private placement of securities. It
received application money on 2nd March 2023. It shall allot its securities by
_________, if failed then repay application money to the subscribers by ________,
else liable to repay that money with interest at the rate of _____________.
(a) 1st April, 16th April, and 12% respectively
(b) 1st May, 16th May, and 12% respectively
(c) 1st April, 16th April, and 6% respectively
(d) 16th April, 1st May, and 12% respectively

2. Modern Furniture Limited, issued a document containing offer of securities for
sale that is considered as deemed prospectus under section 25, which requires
such document must contains certain matters/disclosures in addition to those
required under section 26. Which of following are correct requirements;
i. A statement of the net amount received or to be received as consideration
for the securities to which the offer relates
ii. The persons making the offer were named in the prospectus as promoters
of the company.
iii. The time and place at which the underlying contract for allotment may be
inspected.
(a) i or ii only
(b) i or iii only

(c) ii or iii only
(d) All of i, ii and iii

3. Section 40 of the Companies Act, 2013 requires every company shall make an
application to one or more recognised stock exchange or exchanges before
making public offer. Madhav Casting Limited filed an application to three
exchanges for the securities to be dealt with in such stock exchanges, it received
permission from couple of them and proceed with public issue. There will be:
(a) No penalty, as application has been filed
(b) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh
(c) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh and
every officer of the company who is in default ranging from ` 50 thousand
to ` 3 lakh
(d) Penalty on Madhav Casting Limited ranging from ` 5 lakh to ` 50 lakh and
every officer of the company who is in default ranging from ` 50 thousand
to ` 3 lakh and/or Imprisonment upto one year.
4. Rig exploration and refinery limited (RERL) decided to raise capital through issue
of a shelf prospectus. Company secretary explains the requirement to board that
RERL shall be required to file an information memorandum with the Registrar
within______________, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus.
(a) 15 days
(b) 21 days
(c) 30 days
(d) 1 month
5. Modern Furniture decided to raise capital by issue for which prospectus need to
be issued. The copy of prospectus submitted with registrar for filling need to be
duly signed by:
(a) Any two directors including managing directors

(b) Majority of directors
(c) Majority of directors including proposed directors
(d) Every director or proposed director

1. Explain various instances which make the allotment of securities as irregular
allotment under the Companies Act, 2013.
2. What is a Shelf-Prospectus? State the important provisions relating to the

issuance of Shelf-Prospectus under the provisions of the Companies Act, 2013
and the Companies (Prospectus and Allotment of securities) Rules, 2014.
3. The Board of Directors of Chandra Mechanical Toys Limited proposes to issue

a prospectus inviting offers from the public for subscribing to the equity shares
of the Company. State the reports which shall be included in the prospectus
for the purposes of providing financial information under the provisions of the
4. Unique Builders Limited decides to pay 2.5 percent of the value of debentures
as underwriting commission to the underwriters but the Articles of the
company authorize only 2.0 percent underwriting commission on debentures.
The company further decides to pay the underwriting commission in the form
of flats. Examine the validity of the above arrangements under the provisions
of the Companies Act, 2013.
5. PQR Bakers Limited wants to raise funds for its upcoming project. Accordingly,
it has issued private placement offer letters for issuing equity shares to 55
persons, of which four are qualified institutional buyers and remaining are
individuals. Before the completion of allotment of equity shares under this
offer letter, company issued another private placement offer letter to another
155 persons in their individual names for issue of its debentures.
Being a public company is it possible for PQR Bakers Limited to issue securities
under a private placement offer? By doing so, whether the company is in
compliance with provisions relating to private placement or should these offers
be treated as public offers? What if the offer for debentures is given after
allotment of equity shares but within the same financial year?
6. How does the Companies Act, 2013 regulate and restrict the following matters
in respect of a company going for public issue of shares:
(i) Minimum Amount stated in the Prospectus; and
(ii) Application Money payable on shares.

7. Examine the validity of the following statement with reference to the

provisions of the Companies Act, 2013.
The Articles of Association of X Limited contained a provision that the
underwriting commission may be paid up to 4% of the issue price of the shares.
However, the Board of Directors have decided to pay the underwriting
commission of 5% to Deal & Co., the underwriters."
ANSWERS
1. (b) 1st May, 16th May, and 12% respectively
2. (b) i or iii only
3. (c) Penalty on Madhav Casting Limited ranging from ` 5 lakh to

` 50 lakh and every officer of the company who is in default
ranging from ` 50 thousand to ` 3 lakh.
4. (d) 1 month
5. (d) Every director or proposed director

1. Irregular allotment: The Companies Act, 2013 does not specifically provide
for the term “Irregular Allotment” of securities. Hence, we have to examine
the requirements of a proper issue of securities and consider the
consequences of non- fulfillment of those requirements.
In broad terms, an allotment of shares is deemed to be irregular when it has
been made by a company in violation of Sections 23, 26, 39 or 40. Irregular
allotment therefore arises in the following instances:
1. Where a company does not issue a prospectus in a public offer as
required by section 23; or
2. Where the prospectus issued by the company does not include any of
the matters required to be included therein under section 26 (1), or the
information given is misleading, faulty and incorrect; or

3. Where the prospectus has not been filed with the Registrar for filing
under section 26 (4); or
4. The minimum subscription as specified in the prospectus has not been
received in terms of section 39; or
5. The minimum amount receivable on application is less than 25% of the

nominal value of the securities offered or lower than the amount
prescribed by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained
from one or more of the recognized stock exchanges under section 40
2. As per explanation to section 31, the expression “shelf prospectus” means
a prospectus in respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.
A company is required to issue a prospectus each time it accesses the capital
market. It leads to unnecessary repetition for a company which makes more
than one offer of securities in a year to mobile funds from the public. A
way out is shelf prospectus which remains valid (on the shelf) a specified
time period during which offers for securities may be made by a company
to the public without going through the arduous exercise of issuing fresh
prospectus every time.
1. Filing of shelf prospectus with the Registrar
Shelf prospectus may be filled with the Registrar at the stage of first
offer of securities, by class or classes of companies as the Securities
and Exchange Board may provide by regulations in this behalf.
It has to indicate a period not exceeding one year as the period of
validity of such shelf prospectus.
The period of validity is to commence from the date of opening of
the first offer of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued
during the period of validity of such prospectus, no further
prospectus is required.

2. Filing of ‘Information Memorandum’ with the Shelf Prospectus
A company filing a shelf prospectus shall be required to file an

information memorandum with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus containing;
a. All material facts relating to new charges created,
b. Changes in the financial position of the company as have
occurred between the first offer of securities or the previous offer
of securities and the succeeding offer of securities, and
c. Such other changes as may be prescribed,
The information memorandum shall be prepared in Form PAS-2 and filed

with the Registrar along with the fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within one month prior to
the issue of a second or subsequent offer of securities under the shelf
prospectus.
3. Safeguard (in case of changes) to applicants who made payment
in advance.
It is provided that where a company or any other person has received
applications for the allotment of securities along with advance
payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants
and if they express a desire to withdraw their application, the company
or other person shall refund all the monies received as subscription
within fifteen days thereof.
4. Information Memorandum together with Shelf Prospectus is

deemed Prospectus
Where an information memorandum is filed, every time an offer of
securities is made under sub-section (2), such memorandum together
with the shelf prospectus shall be deemed to be a prospectus.
3. As per section 26(1) of the Companies Act, 2013, every prospectus issued by
or on behalf of a public company either with reference to its formation or
subsequently, or by or on behalf of any person who is or has been engaged

or interested in the formation of a public company, shall be dated and signed

and shall state such information and set out such reports on financial
information as may be specified by the Securities and Exchange Board in
consultation with the Central Government.
It is provided that until the Securities and Exchange Board specifies the
information and reports on financial information under this sub-section, the
regulations made by the Securities and Exchange Board under the Securities
and Exchange Board of India Act, 1992, in respect of such financial
information or reports on financial information shall apply.
According to clause (c) of Section 26 (1), the prospectus shall make a
declaration about the compliance of the provisions of the Companies Act,
2013 and a statement to the effect that nothing in the prospectus is contrary
to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956
and the Securities and Exchange Board of India Act, 1992 and the rules and
regulations made thereunder.
Accordingly, the Board of Directors of Chandra Mechanical Toys Limited
which proposes to issue the prospectus shall provide such reports on
financial information as may be specified by the Securities and Exchange
Board in consultation with the Central Government to comply with the above
stated provisions and make a declaration about such compliance.
4. Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its
securities, subject to a number of conditions which are prescribed under the
Companies (Prospectus and Allotment of Securities) Rules, 2014. In relation to
the case given, the conditions applicable under the above Rules are as under:
(a) The payment of such commission shall be authorized in the company’s
articles of association;
(b) The commission may be paid out of proceeds of the issue or the profit
of the company or both;
(c) The rate of commission in case of debentures, shall not exceed two
and a half per cent (2.5%) of the price at which the debentures are
issued, or as specified in the company’s articles, whichever is less.
Thus, the underwriting commission in case of debentures is limited to 2.5%.

In view of the above, the decision of Unique Builders Limited to pay

underwriting commission exceeding 2% as prescribed in the Articles, is
invalid.
The company may pay the underwriting commission in the form of flats since
there is no prohibition on payment of underwriting commission in kind.
Further, in case of Booth v New Africander Gold Mining Co., it was held that
underwriting commission may be paid in cash or in kind or in lump sum or
by way of a percentage.
5. According to section 42 of the Companies Act, 2013 any private or public

company may make private placement through issue of a private placement
offer letter.
However, the offer shall be made to the persons not exceeding fifty or such
higher number as may be prescribed, in a financial year. For counting
number of persons, Qualified Institutional Buyers (QIBs) and employees of
the company being offered securities under a scheme of employees’ stock
option will not be considered.
Further, Rule 14 (2) of the Companies (Prospectus and Allotment of Securities)

Rules, 2014 prescribes maximum of 200 persons who can be offered
securities under the private placement in a financial year, though this limit
should be counted separately for each type of security.
It is to be noted that if a company makes an offer or invitation to more than

the prescribed number of persons, it shall be deemed to be an offer to the
public and accordingly, it shall be governed by the provisions relating to
prospectus.
Also, a company is not permitted to make fresh offer under this section if
the allotment with respect to any offer made earlier has not been completed
or otherwise, that offer has been withdrawn or abandoned by the company.
This provision is applicable even if the issue is of different kind of security.
Any offer or invitation not in compliance with the provisions of this section
shall be treated as a public offer and all provisions will apply accordingly.
In the given case PQR Bakers Limited, though a public company but the
private placement provisions allow even a public company to raise funds
through this route. The company has given offer to 55 persons out of which

4 are qualified institutional buyers and hence, the offer is given effectively
to only 51 persons which is well within the limit of 200 persons. From this
point of view, the company complies the private placement provisions.
However, as per the question, the company has given another private
placement offer of debentures before completing the allotment in respect
of first offer and therefore, the second offer does not comply with the
provisions of section 42. Hence, the offers given by the company will be
treated as public offer.
In case the company gives offer for debentures in the same financial year
after allotment of equity shares is complete then both the offers can well be
treated as private placement offers.
6. The Companies Act, 2013 by virtue of the provisions as contained in Section
39 (1) and (2) regulates and restricts the minimum amount stated in the
prospectus and the application money payable in a public issue of shares as
under:
Minimum amount stated in a prospectus
No Allotment shall be made of any securities of a company offered to the
public for subscription; unless; -
(i) the amount stated in the prospectus as the minimum amount has been
subscribed; and
(ii) the sums payable on application for such amount has been paid to and
received by the company.
Application money
Section 39 (2) provides that the amount payable on application on each
security shall not be less than 5% of the nominal amount of such security or
such amount as SEBI may prescribe by making any regulations in this
behalf.
Further section 39 (3) provides that if the stated minimum amount is not
received by the company within 30 days of the date of issue of the
prospectus or such time as prescribed by SEBI, the company will be required
to refund the application money received within such time and manner as
may be prescribed.

Rule 11 (1) of the Companies (Prospectus and Allotment of Securities) Rules,

2014 mentions that if the stated minimum amount has not been subscribed
and the sum payable on application is not received within the period
specified therein, then the application money shall be repaid within a period
of fifteen days from the closure of the issue and if any such money is not so
repaid within such period, the directors of the company who are officers in
default shall jointly and severally be liable to repay that money with interest
at the rate of fifteen percent per annum.
In case of any default, the company and its officer who is in default shall be
liable to a penalty, for each default, of one thousand rupees for each day
during which such default continues or one lakh rupees, whichever is less.
7. Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its
securities, subject to the conditions prescribed under the Companies
(Prospectus and Allotment of Securities) Rules, 2014. Rule 13 states that the
rate of commission paid or agreed to be paid shall not exceed, in case of
shares, five percent (5%) of the price at which the shares are issued or a rate
authorised by the articles, whichever is less.
In the given problem, the Articles of X Ltd. have prescribed 4% underwriting
commission but the directors decided to pay 5% underwriting commission.
Therefore, the decision of the Board of Directors to pay 5% underwriting
commission to the underwriters (i.e. Deal & Co.), is invalid.

CHAPTER a
4
SHARE CAPITAL
AND DEBENTURES
LEARNING OUTCOMES

 Know about the Kinds of Share Capital
 Explain the basic requirements for issue of Share Certificates,
Voting Rights and Variation of Shareholders’ Rights
 Explain Calls on Unpaid Shares
 Know about the Time Period permitted for delivery of
Certificates of Securities
 Understand the application of Securities Premium Amount
 Identify prohibition on issue of Shares at a Discount
 Understand the issue of Sweat Equity Shares, Issue and
Redemption of Preference Shares and creation of Capital
Redemption Reserve Account
 Know about the Transfer and Transmission of Securities,
Refusal to Register and Appeal against Refusal

 Explain the concepts relating to the Alteration of Share

Capital and Notice to Registrar thereof
 Understand the concept relating to Further issue of Share
Capital
 Know about the issue of Bonus Shares, Reduction of Share
Capital, Buy-Back of Shares and applicable restrictions
thereon
 Know about issue of Debentures and creation of Debenture
Redemption Reserve Account
 Identify the Punishments and penalties for various offences
including impersonation.

SHARE CAPITAL AND DEBENTURES 4.3
a
CHAPTER OVERVIEW
W
This chapter explains the provisions contained in Chapter IV (comprising Section

43 to 72) of the Companies Act 2013 (hereinafter referred to as the Act or this Act)
regarding the ‘Share Capital and Debentures’, along with relevant procedural
aspects explained in the Companies (Share Capital and Debentures) Rules, 2014.
Share Capital and Debentures

(Sections 43-72)
Concepts relating to Shares

Concepts relating to Debentures
(Sections 43-70)
(Section 71)
1. INTRODUCTION
Chapter IV Consists of sections 43 to 72 as well as the Companies (Share
Capital and Debentures) Rules, 2014.
Finance, the lifeblood for running the affairs of a company, can be raised, inter-alia,
by issuing shares and debentures. In fact, shares and debentures are financial
instruments which help in arranging funds for the company. Under the Companies
Act, 2013, they are jointly referred to as “securities”.
Shares represent ownership interest in a company with entrepreneurial risks and
rewards whereas debentures depict lenders’ interest in the company with limited
risks and returns.
Sometimes, after the issue of capital, a company may either alter or reduce the
share capital depending upon the exigencies of the situation. The company has to
follow the requisite provisions for alteration or reduction of share capital.

Both the shares and debentures are presented in the Balance Sheet on the liabilities
side of the issuer company and on the assets side of the investor and lender
respectively.
Legal provisions relating to these instruments are covered under Chapter IV of the
Companies Act, 2013 (comprising sections 43 to 72) and the Companies (Share
Capital & Debentures) Rules, 2014 as amended from time to time along with
endorsement in the company formation documents or approved at the suitable
company forum, wherever necessary.
2. SHARE CAPITAL-TYPES
WHAT ARE SHARE AND STOCK?
Share – Definition & Description
Section 2(84) of the Act defines share as a share in the share capital of a company
and includes stock.
Capital of a company is termed as share capital, which is divided into units; having
a certain face value. Each such unit is termed as share.
New London & Brazilian Bank v. Brockle Bank 1
A share is not a sum of money..., but is an interest measured in a sum of money,

and made up of various rights, contained in the contract, including the right to a
sum of money of a more or less amount.
Around two decade later, J. Farwell in landmark case of Borland’s Trustee v Steel
Brothers & Co Ltd2 place his trust in the opinion stated above, and observe that
share is the interest of a shareholder in the company measured by a sum of money,
for the purpose of liability in the first place and of interest in the second, and also
consists of a series of mutual covenants entered into by all the shareholders inter
se in accordance with the provisions of the Companies Act and the Articles of
Association.
1
(1882) 21 Ch D 302 (F)
2
(1901) 1 Ch 279

a
Example 1 - Sun Bakers Limited has authorised share capital of ` 50.00 lakh. The
face value of each unit of capital or ‘share’ is ` 10. In this case, it can be said that
the company has 5.00 lakh shares of ` 10 each. When these shares (either in part
or whole) are allotted to various persons, they, on the date of allotment, become
shareholders of the company.
Note: Company limited by share or those which having share capital has to quote
in their memorandum - The share capital of the capital is _ _ _ _ _ rupees, divided
into _ _ _ _ _ shares of _ _ _ rupees each.
Stock - Description
The definition of ‘share’ states that the term ‘share’ includes ‘stock’. If a company
undertakes to aggregate the fully paid up shares of various members as per their
requests and merge those shares into one fund, then such fund is called ‘stock’. In
more simple words we can say that ‘stock’ is a collection or bundle of fully paid-
up shares.
Section 61 (1) (c) of the Act, empower a limited company having a share capital to
convert all or any of its fully paid-up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination.
Students are advised to take note of - What make stock different?

Stock is stated in lump sum whereas a ‘share’ being the smallest unit is having face
value. Originally shares are issued to the shareholders while in case of stock, the
fully paid-up shares of the members are converted into ‘stock’ afterwards. Thus,
‘stock’ is not issued originally but is obtained by conversion of fully paid-up shares.
KINDS OF SHARE CAPITAL [SECTION 43]

Broadly, there are two kinds of share capital of a company limited by shares; Equity
share capital and Preference share capital. Equity Share capital can be further
segregated into two categories based upon rights. Following diagram depicts kinds
of share capital;

Kinds of share capital
Equity share capital Preference share capital
with differential carries preferential right

rights as to w.r.t. payment of dividend
with voting rights and repayment of capital at
dividend, voting or
otherwise time of winding up
Preference Share Capital [explanation II to section 43]

Preference share capital is that part of issued share capital of any company limited
by shares which carries preferential right in respect to;
a. Payment of dividend, may be absolute amount or at fixed rate (which may

either be free of or subject to income-tax); and
b. Repayment of capital, in the case of winding up or repayment of capital.
This preference exists only up to amount paid up or deemed to have been
paid up on the shares, unless there is an agreement in contrary to this.
Example 2 – Ind-swift Pharma Labs Limited and Panacea Biotec Limited issued
preference share.
Ind-swift Pharma provides that the preferential dividend may be a fixed amount
say ` 5,00,000 in one year, payable to preference shareholders before anything is
paid to the ordinary shareholders.
Whereas the Panacea Biotec provides that the amount payable as preferential
dividend may be calculated at a fixed rate @ 8 percent of the nominal value of
each share.

a
Note:
1. Nothing contained in this Act shall affect the rights of the preference
shareholders who are entitled to participate in the proceeds of winding up before
the commencement of this Act.
2. Preference shareholders may also participate in equity pool post the
preferential entitlements.
But to find out their rights of participation we must look within the four corners of
the articles of association and the terms of the issue.
If the right to participate in the surplus is not specified in the terms of the issue,
preference shares are presumed to be not participating. This was affirmed by the
House of Lords in Scottish Insurance Corpn Ltd vs. Wilsons & Clyde Coal Co Ltd 3
3. Preference shares are always presumed to be cumulative and the accumulation
of dividend can be excluded only by a clear provision in the articles of association 4
Illustration – Q&A
Can a company have only preference share capital?
Answer – It may be noted that while a company may have only equity share capital
but it cannot have only preference share capital. This is because preference
shareholders have certain ‘preferential rights’ over the equity shareholders.
Thus, in the absence of equity share capital, there cannot be preferential share capital5
Equity Share Capital [Section 43(a) read with explanation I to section 43]
Shares capital which are not preference shares capital are termed as equity shares
capital. Equity share capital are further classified as;
a. Equity share with voting right (Plain vanilla, because equitable/same voting
rights) or
b. Equity share with differential rights with respect to dividend or voting rights
or otherwise in accordance with Rule 4 of the Companies (Share capital and
Debenture) Rules, 2014.
3
1949 AC 462 HL
4
Staples v Eastman Photographic Materials Co (1896)
5
Bihar State Financial Corporation vs. CIT Bihar (1976)

Equity shares are often referred as to ordinary share and sometime as common
share
Equity Shares with Differential Rights [Rule 4 of the Companies (Share

capital and Debenture) Rules, 2014]
I. Conditions to issue shares with differential rights
As per sub-rule 1, A company limited by shares may issue equity shares with
differential rights as to dividend, voting or otherwise, if it complies with the
following conditions:
a. The articles of association of the company authorizes the issue of these
shares.
b. Approval of the shareholders is obtained by passing of ordinary resolution
at the general meeting. A listed public company is required to pass the
resolution through postal ballot
c. The voting power in respect of shares with differential rights of the company
shall not exceed Seventy Four 6 percent of total voting power at any point of
time
d. The company has not defaulted in filing annual accounts and annual
returns for the 3 financial years preceding the year in which it was decided
to issue such shares
e. The company has not defaulted in the payment of declared dividend,
interest, or coupon; redemption of preference shares or debenture; or
repayment of matured deposits.
f. The company has not defaulted in the
1. Payment of dividend on preference shares, or
2. Payment of interest or Repayment of any term loan from a Public
Financial Institution (PFI) or State-level Financial Institution (SFI) or
Scheduled Bank.
3. Repayment of any term loan from a PFI or SFI or Scheduled Bank.
4. Statutory dues relating to its employees
5. Crediting the amount in Investor Education and Protection Fund
6
W.e.f. 16th August 2019 through G.S.R. 574(E) (Note - Earlier limit was 26%)

a
Note:
A company may issue equity shares with differential rights upon expiry of five
years from the end of the financial year in which default mentioned in point f
stated above, was made good7
g. the company has not been penalized by Court or Tribunal during the last
three years of any offence under
1. Reserve Bank of India Act, 1934 8,
2. Securities and Exchange Board of India Act, 1992 9,
3. Securities Contracts Regulation Act, 1956 10,
4. Foreign Exchange Management Act, 1999 11 or
5. Any other special Act, under which such companies being regulated by
sectoral regulators.
Note:
1. Equity shares with differential rights issued by any company under the
provisions of the Companies Act, 1956 12 and the rules made thereunder, shall
continue to be regulated under such provisions and rules. 13
2. Here it is also worth noting that; before the amendment made in year 2000,
to the Companies Act 195614, the shares with differential voting rights were
not permitted to be issued. Though such differential voting rights existed
prior to the enactment of the Companies Act 1956 15.
II. Contents of Explanatory statement (annexed to notice)

Sub-Rule 2 provides the explanatory statement annexed to the notice of the
general meeting or of a postal ballot shall contains various matters like particulars
7
Inserted w.e.f. 19th July 2016 though G.S.R. 704(E) - Companies (Share Capital and
Debentures) Third Amendment Rules, 2016
8
Act 2 of 1934
9
Act 15 of 1992
10
Act 42 of 1956
11
Act 42 of 1999
12
Act 1 of 1956
13
W.e.f 18th June 2014, inserted though G.S.R. 413.(E). - Companies (Share Capital and
Debentures) Amendment Rules, 2014 after Rule 4(6).
14
Supra note 15
15
ibid

of the issue including its size, details of differential rights, etc.
III. Prohibition on Conversion

Sub-Rule 3 prohibit the conversion of existing equity share capital with voting rights
into equity share capital carrying differential voting rights and vice versa.
IV. Disclosure in the Board’s Report

Sub-Rule 4 requires, the Board of Directors to disclose the specified particulars, in
the Board’s Report for the financial year in which the issue of equity shares with
differential rights was completed.
V. Rights to the holders of the equity shares with differential rights
Sub-rule 5 states that subject to the differential rights, the holders of the equity
shares with differential rights shall enjoy all other rights such as bonus shares, rights
shares, etc., which the holders of equity shares are entitled to.
VI. Particulars of shares to be maintained in the register of members
Sub-rule 6 provides that where a company issues equity shares with differential
rights, the Register of Members maintained under section 88 shall contain all
the relevant particulars of the shares so issued along with details of the
shareholders.
Section 43 shall not apply to:

1. Specified IFSC Public Company, where memorandum of association or
articles of association of such company provides for it. 16
2. Private company, where memorandum or articles of association of the
private company so provides; however, this exemption shall be available to
only that private company which has not committed a default in filing its
financial statements under section 137 or annual return under section 92
with the Registrar.17
16
GSR 8 (E), dated 4th January, 2017
17
GSR 464 (E), dated 5th June, 2015 as amended by GSR 583 (E), dated 13 th June, 2017

a
3. CERTIFICATE OF SHARES [SECTION 46]

PRIMA FACIE EVIDENCE OF TITLE
Shares Issued and held in physical form
As per sub-section 1, a certificate specifying the shares held by any person, shall
be prima facie evidence of the title of the person to such shares if issued;
a. Under the common seal if any of the company or
b. Signed by two directors or
c. Signed by a director and the Company Secretary, wherever the company has
appointed a Company Secretary
Note:
1. Since w.e.f. 29-05-2015 though Companies Amendment Act 2015,

requirement to have common seal is optional for companies, hence physical
share certificate issued under sign of two director or of one director along
with company secretary is valid.
2. If the composition of the Board permits of it, at least one of the aforesaid two
directors shall be a person other than the managing or whole-time director
3. A director shall be deemed to have signed the share certificate if his signature
is printed thereon as a facsimile signature by means of any machine,
equipment or other mechanical means such as engraving in metal or
lithography, or digitally signed, but not by means of a rubber stamp, provided
that the director shall be personally responsible for permitting the affixation
of his signature thus and the safe custody of any machine, equipment or other
material used for the purpose.
Shares held in Depository Form
As per sub-section 4, where a share is held in depository form, the record of the
depository is the prima facie evidence of the interest of the beneficial owner.

Students are advised to take note:
Requirement regarding securities issued in Dematerialised form, can be referred in

Rule 9 and Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules,
2014.
Rule 9A was inserted by the Companies (Prospectus and Allotment of Securities)

Third Amendment Rules, 2018, w.e.f. 2-10-2018 and requires every unlisted public
company to issue the securities only in dematerialised form and also facilitate
dematerialisation of all its existing securities.
ISSUE OF RENEWED/DUPLICATE SHARE CERTIFICATE [SUB-SECTION 2

READ WITH RULE 6 OF THE COMPANIES (SHARES AND DEBENTURES)
RULES, 2014]
Issue of renewed certificate
A case wherein originally issued share certificate has been defaced, mutilated or
torn, a renewed share certificate in replacement shall be issued, in lieu of surrender
of such original certificate, to the company.
Note:
1. A company may replace all the existing certificates by new certificates upon
sub-division or consolidation of shares or merger or demerger or any
reconstitution without requiring old certificates to be surrendered
2. On renewed certificate it shall be stated that it is “Issued in lieu of share

certificate No..... sub-divided/replaced/on consolidation”
3. Company may charge such a fee as board may think fit, but not exceeding
` 50 per certificate; and no fee shall be payable pursuant to scheme of
arrangement sanctioned by the High Court or Central Government.
Issue of duplicate certificate
A case wherein share certificate originally issue has been lost or destroyed, a share
certificate in duplicate may be issued if board is consented for the same based
upon evidences produced.

a

1. Company may charge fees as the Board thinks fit, not exceeding rupees fifty
per certificate
2. On the face of duplicate certificate, it shall be stated prominently that it is
“duplicate issued in lieu of share certificate No......” and the word “duplicate”
shall be stamped or printed prominently
3. In case unlisted companies, the duplicate share certificates shall be issued
within a period of three months and in case of listed companies such
certificate shall be issued within fifteen days, from the date of submission of
complete documents with the company respectively.
Record of renewed and duplicate certificate to be maintained

Particulars of every renewed and duplicate share certificates maintained in Form
SH 2 with cross reference to register of members, in shape of register.
Such register shall be kept at registered officer or any other place where register
of members in custody of company secretary or such other person as may be
authorised by the Board.
All entries made in such register shall be authenticated by the company secretary
or such other person as may be authorised by the Board.
MANNER OF ISSUE OF CERTIFICATES/DUPLICATE CERTIFICATES
Sub-section 3 overrule the articles of a company, and say the issue of a certificate
of shares or the duplicate thereof, the particulars to be entered in the register of
members and other matters shall be in manner and form as prescribed in rule 5, 6,
and 7 of the Companies (Shares and Debentures) Rules, 2014.
Rule 5 of the Companies (Shares and Debentures) Rules, 2014 applies, where
shares are not in demat form
Share certificate is in vogue in case of shares which are held in the physical
form, not in the demat form (under the depository mode). Hence provisions
contained in rule 5 of the Companies (Shares and Debentures) Rules, 2014 pertaining
to share certificate applicable where shares are not in demat form.

Pre-requisites for issue of share certificate

Share Certificate shall be issued on surrender of letter of allotment or fractional
coupons of requisite value (save in cases of issues against letters of acceptance or
of renunciation, or in cases of issue of bonus shares); in pursuance of a resolution
passed by the Board.
Form of share certificate
Certificate of share shall be in Form SH 1 or as near thereto as possible and shall
specify;
a. The name(s) of the person(s) in whose favor the certificate is issued,
b. The shares to which it relates and
c. The amount paid-up thereon.
Recording of particulars stated in share certificate
The particulars of every share certificate issued in accordance with sub-rule (1) shall
be entered in the Register of Members maintained in accordance with the
provisions of section 88 along with the name(s) of person(s) to whom it has been
issued, indicating the date of issue.
Maintenance of share certificate forms and related books and documents
(Rule 7 of the Companies (Shares and Debentures) Rules, 2014)
All blank forms to be used for issue of share certificates shall be printed and the
printing shall be done only on the authority of a resolution of the Board and these
shall be consecutively machine-numbered. Such forms shall be kept in the custody
of the secretary or such other person as the Board may authorise for the purpose.
All books pertain to record of share certificates shall be preserved in good order
not less than thirty years and in case of disputed cases, shall be preserved
permanently.
All certificates surrendered to a company shall immediately be defaced by stamping
or printing the word “cancelled” in bold letters and may be destroyed after the
expiry of three years from the date on which they are surrendered, under the
authority of a resolution of the Board and in the presence of a person duly
appointed by the Board in this behalf.

a
Note:
1. Share Certificate is not a negotiable instrument.
2. Company shall issue only one share certificate in all those cases where shares
are held by more than one person jointly with others and delivery of share
certificate to any one of them will amount to delivery to all of them.
PUNISHMENT FOR ISSUING DUPLICATE CERTIFICATE OF SHARES WITH

INTENT TO DEFRAUD [Sub-section 5]
If a company with intent to defraud issues a duplicate certificate of shares, the
punishment shall be as specified in table;
Liable Minimum Fine Maximum Fine

Higher of:
Five times the face Ten times the face
Company value of the shares value of such shares
involved or
Rupees ten crores
And
Liable for action under section 447
Every officer of the Note – Provisions of Section 447 already
company who is in default explained as separate topic under chapter 3 of
this module.
Example 3 – It is observed that Golden Apple Transport Limited issued share

certificates in duplicate with intend to defraud. The total shares in regard to which
such certificates are issued are nearly 12,00,000. Face value of each share is ` 10.
The maximum fine that can be imposed on company shall be ` 12,00,00,000.
4. VOTING RIGHTS [SECTION 47]

VOTING RIGHTS OF MEMBERS HOLDING EQUITY SHARE CAPITAL [SUB-
SECTION 1]
Subject to the provisions of section 43, section 50 (2) and section 188 (1)
a. Every member of a company limited by shares and holding equity share
capital therein, shall have a right to vote on every resolution placed before
the company; and

b. His voting right on a poll shall be in proportion to his share in the paid-up
equity share capital of the company. But in case of Nidhi Company, no
member shall exercise voting rights on poll in excess of five per cent, of
total voting rights of equity shareholders. 18
Note:
1. As per section 2(93) Voting right means the right of a member of a company
to vote in any meeting of the company or by means of postal ballot.
2. Section 106 specify provisions regarding restriction on voting rights.
3. Section 43 has overriding effect on section 47, hence holders of equity share
capital with differential rights will exercise voting right as per clauses of article
of association or terms of issue; rather on proportional basis.
VOTING RIGHTS OF MEMBERS HOLDING PREFERENCE SHARE CAPITAL

[SUB-SECTION 2]
Every member of a company limited by shares who is holding any preference share
capital shall, in respect of such capital, have a right to vote on resolution;
a. Placed before the company which directly affect the rights attached to his
preference shares, and
b. For the winding up of the company, or for the repayment or reduction of
its equity or preference share capital.
Note:
Voting right of preference share holder, on a poll shall be in proportion to his share
in the paid-up preference share capital of the company.
Second Proviso to section 47 (2) empowers preference shareholder with right to
vote on all the resolutions placed before the company, in case where the dividend
in respect of his class of preference shares has not been paid for a period of two
years or more.
First Proviso to section 47 (2), provides that in case of resolutions wherein both equity
shareholders and preference shareholders are entitled to vote, the proportion of the
voting rights of equity shareholders to the voting rights of the preference
shareholders shall be in the same proportion as the paid-up capital in respect of the
equity shares bears to the paid-up capital in respect of the preference shares.
18
Notification No. GSR 465 (E), dated 5th June, 2015.

a
Summary of section 47
Voting Rights
Preference Shares (In

Equity Shares proportion of paid-up
capital)
On every resolution Dividend not Directly

placed before the paid for 2 years Winding up affecting
company or more interest
Equity shares
Normal having Differential
Rights
In proportion As defined in
of paid-up Articles/ Terms
capital of issue
Example 4 – Indswift Pharma Labs Limited raised the capital of 300 crore through
issue of single series of 8% preference share apart from 1200 crore ordinary shares.
Indswift last paid dividend to such preference share holder, for 2019-20.
Preference shareholder w.e.f 1 st April 2022 assume the right to vote on any
resolution placed before company. But till 31 st March 2022 they can vote only on
that resolution which directly affect the rights attached to his preference shares or
involve matter of the winding up of the company, or for the repayment or reduction
of its equity or preference share capital.
The proportion of voting right of equity shareholders to the voting rights of the
preference shareholders shall be 4:1.

Section 47 shall not apply to;

1. A Specified IFSC Public Company, where memorandum of association or
articles of association of such company provides for it. 19
2. A private company, where memorandum or articles of association of the
private company so provides, however, this exemption shall be avaible to only
that private company which has not committed a default in filing its financial
statements under section 137 or annual return under section 92 with the
Registrar.20
5. VARIATION OF SHAREHOLDERS’ RIGHTS

[SECTION 48]
A shareholder who was given the right to purchase the shares of the company on
a pre-emptive basis was held to constitute a special class distinguishing him from
other shareholders who did not have any such right, and consequently, his right
was not permitted to be taken away without his consent.21 If it is proposed to
change the rights of any class, certain procedure has to be followed.
Section 48 allows the variation, if three conditions (First two stated by sub-section
1, while third and last one by sub-section 2) has been met.
First - There should be a provision in the memorandum or articles of the
company entitling it to vary such class rights, in absence of same; the terms of
issue of the shares of that class not prohibiting such a variation.
Second - The holders of at-least 75% of the issued shares of that class must have
given their consent in writing or pass a special resolution sanctioning the
variation at a separate class meeting.
Proviso to sub-section 1, provides if variation by one class of shareholders affects
the rights of any other class of shareholders, the consent of three-fourths of such
other class of shareholders shall also be obtained and the provisions of this
section shall apply to such variation.
19
20
GSR 464 (E), dated 5th June, 2015 as amended by GSR 583 (E), dated 13 th June, 2017
21
Cumbrian Newspapers Group Ltd v Cumberland Sf Westmorland Herald Newspaper &
Printing Co Ltd (1987) 2 Comp LJ39.

a
Third - The holders of at least 10 per cent of the shares of that class who did not
consent to or vote in favour of the resolution may apply to the Tribunal and then
variation shall not take effect unless and until it is confirmed by the Tribunal.
Procedural Aspects for confirmation from tribunal

An application should be made within 21 days of the date of consent or resolution.
It can be made by one (or more of their number) as they may appoint in writing;
on behalf of the shareholders entitled to make the application
Sub-section 3 provides, the decision of the Tribunal have binding effect upon
shareholders of the class. Further sub-section 4 requires the company to file a
copy of the order with the Registrar within 30 days of the date of the order.
Example 5 – A resolution sanctioning the variation has been moved on 1 st

November 2022, the application with tribunal shall be filled by 22nd November
2022. Further if tribunal pass its order on 4 th January 2023, then copy of order shall
be filed with registrar by 6 th March 2023.
Illustration - MCQ
DBS Chemicals Limited issue ordinary share of different classes. DBS planned to vary
rights of one the class wherein there were only 105 holders. 100 out of 105 holders
own 0.5% shares of that class, whereas each of remaining 5 holders hold 10% shares
of that class. Presuming 100 holder who own 0.5% shares already signed/authorised
the consent letter sanctioning the variation, how many holders out of such 5 need to
authorise the said letter to approve the variation.
Options;
a. 0
b. 1
c. 3
d. 5
Answer – c. (Refer section 48(1)
The holders of at-least 75% of the issued shares of that class must have given
their consent in writing or pass a special resolution sanctioning the variation at a
separate class meeting.
Mind it is 75% of issued shares’ holders not 75% of holders.

Crux of some of landmark judgements – to better understand the ‘variation’

New issue of preference shares ranking pari-passu with the existing shares does
not amount to variation so as to require the consent of preference shareholders.22
Cancellation of shares and reduction of capital also do not amount to variation of
class rights.23
6. CALLS ON SHARE [SECTION 49 TO SECTION 51]

The liability of a shareholder to pay the full value of the shares held by him, which
is currently partly paid-up is enforced by making "calls" for payment.
It is worth noting here that every shareholder is under a statutory liability to pay
the full amount of his shares as Section 10(2) declares that "all money payable by
any member to the company under the memorandum or articles shall be a debt
due from him to the company".
But the liability to pay this debt arises only when a valid call has been made. Section
49 lay down the principle of uniformity, whereas section 50 deals with calls in
advance and section 51 contains the provisions regarding dividend rights on paid-
up amount.
CALL SHALL BE ON UNIFORM BASIS [SECTION 49]

Calls shall be made on a uniform basis on all shares that are falling under the same
class.
Note:
1. Usually share with same nominal value are considered as same class, but
shares of the same nominal value on which different sums have been paid
shall not be deemed, for this purpose, to fall under the same class.
2. A shareholder on whom a regular call for payment has been served may
choose to pay only a part of the sum due.
22
White v Bristol Aeroplane Co Ltd (1953) 2 WLR 144.
23
Essar Steel Ltd, re, (2005) 59 SCL457 (Guj)

a
Here it is important to consider the debt (of calls made) is not an entire and
indivisible debt, therefore, the company may be bound to accept the
amount tendered by the shareholder
3. How much to call on partly-paid share?
This will be the decision of board, subject to clauses to Article and terms of issue.
Example 6 – Prism Glass Limited issued three series of equity shares, all carry the
nominal value of ` 100, and the paid-up value for each series is 100, 80 and 55
respectively.
All will be considered as different class of shares. Since for first class share is fully paid-
up, no call can be made, whereas in case of remaining two classes call can be made.
Where a shareholder paid the first two calls after a great delay and neglected to pay
the third call and the directors, being annoyed, and called upon him to pay the whole
amount due. In your opinion is call valid?
Answer - A call can’t be made on some of the members only, unless they constitute
a separate class of shareholders, hence such a call shall be invalid. 24
CALLS-IN-ADVANCE [SECTION 50]
As per Section 50, a company may, if so authorised by its articles, accept from any
member the whole or a part of the amount remaining unpaid on any shares held
by him, although no part of that amount has been called up.
Note
1. Such advance payment will not entitle the member to more voting rights as
compared with other members until all have been called upon to pay.
2. Interest can be paid on such advance, if permitted by article. Here it is
worth nothing that, where the rate of interest is permitted by the articles on
such advance payment, same could be varied by shareholders in general
meeting. To illustrate; a rate 6 percent may increase to 10% by
shareholders.25
24
Galloway v Halle Concerts Society, (1915) 2 Ch 233
25
CIT v Manipal Industries Ltd, (1997) 12 SCL 15 (ITAT).

Example 7 - Coriander Masale Limited has issued 10,00,000 equity shares of ` 10

each on which ` 6 per share has been called till allotment and the first and final call
of ` 4 is yet to be made. Reena holds 10,000 shares on which she has paid whole
of ` 10 per share. In the upcoming extra-ordinary general meeting of the company
she wants to exercise her voting rights as the owner of fully paid-up shares.
However, the company cannot permit her as she does not have voting right in
respect of the ‘advance amount’ paid by her in respect of first and final call. The
restriction will continue till the amount is duly called up by the company.
Moon Star Machineries Limited is authorised by its articles to accept the whole or any
part of the amount of remaining unpaid calls from any member even if no part of
that amount has been called up by it. ‘Anand’, a shareholder, deposits in advance the
remaining amount due on his partly paid-up shares without any calls being made by
the company. Advise the company about the validity of accepting money in advance.
Answer - In view of the authorisation given by the Articles, Moon Star Machineries
Limited is permitted to accept the advance amount received on unpaid calls from
Anand. In other words, this is a valid transaction.
PAYMENT OF DIVIDEND IN PROPORTION TO PAID-UP AMOUNT

[SECTION 51]
The company if so authorised by article, may be permitted to pay dividends in
proportion to the amount paid-up on each share.
The Board of Directors of a company may decide to pay dividends on pro rata basis
if all the equity shares of the company are not equally paid-up. However, in the
case of preference shares, dividend is always paid at a fixed rate.
7. ISSUE OF SHARES AT A PREMIUM OR

DISCOUNT [SECTION 52 & SECTION 53]
ISSUE OF SHARES AT A PREMIUM & APPLICATION OF PREMIUM
[SECTION 52]
Since there is no restriction imposed by the Act on the sale of shares at a premium,
hence if the market exists, a company may issue its shares at a price higher than
their face/nominal value. But the Act does regulate the disbursement of the amount
collected as premium through section 52.

a
Note:
1. The power to issue shares at premium need not be specifically provided by

AOA.
2. SEBI guidelines have to be observed by listed entities, as regulations indicate

when an issue has to be at par and when premium is chargeable.
When a company issues shares at a price higher than their face value, the shares
are said to be issued at premium and the differential amount is termed as premium.
Example 8 - A share having face value of ` 10 is issued at a price of ` 14. The

amount over and above the face value of ` 10 i.e. ` 4 is called premium.
Practical Insight
Lloyds Luxuries IPO opens on Sep 28, 2022, and closes on Sep 30, 2022. The date
of listing on NSE SME was October 11, 2022 (Tuesday). Fixed issue price against the
Face Value of ₹ 10 per share is ₹ 40 per share. Hence, premium charges is ₹30 per
share.
Transfer of premium to Securities Premium Account [Sub-section1]

Sub-section 1 lay-down following principles that shall be observed in regards to
premium;
a. Premium may be received in cash or in kind.
b. The amount of premium so received, whether in cash or kind, shall be carried
to a separate account to be known as the Securities Premium Account.
c. The amount to the credit of share premium account has to be maintained
with the same sanctity as paid-up share capital
d. It can be reduced only in the manner of paid-up share capital can be

reduced under this act. Liberty is, however, given to use the fund in the sub-
section 2 and 3.
Note:
1. The amount to the credit of the share premium account has to be shown as
a separate item in the Balance-sheet under Schedule III, Part B of the Act and
if it was disposed of either wholly or partly, then disclosure shall be made
‘how it was disposed’?

2. The DCA was of opinion that the amount of premium can’t be treated as a
free reserve as it is in the nature of a capital reserve. 26
3. A reduction of the premium account was allowed under a scheme which
experts had approved as fair, just and proper.27
Application of Premium received on Issue of Shares [sub-section 2 & 3]

Sub-section 2 allow the companies to apply securities premium account for;
a. Issue of fully paid bonus shares;
b. Writing off the preliminary expenses;
c. Writing off the issue expenses (expenses including commission paid or
discount allowed on any issue of shares or debentures);
d. Premium payable on the redemption (of any preference shares or of any
debentures); or
e. Buy-back (purchase of its own shares or other securities under section 68).
Sub-section 3 has overriding effect over sub-section 1 and 2. It restricts the
application of Securities Premium Account in case of;
Such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies under
Section 133
For the purpose of;
a. Issue of fully paid bonus shares;
b. Writing off the issue expenses (expenses including commission paid or
discount allowed on any issue of shares);
c. Buy-back (purchase of its own shares or other securities under section 68).
PROHIBITION ON ISSUE OF SHARES AT DISCOUNT [SECTION 53]
Where the issue price is lower than the face value of the shares, such issue of shares
is regarded as being issued at discount and the differential amount is known as
discount.
26
Circular No 3/77 of 15-4-1977
27
Zee Tele Films Ltd, re, (2005) 124 Comp Cas 102 (Bom).

a
Example 9 - A share having face value of ` 100 is issued at a lower price of ` 95. The
differential amount of ` 5 is known as discount which is being allowed by the company.
Though title of section used the word prohibited, but indeed issue of share at
discount is not fully prohibited, it is only restricted especially after the enactment
of the Companies (Amendment) Act, 2017 (effective from 09th February 2018).
Sub-section 1, except the issue of ‘Sweat Equity Shares’ under section 54 of this
Act, a company shall not issue shares at discount.
Further, sub-section 2, provides any share issued at discount by company is void.
Sub-section 2A, is overriding provision (to sub-section 1 and 2) inserted though
Companies (Amendment) Act, 2017 empowers the company to issue shares at
discount to its creditors as result of converting their debt on company into
shares as a result of;
a. Statutory resolution plan or
b. Debt restructuring scheme

In accordance with any guidelines or directions or regulations specified by the
Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking
(Regulation) Act, 1949.
Sub-section 3 provides the penalties that can be imposed where any company fails to
comply with the provisions of Section 53;
Liable Penalty
Every officer who is Upto an amount equal to the amount raised through the
in default issue of shares at a discount or five lakh rupees, whichever
is less
Company Refund all monies received with interest at the rate of twelve
percent per annum from the date of issue of such shares
Note:
It is to be noted that the restrictions mentioned in Sections 52 and 53 shall apply
only in respect of issue of shares (either equity or preference shares) but not to the
issue of any debt related products like bonds or debentures whose pricing is mostly
governed by YTM (yield to maturity) considerations.

8. ISSUE OF SWEAT EQUITY SHARES [SECTION 54]

MEANING OF ‘SWEAT EQUITY SHARES’ [SECTION 2(88)]
The term ‘sweat equity shares’ means such equity shares as are issued by a
company to its directors or employees at a discount or for consideration, other
than cash, for providing their know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name called.
Hence one can say, sweat equity shares are issued to keep the employees of a
company motivated by making them partner in the growth of the company. Mind
it, Sweat equity shares is a different concept from Employee stock option in multiple
ways.
Section 54 lists out the conditions that shall be fulfilled by company prior to issue
of sweat equity share apart from designates these at equal footing to equity shares.
STATUS OF SWEAT EQUITY SHARES AND HOLDER THEREOF [SECTION
54(2)]
Sub-section 2 provides;
a. The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares
issued under section 54 of the Act
b. The holders of sweat equity shares shall rank pari-passu with other equity
shareholders.
Pari-passu is a Latin phrase that means "on equal footing"
CONDITIONS FOR ISSUE OF SWEAT EQUITY SHARES [SECTION 54(1)]

According to Section 54 (1), a company may issue sweat equity shares if all of the
following conditions are fulfilled;
a. Share of that class must be already issued
b. Issue is authorised by a special resolution passed by the company;
c. Resolution specifies the details regarding the number of shares, the current
market price, consideration, if any, and the class or classes of directors or
employees to whom such equity shares are to be issued;
d. The issue of sweat equity shares must be in accordance with
regulations/rules as state in table;

a
Company Applicable Provisions/Regulations

Listed on Recognised Stock Regulations made by the Securities and Exchange
Exchange Board in this behalf
Rule 8 of the Companies (Share and Debentures)
Other than above
Rules, 2014
Illustration – T&F
A company that incorporated and commenced the business on 9th Nov 2022, can
issue sweat equity share only after 8 th Nov 2023.
Answer - False. Currently there is no condition prescribed by section 54 (1)

regarding age of company.
Clause c to section 54(1) omitted by the Companies (Amendment) Act, 2017 w.e.f
7th May 2018 “not less than one year has, at the date of such issue, elapsed since
the date on which the company had commenced business”.
SOME OF THE IMPORTANT PROVISIONS CONTAINED IN RULE 8 OF THE

COMPANIES (SHARE AND DEBENTURES) RULES, 2014
Meaning of Employee (Explanation I to sub-rule 1)
Employee means
a. a permanent employee of the company who has been working in India or

outside India; or
b. a director of the company, whether a whole-time director or not; or
c. an employee or a director as defined above, either of subsidiary or holding

company of concerned company; in India or outside India
Meaning of ‘Value additions (Explanation II to sub-rule 1)
The expression ‘Value additions’ means;
a. Actual or anticipated economic benefits derived or to be derived by the

company from an expert or a professional

b. For providing know-how or making available rights in the nature of

intellectual property rights,
c. By such person to whom sweat equity is being issued

d. For which the consideration is not paid or included in the normal
remuneration payable under the contract of employment (in the case of an
employee).
Validity of Special Resolution (Sub-rule 3)
The special resolution authorising the issue of sweat equity shares shall be valid for
making the allotment within a period of not more than twelve months from the date
of passing.
Limit on issue of Sweat Equity Shares (Sub-rule 4)
During a year, the maximum amount/limit for which sweat equity shares can be
issued is higher of;
a. Fifteen percent of the existing paid up equity share capital or
b. Shares of the issue value of rupees five crore.
The issuance of sweat equity shares (cumulative, including all previous issues, if any)
shall not exceed twenty five percent, of the paid-up equity capital of the Company
at any time. This limit for Startup companies is fifty percent of paid up capital upto ten
years from the date of its incorporation or registration.
Lock-in Period [Sub-rule 5]
Sweat equity shares issued to directors or employees shall be locked in/non-
transferable for a period of three years from the date of allotment.
Valuation of Sweat Equity Shares [Sub-rule 6]
Sweat equity shares to be issued shall be valued at a price determined by a

registered valuer as the fair price giving justification for such valuation.
Quoted market prices in an active market are the best evidence of fair value and
should be used, where they exist, to measure the financial instrument.

a
Valuation of IPR/know-how/value additions [Sub-rule 7]
The valuation of intellectual property rights or of know how or value additions for
which sweat equity shares are to be issued, shall be carried out by a registered valuer,
who shall provide a proper report addressed to the Board of directors with
justification for such valuation.
Treatment of non-cash consideration [Sub-rule 9]
Where the sweat equity shares are issued for a non-cash consideration on the basis of
a valuation report in respect thereof obtained from the registered valuer, such non-
cash consideration shall be treated in the following manner in the books of account of
the company:
Form of Non-cash consideration Treatment
Depreciable or amortizable asset Carried to the balance sheet
Other than above Shall be recorded as expense
Disclosure in the Directors’ Report [Sub-rule 13]
The Board of Directors shall, inter alia, disclose in the Directors' Report for the year in
which such shares are issued, the specified details of issue of sweat equity shares.
Maintenance of Register [Sub-rule 14]
The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3. It
shall be maintained at the registered office of the company or such other place as the
Board may decide.

9. ISSUE AND REDEMPTION OF PREFERENCE

SHARES [SECTION 55]
Following diagram depicts the types of preference shares:
On the basis of Cumulative

payment of
dividend Non-cumulative
On the basis of Participatory

participation in
surplus Non-participatory
Types of
Convertible
Preference
Shares (mandatorily or optionally)
On the basis of
conversion (partially or fully)
Non-convertible
Redeemable
On the basis of
redemption Irredeemable
(cannot be issued)
PROHIBITION ON ISSUE OF IRREDEEMABLE PREFERENCE SHARES [SUB-

SECTION 1]
A company limited by shares shall not issue any preference shares which are
irredeemable.
It worth noting that the amendment of 1988 to the Companies Act 1956, abolished
the category of irredeemable preference shares.
ISSUE AND REDEMPTION OF REDEEMABLE PREFERENCE SHARE [SUB-
SECTION 2]
From the sub-section 1, it can be constructed reasonably that only redeemable
preference shares can be issued by company limited by shares, sub-section 2

a
provides for conditions as applicable to the issue and redemption of redeemable

preference shares.
Authorised by Article of Association
A company limited by shares may issue redeemable preference shares only if so
authorised by its articles.
Example 10 – Medanta Healthcare Limited is planning to raise the capital through
issue of preference share. It article is silent about this. Board of Directors are of
opinion that redeemable share can be issued.
Since in the given case article is silent, not authorise the issue of preference shares
expressly, hence Medanta Healthcare Limited can’t issue preference share. They
may alter the article of association.
Maximum Tenor of redeemable Preference Shares and exception thereto
Sub-section 2 also provides preference shares shall be redeemed within a period
not exceeding twenty years from the date of their issue subject to such
conditions as are prescribed in Rule 9 of the Companies (Share Capital and
Debentures) Rules, 2014.
These conditions laid-down by sub-rule 1 are;
a. A special resolution in the general meeting of the company shall be passed
b. At the time of such issue of preference shares, the company should not have
subsisting default in the;
i. Redemption of preference shares or
ii. Payment of dividend due on any preference shares.
Sub-rule 2 and 3 enumerates the matters to be specified in resolution and
explanatory statement to be annexed to the notice of such general meeting in
which resolution has to be passed respectively.
Sub-rule 4 requires a company that issues preference shares, to maintain a Register
of Members under Section 88, which shall contain the particulars in respect of such
preference shareholder(s).
Further sub-rule 5 provides that if company wish to list its preference shares on a
recognized stock exchange, shall issue such shares in accordance with the
regulations made by the SEBI in this behalf.

Exception to maximum tenor limit of twenty years (First proviso to section

55(2) read with explanation to section 55 and Rule 9 of the Companies (Share
Capital and Debentures) Rules, 2014).
For infrastructure projects specified in schedule VI of this Act, a company may issue
preference shares for a period exceeding twenty years but not exceeding thirty
years subject to the redemption of at least 10% of such preference shares annually,
beginning from 21st year onwards or earlier, on proportionate basis, at the option
of preferential shareholders.
Redemption of Preference Shares [Second proviso to section 55(2)]
Second proviso to section 55(2) provide conditions for redemption and payment
of premium on redemption, if any
a. Preference shares shall be redeemed out of;
1. Profits of the company which would otherwise be available for dividend
or
2. Proceeds of a fresh issue of shares made for the purposes of such
redemption.
b. Shares to be redeemed shall be fully paid.
c. Where such shares are proposed to be redeemed out of the profits of the
company;
1. A sum equal to the nominal amount of the shares to be redeemed, out
of such profits (profit & free reserves, which otherwise is available for
dividend), shall be transferred to a reserve, called Capital Redemption
Reserve
2. The amount to the credit of Capital Redemption Reserve has to be
maintained with the same sanctity as paid-up share capital
3. Capital Redemption Reserve can be reduced only in the manner of
paid-up share capital can be reduced under this Act.
For the purpose of this section

1. Redemption of preference shares is not taken as reduction of the company's
authorised share capital.
2. The company may issue new shares up to the nominal amount of the shares
redeemed and the capital shall not be deemed to have been increased.

a
Example 11 - During the current financial year, the Board of Directors of Vintee
Lifestyles Garments Limited is to undertake redemption of 20,000 preference shares
of ` 100 each at a premium of ` 20 per share. It is made out by the Accounts
Department that the profits are sufficient to meet the ensuing liability arising out
of redemption of preference shares at premium. In this case, the amount that needs
to be transferred to Capital Redemption Reserve account out of profits which are
otherwise available for dividend, is ` 20,00,000 being the sum equal to the nominal
amount of the preference shares to be redeemed. There is no need to transfer to
CRR account any amount paid towards premium.
d. Source of premium, if any; payable at redemption of preference shares
In case of such class of companies, as may be prescribed and whose financial
statement comply with the accounting standards prescribed for such class of
companies under section 133, the premium, if any, payable on redemption shall be
provided for out of the profits of the company, before the shares are redeemed.
Provided also that premium, if any, payable on redemption of any preference shares
issued on or before the commencement of this Act by any such company shall be
provided for out of the profits of the company or out of the company’s securities
premium account, before such shares are redeemed.
In a case not falling under above scenario, the premium, if any, payable on
redemption shall be provided for out of the profits of the company or out of the
company’s securities premium account, before such shares are redeemed.
Summary of above provisions are tabled below;
Category Source Timing (Shall be

provided)
Such class of companies, Out of the profits of the before such shares are
as may be prescribed company redeemed
and whose financial
statement comply with
the accounting
standards prescribed for
such class of companies
under section 133

Premium payable on Out of the profits of the

redemption of any company or out of the
preference shares issued company‘s securities
on or before the premium account
commencement of this
Act
Any other case
Issue of further Redeemable Preference Shares (if a Company is unable to

redeem existing preference shares or pay dividend) [Sub-section 3]
Where a company is not in a position to redeem any preference shares or to pay
dividend on such preference shares (called unredeemed preference shares) in
accordance with the terms of issue; then such company may issue further
redeemable preference shares to the holder of unredeemed preference shares;
equal to the amount due, including the dividend thereon; with the consent of the
holders of three-fourth in value of such unredeemed preference shares, and
approval of the tribunal on a petition made by it in this behalf.
In this way the unredeemed preference shares shall be deemed to have been
redeemed.
Where a company is not in a position to redeem any

preference shares or to pay dividend on such
preference shares (called unredeemed preference
shares) in accordance with the terms of issue;
Then such company may issue further redeemable

preference shares to the holder of unredeemed
preference shares;
Equal to the amount due, including the dividend

thereon;
With the consent of the holders of three-fourth in

value of such unredeemed preference shares, and
approval of the tribunal on a petition made by it in this
behalf.
In this way the unredeemed preference shares shall be

deemed to have been redeemed.

a
Note:
In regards to preference shares held by shareholder who have not consented to the
issue of further redeemable preference shares, the tribunal shall order the
redemption forthwith; while giving approval under section 55(3)
Example 12 – Bell Homes Furnisher Limited (BHFL) unable to redeem the

preference shares as they become due. Hence BHFL decided to issue further
preference share against unredeemed preference shares. Holder holding 93% of
such unredeemed preference shares in value, gave their consent; tribunal also
assented to issue of further preference shares. The 18 holders who own remaining
7% seek redemption of shares held by them.
In this case while giving approval under section 55(3), tribunal shall order the
redemption forthwith of shares (7% in value) held by dissenting 18 holders.
Utilisation of CRR Account [Sub-section 4]
The capital redemption reserve account may be applied in paying up unissued
shares of the company to be issued to the members as fully paid bonus shares.
10. TRANSFER AND TRANSMISSION OF

SECURITIES AND THE ALLIED PROVISIONS
[SECTION 56 TO SECTION 59]
The procedures and formalities for the transfer of the securities as laid down by
sections 56-59 are largely applicable to securities that are in other form than demat
form.
TRANSFER AND TRANSMISSION OF SECURITIES OR INTEREST OF
MEMBER IN COMPANY [SECTION 56]
Requirement for Registering the Transfer of Securities [Sub-section 1]
Except, where the transfer is between persons both of whose names are entered
as holders of beneficial interest in the records of a depository
A company shall register a transfer of;
a. securities of the company, or

b. the interest of a member in the company in the case of a company having no

share capital,
Only if, following conditions fulfilled prior to such registration;
a. The instrument of transfer must be executed both by the transferor and
the transferee.
b. The instrument must specify the name, address and occupation, if any, of
the transferee.
c. The instrument of transfer should be duly stamped and dated.
d. The instrument of transfer should be in the prescribed form. As per Rule 11

(1) of the Companies (Share Capital and Debentures) Rules, 2014, Form No.
SH-4 is to be used, in case securities are held in physical form
e. The instrument should be delivered to the company along with the

certificate relating to the shares transferred within 60 days from the date
of execution. If the share certificate is not in existence, the letter of allotment
of securities should be filed.
The proviso to Section 56(1) says that where the instrument of transfer has been
lost or it has not been delivered within the prescribed period (i.e. 60 days from
the date of Execution), the company may register the transfer on such terms as to
indemnity as the Board may think fit.
Transfer of partly paid Shares on an application of transferor alone (Sub -

section 3 read with rule 11 (3) of the Companies (Share Capital and
Debentures) Rules, 2014
Where an application is made by the transferor alone and relates to partly paid
shares, a company shall not register a transfer of partly paid shares, unless the
company has given a notice in Form No. SH-5 to the transferee and the transferee
has given no objection to the transfer within two weeks from the date of receipt
of notice.
Example 13 - Himanshu has received a notice from Chaitanya Progressive Books
Private Limited on 7th August, 2023 intimating that Shefali has submitted a transfer
deed duly signed by her for transfer of 500 partly paid shares (` 6 paid-up out of
Face Value of ` 10 per share) in his name.
Himanshu as transferee must raise his objection to the proposed transfer of partly
paid shares latest by 21 st August, 2023.

a
Exemptions28 in case of government companies/securities

Government Company, which has not committed a default in filing its financial
statements under section 137 or Annual Return under section 92 with the Registrar
given.
Full exemption from conditions laid-down by section 56(1) in respect to transfer

of securities held by nominees of the Government.
Partial exemption in respect to transfer of bonds issued by a Government
company. Only an intimation by the transferee specifying his name, address and
occupation, if any, has been delivered to the company along with the certificate
relating to the bond; and if no such certificate is in existence, along with the letter
of allotment of the bond. There is no requirement of proper instrument of transfer,
to be duly stamped and executed by or on behalf of the transferor and by or on
behalf of the transferee.
Power to Register Transmission not affected by section 56 (1) (Sub-section 2)
The power of company to register transmission shall not be affected by the
conditions imposed by Section 56 (1) for registration of transfer.
Hence company is empowered to register transmission of right, if it receives an
intimation from any person to whom such right has been transmitted. There is no
need for submission of instrument of transfer in case of transmission.
Transmission (vis-à-vis transfer).
The word 'transmission' means devolution of title to securities otherwise than by
transfer, for example, devolution by death, succession, inheritance, bankruptcy,
marriage, etc. On registration of the transmission of securities, the person entitled
to transmission of securities becomes the holder and is entitled to all rights and
subject to all liabilities arising therefrom.
While transfer of shares is brought about by delivery of a proper instrument of
transfer (viz, transfer deed) duly stamped and executed, transmission of shares is
done by forwarding the necessary documents (such as a notarised copy of death
certificate) to the company.
28
In terms of Notification No. GSR 463 (E), dated 5th June, 2015

Few cases of transmission for better understanding - In the following cases

(mind it this list is not exhaustive, only illustrative), transmission of shares shall take
place;
1. Death: When a shareholder expires, his shares need to be transmitted to his
legal representative.
2. Insolvency: When a shareholder becomes insolvent, his shares are to be
transmitted to his Official Receiver.
3. Lunacy: When a shareholder becomes lunatic, his shares are to be
transmitted to his administrator appointed by the Court.
Transfer of Security of the Deceased Person by his Legal Representative [Sub-

section 5]
The transfer of any security (or other interest in company) made by legal
representative of a deceased person, shall be valid as if such legal representative is
holder at the time of the execution of the instrument of transfer; even if, in actual
such legal representative is not a registered holder.
This sub-section is basically bringing ease to legal heir with deeming effect of being
holder of security or other interest in company of a deceased person.
Example 14 - Richa Daniel, after having obtained succession certificate, succeeded

to 7,000 shares of ` 100 each allotted to her late father Alexender Daniel by Speed
Software Limited. To pay off the debt of her cousin Stesley, she wants to transfer
whole of the 7,000 shares to her on the basis of a duly stamped instrument of
transfer which has been signed by her as well as Stesley. Accordingly, she has
delivered the required documents to the company for transfer of shares.
In terms of Section 56 (5), the company, on receipt of duly stamped instrument of
transfer along with requisite share certificates and succession certificate, shall
transfer the shares in favour of Stesley. Thus, even though Richa Daniel, the legal
representative of Alexender Daniel, is not a holder of 7,000 shares as per the
Register of Members of the company, the transfer effected by her in favour of her
cousin Stesley is a valid transfer as if she had been the holder of securities at the
time of executing the transfer deed.
Note - As an alternative, Richa Daniel may choose to get herself registered as
holder of the 7,000 shares in which case, she will make an application to Speed
Software Limited. Such application shall be accompanied with share certificates and

a
succession certificate. There is no need to submit instrument of transfer or transfer

deed in such a case of transmission. This is so because transfer deed cannot be
signed by the deceased person as transferor.
On receipt of these documents, the company will scrutinize them and if found in
order, it shall proceed to enter the name of Richa Daniel in the Register of Members.
Consequently, the name of the deceased person i.e. Alexender Daniel shall be
deleted. Further, new share certificates will be issued in the name of Richa Daniel,
the legal representative of Alexender Daniel.
Time Period for Delivery of certificates [sub-section 4]
Every company shall, unless prohibited by any provision of law or any order of
Court, Tribunal or other authority, deliver the certificates of all securities allotted,
transferred or transmitted;
Particulars Time Period for delivering the Certificates

In the case of subscribers to the Within a period of two months from the date
memorandum. of incorporation.
In the case of any allotment of Within a period of two months from the date
any of its shares by a company. of allotment.
In the case of a transfer of Within a period of one month from the date of
securities. receipt of the instrument of transfer by the
company
In the case of a transmission of Within a period of one month from the date of
securities. receipt of the intimation of transmission by
the company
In the case of any allotment of Within a period of six months from the date of
debenture. allotment.
In the case of all securities by Within a period of sixty days after

specified IFSC public and private incorporation, allotment, transfer or
company 29
transmission.
29

Note:
In case where the securities are dealt with in a depository, the company shall
intimate the details of allotment of securities to depository immediately on
allotment of such securities. (Proviso to sub-section 4)
Example 15 – A request for transfer of shares has been received by Ind-swift

Pharma Labs Limited in form SH-4 along with instrument of transfer on
25th November 2022. The company shall deliver the certificate to that effect by 24 th
December 2022.
Penalty [Sub-section 6]
Liable Default Penalty

In complying with the provisions
Company and every officer of
of sub-sections (1) to (5) to ` 50,000
the company who is in default
section 56
Liability of Depository [Sub-section 7]

Where any depository or depository participant, with an intention to defraud a
person, has transferred shares, it shall be liable under Section 447 along with the
liability mentioned under the Depositories Act, 1996 30.
Note:
1. With the dematerialisation process becoming a necessity in case of unlisted
public companies i.e. they are required to dematerialise all of their securities as per
Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the
chances of forgery are very thin or almost negligible.
2. The provisions contained in Section 447 which describe ‘punishment for fraud’
are stated in the earlier Chapter 3 relating to ‘Prospectus and Allotment of
Securities’.
30
Act 22 of 1996

a
PUNISHMENT FOR PERSONATION OF SHAREHOLDER [SECTION 57]

If any person deceitfully personates;
a. as an owner of any security or
b. interest in a company, or
c. as an owner of any share warrant or coupon issued in pursuance of this Act,
And, thereby obtains or attempts to obtain any such security or interest or any such
share warrant or coupon, or receives or attempts to receive any money due to any such
owner,
Such person shall be punishable with;
a. Imprisonment for a term which shall not be less than one year but which may
extend to three years and
b. Fine which shall not be less than one lakh rupees but which may extend to five
lakh rupees.
Penalty Minimum Maximum up to

Imprisonment One year Three years
And
Fine One Lakh Five lakh
Note:
Personation for acquisition of securities is offence under section 38 punishable under
section 447. Mind it section 447 is general provision.
Gravity of offence committed by personation under section 38 and section 57 may be
considered while imposing penalty out of range provided.
It is worth noting, offence of cheating by personation under section 416 of Indian Penal
Code, 1860 is punishable under section 419 of code, with punishment of either
description which may extend upto three year or with fine or with both.
Student may refer section 38 and section 447, both covered under chapter 3 of this
module.

Additional Reading on Forged Transfer

A forged transfer is a ‘nullity’ and is not legally binding. Forged transfer takes place
when a company effects transfer of shares on the basis of an instrument of transfer
containing forged signatures of transferor. Is it possible for a transferee of ‘forged
transfer’ to acquire ownership of shares contained in the instrument of transfer?
The answer is ‘NO’. At the same time, the transferor who is the real owner continues
to be the shareholder and accordingly, the company can be forced by him to delete
the name of the transferee and to restore his name as owner of shares in the
Register of Members.
What will happen if the transferee of ‘forged transfer’ transfers the shares to
another buyer who does not know about the forgery and the company also
registers the transfer in the name of new buyer and endorses the share certificates.
In fact, the company cannot deny the ownership rights of new genuine buyer but
it can also not deny the ownership rights of original shareholder because ‘forged
transfer’ is void ab-initio and therefore, the company has to restore his name. While
restoring the name of the original shareholder, the company may be asked to
compensate the new genuine buyer who exercised good faith in purchasing the
shares. As a remedy, the company may get itself indemnified by the first transferee
who used the forged instrument of transfer to get the shares transferred in his
name.
REFUSAL OF REGISTRATION AND APPEAL AGAINST REFUSAL [SECTION

58]
Shares are movable property, hence can be transferred by the shareholders in the
manner prescribed by the Articles. The right to transfer shares is absolute in nature
and inherently vested with the ownership of the shares. In no case Articles can take
away the rights of members to transfer shares in absolute, by making shares non-
transferable.
Shares of a public company are freely transferable, whereas a private company is

required under section 2(68)(i) to restrict the right of the members to transfer the
shares. The articles of association of private companies contain certain kind of
restrictions on the transferability of shares. Generally, the restriction put by a private
company is that of pre-emption whereby the members are required to offer their
shares first to the existing members of the company before offering them to the
outsiders.

a
Section 58 contains the procedure which needs to be followed by a company while

refusing to register the transfer of securities. It also contains process of filing appeal
against such refusal.
Notice of Refusal to be sent [Sub-section 1]
If a private company limited by shares refuses to register the transfer of, or the
transmission by operation of law of the right to any securities or interest of a
member in the company, then the company shall;
Send notice of refusal to the transferor and the transferee or to the person giving
intimation of such transmission and stating reasons thereto,
Within a period of thirty days from the date on which the instrument of transfer,
or the intimation of such transmission, was delivered to the company.
Securities/other interest in Public Company [sub-section 2]
The securities or other interest of any member in a public company are freely
transferable.
Any contract or arrangement between two or more persons in respect of transfer

of securities shall be enforceable as a contract.
Appeal to Tribunal against Refusal [Sub-section 3]
The transferee may appeal to the Tribunal against the refusal by private company
to register the transfer or transmission, within a period of;
a. Thirty days from the date of receipt of the notice or
b. Sixty days from the date on which the instrument of transfer or the
intimation of transmission, was delivered to the company, in case no notice
has been sent by the company.
Example 16 – An application has been received by Private Company for transfer of

share on 25 th Nov 2022. The transferee didn’t get any response from company,
hence may advance an appeal to the tribunal by 24th January 2023.
Appeal to Tribunal against Refusal by a Public Company without sufficient

cause [Sub-section 4]
If a public company without sufficient cause refuses to register the transfer of

securities within a period of thirty days from the date on which the instrument of

transfer or the intimation of transmission, is delivered to the company, the

transferee may appeal to the tribunal, within, within a period of
a. Sixty days of such refusal or
b. Ninety days of the delivery of the instrument of transfer or intimation of

transmission, where no intimation has been received from the company.
Example 17 – An application has been received by Public Company for transfer of

share on 25 th Nov 2022. The transferee didn’t get any response from company,
hence may advance an appeal to the tribunal by 23 rd February 2023.
Order of Tribunal [Sub-section 5]
The Tribunal, while dealing with an appeal may, after hearing the parties, either
dismiss the appeal, or by order direct;
a. Transfer or transmission shall be registered by the company and the

company shall comply with such order within a period of ten days of the
receipt of the order; or
b. Direct rectification of the register and also direct the company to pay
damages, if any, sustained by any party aggrieved.
Contravention of the Order of the Tribunal [Sub-section 6]
If a person contravenes the order of the Tribunal, he shall be punishable with

imprisonment for a term not less than one year but may extend to three
years and with fine not less than one lakh rupees which may extend to five lakh
rupees.
Summary of penalty
Penalty Minimum Maximum up to
Imprisonment One year Three years
And
Fine One Lakh Five lakh

a
Summary of section 58
Refusal to transfer
Private company Public company
Can't refuse without sufficient

Send notice of refusal with cause
reasons
Appeal to Tribunal in 30/60 Appeal to Tribunal in 60/90

days days
Tribunal will either dismiss appeal or order:

1. Transfer within 10 days
2. Rectification of Register
In case of contravention of order:

Fine and impriosnment
Illustration – T&F
Notice of refusal to register transfer of shares by private company shall be sent
only to the transferee within 30 days, stating reasons of refusal therein.
Answer – False, notice of refusal shall be given to both transferee and transferor
under section 58(1).
RECTIFICATION OF REGISTER OF MEMBERS [SECTION 59]
It is the duty of the company to keep the register up to date so as to give at all
times the accurate and correct position as to particulars of shareholding, because
If a person's name appears in the register of members, he is presumed to be the
shareholder or member, even if, in fact, he is not so. Contrarily, if a person's name
is absent from the register, apparently he is not a member, although he may have
done everything to entitle him to become one.
Section 59 entrust right to appeal with aggrieved person, apart from vesting power
in tribunal to order for rectification of register of members.
Appeal by Aggrieved Person [Sub-section 1]
An aggrieved person, member of company or company may appeal to tribunal
or to a competent court (outside India, specified by the Central Government by

notification, in respect of foreign members or debenture holders residing outside

India), for rectification of the register if without sufficient cause,
a. the name of any person is entered in the register of members of a company,
or
b. the name of any person is omitted, after having been entered in the register,
or
c. if a default is made, or unnecessary delay takes place in entering in the
register, the fact of any person having become or ceased to be a member.
Note:
The words "unnecessary delay" have not been defined in the Act and, therefore, it
becomes a question of evidence to be decided on the facts of each case. A failure
to register a transfer within one month of the application, which was contrary to
the listing agreement, was held to be an unreasonable delay.
Every shareholder has an interest in the proper maintenance of the company's
register of members. Any member can make an application without showing any
injury or prejudice to him. Personal grievance is not necessary for locus standi.
Order of the Tribunal [Sub-section 2]
Tribunal may, after hearing the parties to the appeal either dismiss the appeal or
by order;
a. Direct that the transfer or transmission shall be registered by the company

within a period of ten days of the receipt of the order, or
b. Direct rectification of the records of the depository or the register and in the
latter case, direct the company to pay damages, if any, sustained by the party
aggrieved.
Example 18 – After hearing both parties of appeal over removal of name of
applicant from register of member without sufficient cause, tribunal pass an order
to reinstate the name in register with payment of damages to holder as well cost
of litigation. Company has to pay damages as ordered apart from rectification of
the register.
Rights of holder is protected [Sub-section 3]
Sub-section 3 protects the right of a holder of securities, to transfer such securities.
Further, any person acquiring such securities shall be entitled to voting rights

a
unless the voting rights have been suspended by an order of the

Tribunal.
Transfer of Securities contravenes certain Acts and Direction of Tribunal [Sub-

Section 4]
Tribunal may, on an application (made by the depository, depository participant,

company, the holder of the securities or the Securities and Exchange Board), direct
any company or a depository to set right the contravention and rectify its
register or records concerned, where the transfer of securities is in contravention
of any of the provisions of the;
a. The Securities Contracts (Regulation) Act, 1956
b. The Securities and Exchange Board of India Act, 1992
c. The Companies Act, 2013 or
d. Any other law for the time being in force
11. ALTERATION OF SHARE CAPITAL

[SECTIONS 61-70]
Bonus Issue
(section 63)
Rights Issue Reduction
(section 62) (section 66)
Power to limited Alteration

Buy back
companies of Share
(Section 68)
(section 61) Capital

Definition:
1. Authorised Capital or Nominal Capital
Section 2(8) defines the term authorised capital or nominal capital to mean such
capital as is authorised by the memorandum of a company to be the maximum
amount of share capital of the company.
2. Called-up Capital
Section 2(15) states that the term called-up capital means such part of the capital,
which has been called for payment.
POWER OF LIMITED COMPANY TO ALTER ITS SHARE CAPITAL [SECTION

61]
A limited company with a share capital can alter the capital clause of its
memorandum of association in any of the following ways, provided authority to
alter is given by the articles.
a. It may increase its authorised capital by such amount as it thinks expedient.
b. Consolidate and divide the whole or any part of its share capital into shares
of larger amount.
c. Convert all and any of its fully paid up shares into stock or vice-versa into
any denomination.
d. Sub-divide the whole or any part of its share capital into shares of smaller
amount.
The proportion between the amount paid and unpaid (if any) on each reduced
share shall be the same as it was in the case of the share from which the
reduced share is derived.
e. Cancel those shares which have not been taken up and reduce its capital
accordingly.
Example 19 – A share with face value of ` 100, on which ` 80 is paid up, can be
split into 10 shares of ` 10 nominal value each, with ` 8 being paid up.
Note:
Any of the above things can be done by the company by passing a resolution at
a general meeting.

a
Approval of the National Company Law Tribunal requires only in the case wherein
consolidation and division [suggested in point (b)] results in changes in the voting
percentage of shareholders.
Within 30 days of alteration, a notice must be given in Form SH-7 to the Registrar
who will record the same and make necessary alteration in the company's
memorandum. (Section 64 read with Rule 15 of the Companies (Share Capital and
Debentures) Rules, 2014).
Further subsection 2 provides that the cancellation of shares shall not be deemed
to be a reduction of share capital. Mind it, reduction of capital covered under
FURTHER ISSUE OF SHARE CAPITAL – RIGHTS ISSUE; PREFERENTIAL
ALLOTMENT [SECTION 62]
A rights issue involves pre-emptive subscription rights to buy additional securities
in a company offered to the company’s existing security holders. It is a non-dilutive
prorata way to raise capital.
Example 20 - If a company announces ‘1:10 rights issue’, it means an existing
shareholder can buy one extra share for every ten shares held by him/her. Usually
the price at which the new shares are issued by way of rights issue is less than the
prevailing market price of the stock to encourage subscription.
Practical Insight
Right Issue by Suzlon Energy Limited (October 2022)
Suzlon Energy Limited (SEL) is among the world's leading renewable energy
solutions provider in India operating in wind energy segment.
To part finance its needs for repayment/prepayment of certain borrowings
(` 900.00 crore) and general corporate purposes (` 283.50 crore), SEL is offering a
rights issue of 240 crore equity shares (Face Value ` 2) each at a price of ` 5 per
share (Current Market Price of Share was ` 8.47) to mobilize ` 200.00 crore.
The company is offering the right shares in the ratio of 5 shares for every 21 shares
held as of the record date of October 04, 2022. Rights entitlements can be
renounced up till Oct 14, 2022 (Current Market Price of Rights Entitlement was
` 1.32).

The issue opens for subscription on October 11, 2022, and will close on October
20, 2022.
Only 50% amount (i.e. ` 2.50 per share) is to be paid on application and the balance
on one or more calls by the company from time to time.
Post allotment, shares will be listed on BSE and NSE.
SEL is proposed to spend ` 16.50 crore for this Right Issue process.
Class of companies Power to Right Issue Applicable Provisions

Listed companies or Provisions of the Securities and
companies intended Exchange Board of India Act,
to get its securities 23(1)(c) 1992 and the rules and
listed regulations made thereunder
Public companies
not covered above Provisions of this Act and rules
Private companies made thereunder
23(2)(a)
not covered above
Offering of issue of further Shares [Sub-section 1]
Issue of Further
Shares
To existing equity
To employees To any person
shareholders
Employee Stock For cash or non-
Right Issue
Option cash considerations
u/s 62(1)(a)
u/s 62(1)(b) u/s 62(1)(c)
(Special Resolution +
(Special Resolution) (Special Resolution)
Offer through notice)

a
Whenever a company having a share capital, proposes to increase its subscribed

capital by the issue of further shares, such shares shall be offered;
a. To persons who are holders of equity shares (existing on date of such offer),
1. in proportion to the paid-up capital on those shares held by them;
2. by sending a letter of offer in form of notice, such notice shall specify;

i. Specify the number of shares to be offered
ii. Specify the time period within which the offer must be accepted.
The time period should not be less than 15 days or such lesser
number of days as may be prescribed but not exceeding 30 days
from the date of the offer
Note – Rule 12A inserted in the Companies (Share Capital and

Debentures) Rules, 2014, that provides the time period within which the
offer shall be made for acceptance shall be not less than seven days
from the date of offer 31
iii. Specify, if the offer is not accepted within the specified time, it shall be
deemed to have been declined.
iv. Confirm the right to renounce all or any of shares to existing holders,
in favour of some other person; unless article otherwise provided.
Note:
1. If offer declined by existing holder, then at intimation of such decline
or after expiry of the specified time given to him for exercise the right,
the Board of Directors may dispose of them (such shares, in regard to
which offer is declined) in such manner which is not dis-advantageous
to the shareholders and the company.
2. While determining/checking proportion, then as nearly as the
circumstances admits shall be acceptable.
31
G.S.R. 113(E) dated 11th Feb 2021

3. In case of a Private Company 32 and Specified IFSC Public Company 33,

any shorter time periods to accept the offer may be provided, if ninety
percent of the members have given their consent in writing or in
electronic mode for such shorter period
b. To employees under a scheme of employees’ stock option, subject to:
1. Special resolution passed by company, and
2. Conditions as may be prescribed in Rule 12 of the Companies (Share

Capital and Debentures) Rules, 2014.
Note:
1. The term ‘employees’ stock option’ means the option given to the
directors, officers or employees of a company or of its holding company
or subsidiary company or companies, if any, which gives such directors,
officers or employees, the benefit or right to purchase, or to subscribe
for, the shares of the company at a future date at a pre-determined
price (Section 2(37)
2. Instead of special resolution, ordinary resolution will be sufficient, in

following cases;
a. Private company which has not defaulted in filing its financial

statements under Section 137 or Annual Return under Section 92. 34
b. Specified IFSC Public Company.35
3. In case of a listed company, conditions prescribed by SEBI (Share

Based Employee Benefits) Regulations, 2014 shall be observed.
c. To any persons, if so authorised by a special resolution even if they are not

within the two categories mentioned above.
32
GSR 464 (E), dated 5th June, 2015 as amended by GSR 583 (E), dated 13th June, 2017
33
34
35

a
Note:
1. Where further shares are offered through manner specified in point iii
above, then such offer can be for cash or for a consideration other
than cash.
2. Further, in case of non-cash consideration, price to be determined by
valuation report of a registered valuer subject to such conditions as
may be prescribed in Rule 13 of the Companies (Share Capital and
Debentures) Rules, 2014.
Example 21 - A company, listed at Bombay Stock Exchange, intends to offer its

further shares to the non-members. The existing members of the company consider
such offer as invalid in view of the provisions contained in Section 62 (1) (a).
However, the company is not prohibited in absolute terms while offering new
shares to the non-members. It can do so after passing a special resolution as
required in Section 62 (1) (c). Thus, new shares of a company limited by shares may
be issued to non-members under certain circumstances.
Illustration– Q&A
What shall be length of period specified by notice of offer of further issue for giving
acceptance?
Answer – Notice of offer of further shares shall specify the time period within
which the offer must be accepted. The time period should not be less than 15 days
or such lesser number of days as may be prescribed but not exceeding 30 days
from the date of the offer
Note – Rule 12A inserted in the Companies (Share Capital and Debentures) Rules,
2014, provides the time period within which the offer shall be made for acceptance
shall be not less than seven days from the date of offer.
Dispatch of Notice to the existing Shareholders [sub-section 2]
Notice referred in sub-section (1) shall be dispatched through registered post or

speed post or through electronic mode or courier or any other mode having proof
of delivery to all the existing shareholders at least three days before the opening
of the issue.

In case of a Private Company 36 any shorter length (less than 3 days) of notice
period shall also be acceptable, if ninety percent of the members have given their
consent in writing or in electronic mode for such shorter period.
Example 22 – Notice of right issue dispatch to holders at their registered e-mail ID

in two days advance to opening of issue. Out of 4230 members 3075 member
holding 94% of shares acknowledges the mail and consented to shorter length of
notice. Despite the mode of dispatching notice and furnishing consent by members
to shorter length is valid, the notice stands invalid because at-least 90% of
members shall give their consent to shorter length of notice; where as in given case
nearly 72.70% (3075 out of 4230) given consent. Here number of members is to be
considered not their holding.
Exception – Section 62 shall not be applicable on conversion of debenture or
loan into equity shares [Sub-section 3]
Conversion of debenture (pursuant to conditions of issue) or loan (pursuant to

conditions of grant of loan) into equity shares leads to increase in the subscribed
capital of a company.
Sub-section 3 states section 62 shall not be applicable to such increase in
subscribed capital provided;
a. Those terms and conditions under which such conversion took place,
b. Must be approved by company in general meeting through special

resolution,
c. Prior to issue of debenture and grant of loan.
Compulsorily conversion of Debentures/Loan from government into Shares
[Sub-section 4, 5 and 6]
Sub-section 4 empowers the government to direct by order;
a. Conversion of debentures (issued to government) or loans (issued by

government) to company, either full or in part thereof into shares of such
company,
b. If that Government considers it necessary in the public interest so to do,
36

a
c. on such terms and conditions as appear to the Government to be

reasonable in the circumstances of the case,
d. even if terms of the issue of such debentures or the raising of such loans
do not providing for an option for such conversion.
Proviso to sub-section 4 provides remedy to company against hostile

conversion.
Where the terms and conditions of such conversion are not acceptable to the
company, it may appeal to the Tribunal, within sixty days from the date of
communication of such order.
Tribunal after hearing the company and the Government shall pass such order as it
deems fit.
Sub-section 5 requires, government shall consider following while determining

the terms and conditions of conversion;
a. the financial position of the company,
b. the terms of issue of debentures or loans, as the case may be,
c. the rate of interest payable on such debentures or loans, and
d. such other matters as it may consider necessary.
Sub-section 6 states pursuant to order of government for conversion of debenture
and loan into equity shares, under sub-section 4, the authorised share capital of
such company shall stand increased by an amount equal to the amount of the
value of shares which such debentures or loans or part thereof has been converted
into and memorandum shall stand altered.
Section 62 shall not apply to Nidhi Company. While complying with such exception,
the Nidhi Companies shall ensure that the interests of their shareholders are
protected.37
ISSUE OF BONUS SHARES [SECTION 63]

The term bonus share is not defined anywhere in the Companies Act 2013. However,
the characteristics of bonus shares along with condition and manner of issue of fully
paid-up bonus share by a company to its member highlighted by section 63.
37
GSR 465 (E), dated 5th June, 2015

In commercial parlance, the bonus shares are shares issued proportionately by a

company to its current shareholders as fully paid-up shares free of cost.
Example 23 – If a company decided to issue bonus share in ratio of 1:2 (one for
every two shares held), then the holder of 100 shares of a company will get 50
bonus share without making any payment. There his holding of shares will now be
150 instead of 100.
Status of Bonus Shares from lens of the Judiciary
Hon’ble Supreme Court in case of Standard Chartered Bank v Custodian 38
Bonus share is an accretion. A bonus share is issued when the company capitalises
its profits by transferring an amount equal to the face value of the share from its
reserve to the nominal capital.
In other words, the undistributed profit of the company is retained by the company
under the head of capital against the issue of further shares to its shareholders.
Bonus shares have, therefore, been described as a distribution of capitalised
undivided profit.
In the case of issue of bonus share there is an increase in the capital of the company
by transferring of an amount from its reserve to the capital account and thereby
resulting in additional shares being issued to the shareholders.
A bonus share is a property which comes into existence with an identity and value
of its own and capable of being bought and sold as such.
Sources for issue of Bonus Share [Sub-section 1]

A company may issue fully paid-up bonus shares to its members out of;
a. its free reserves (other than revaluation reserve);
b. the securities premium account; or
c. the capital redemption reserve account.
38
(2000) 6 SCC 427

a
Bonus shares shall not be issued by capitalising reserves created by the revaluation
of assets [Proviso to section 63(1)]
Bonus shares may be issued from Bonus shares shall not be issued from
Free Reserves Revaluation Reserve
Securities Premium Reserve
Capital Redemption Reserve
Pre-requisites for issue of bonus shares [Sub-section 2]

No company may capitalise its profits or reserves for the purpose of issuing fully
paid-up bonus shares, if;
a. it is authorised by its Articles,
b. it has on the recommendation of the Board, been authorised in the general
meeting of the company;
c. it has not defaulted in payment of interest or principal in respect of fixed

deposits or debt securities issued by it;
d. it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
e. the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
f. it complies with such conditions as prescribed by Rule 14 of the Companies
(Share capital and debenture) Rules, 2014, that a company which has once
announced the decision of its Board recommending a bonus issue, shall not
subsequently withdraw the same.
Note:
1. The bonus shares shall not be issued in lieu of dividend (Sub-section 3 to
section 63)
2. Proviso to sub-section 5 to section 123 of this act carries confirmatory
provisions to those contained in section 63.
According to the proviso to Section 123(5) of the Act, it is permissible for a

company to capitalise its profits or reserves for the purpose of issuing fully paid
up bonus shares or paying up any amount for the time being unpaid on any
shares held by the members of the company.
Illustration – True/False
Bonus share can be issued to partly paid shares in proportion to paid-up value.
Answer – False, Bonus shares can only be issued against fully paid, the partly paid-
up shares, if any outstanding on the date of allotment, are made fully paid-up.
NOTICE TO BE GIVEN TO REGISTRAR FOR ALTERATION OF SHARE

CAPITAL [SECTION 64]
As and when, there is an alteration (including increase and decrease) of share
capital, the company concerned shall notify the registrar. The provisions in this
respect are contained in Section 64.
Filing of Prescribed Notice [sub-section 1]
Company shall file a notice in the Form No. SH-7 as per Rule 15 of the Companies
(Share Capital and Debentures) Rules, 2014 with the Registrar, along with an
altered memorandum; within thirty days of alteration (including increase or
decrease) to its capital in case of;
a. Alternation of capital in manner specified in section 61 (1),
b. Order made by the Government under section 62(4) read with 62(6) has the
effect of increasing authorised capital of a company; or
c. Redemption of any redeemable preference shares,
Penalty for Default in Filing of Notice [Sub-section 2]
Where any company fails to file notice as manner prescribed in sub-section 1 then
such company and every officer who is in default shall be liable to a penalty of five
hundred rupees for each day during which such default continues, subject to a
maximum of five lakh rupees in case of a company and one lakh rupees in case of
an officer who is in default.

a
Summary of penalty
Liable Penalty
Company Five hundred rupees for each day during which such default
continues, subject to a maximum of five lakh rupees
Every officer who Five hundred rupees for each day during which such default
is in default continues, subject to a maximum of one lakh rupees
REDUCTION OF SHARE CAPITAL [SECTION 66]
Conservation of capital is one of the main principles of company law, because any
reduction of capital diminishes the fund; out of which creditor and other debt
holders are to be paid, therefore it adversely impact them. But sometimes it may
become necessary for the company to bring about a reduction in its capital.
Therefore, closely fenced power is given by Section 66.
Reduction of Share Capital by Special Resolution to be confirmed by Tribunal

[Sub-section 1]
A company being ‘company limited by shares’ or ‘company limited by

guarantee and having a share capital’ may reduce the share capital in any
manner and in particular manners as state below -
a. Extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up; or
b. Cancel any paid-up share capital which is lost or is unrepresented by any

available assets; or
c. Pay off any paid-up share capital which is in excess of the wants of the
company
a. Subject to Passing a special resolution; and
b. Alter its memorandum by reducing the amount of its share capital and
of its shares accordingly; and
c. Repayment of any deposits accepted by it, either before or after the

commencement of this Act, or the interest payable thereon shall not be
in arrear.

Example 24 - In respect of a share of ` 10, a company has called only ` 7 per share
and the same has been paid by all the shareholders. The company decides not to
call remaining ` 3 per share and reduces its shareholders’ liability. If done, the
company is said to have reduced its share of ` 10 to
` 7 as fully paid-up share.
Issue of Notice by the Tribunal [Sub-section 2]
The Tribunal shall give notice of every application made to it;
a. to the Central Government (power delegated to Regional Directors)

b. to the Registrar and
c. to the Securities and Exchange Board, in the case of listed companies, and
d. the creditors of the company
Tribunal shall consider the representations (if any) made by them within a period
of three months from the date of receipt of the notice.
Note:
1. Where no representation has been received within the said period of three
months, it shall be presumed that they have no objection to the reduction.
2. Considering representations is statutorily required, not admitting it in full.
Example 25 – An application for reduction of capital received by NCLT on 22 nd

November 2022 from a unlisted company, he send a notice of such application to
concerned RD, RoC as well as to creditor on 28 th November 2022. Notice to RD and
RoC sent in registered post which reached to them on 1 st December 2022. Hence
in given case RD and RoC can make representation till 28 th Feb 2023. If any
representation made thereafter, Tribunal is not bound to consider that.
Order of Tribunal [Sub-section 3]
The Tribunal may make an order confirming the reduction of share capital on
such terms and conditions as it deems fit only if it is satisfied that -
a. The debt or claim of every creditor of the company has been either
i. Discharged or
ii. Determined or

a
iii. Has been secured or
iv. His consent is obtained.

b. The accounting treatment, proposed by the company for such reduction is
in conformity with the accounting standards specified in Section 133 or any
other provision of this Act.
How tribunal determine that, ‘whether accounting treatment, proposed by the

company for such reduction is in conformity with the accounting standards
specified in Section 133 or not’?
While making an application, a certificate to that effect by the company’s auditor

has been filed with the Tribunal.
Publication of Order of Confirmation of Tribunal [Sub-Section 4]

The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in such manner as the Tribunal may direct.
Delivery of Certified Copy of Order of Tribunal to Registrar [Sub-section 5]
Within thirty days of the receipt of the copy of the order, the company shall
deliver; to the Registrar, a certified copy of the tribunal order and minutes
(containing special resolution) approved by the Tribunal showing;
a. the amount of share capital;
b. the number of shares into which it is to be divided;
c. the amount of each share; and
d. the amount, if any, at the date of registration deemed to be paid-up on each
share,
Registrar on receipt, shall register the same and issue a certificate to that effect.
Exemption to Buy-Back [Sub-section 6]
Nothing in this section shall apply to buy-back of its own securities by a company
under Section 68.
No Liability of Members [Sub-Section 7]
A member (whether in past or present) shall be liable to pay the amount (call or
contribution) maximum upto difference (if any) between the amount deemed to
have been paid on his shares and the nominal value of the reduced shares.

‘Deemed to have been paid’ here signify reduced amount against the amount that
have been actually paid on the share.
In case where Creditor is entitled to object but was not included in the list
of Creditors [Sub-section 8]
If a reduction of share capital took place; and where a creditor is entitled to object
to a reduction of share capital, but his name and interest (his debt or claim on
company) not entered on the list of creditors, either because of:
a. His ignorance of the proceedings for reduction or
b. Nature of his interest (debt or claim)
Then in respect of his interest, company commits a default, within the meaning
of section 6 of the Insolvency and Bankruptcy Code, 2016.
Action to make claim of creditor good (Remedy available to such unpaid
creditor)
If company is running its operation
a. Every person, who was a member of the company on the date of the
registration of the order for reduction by the Registrar,
b. Shall be liable to contribute to the payment of such debt or claim,

c. But not exceeding the amount which he would have been liable to
contribute if the company had commenced winding up on the day
immediately before the said date.
If company is wound up
The Tribunal may, on the application of any such creditor and proof of his
ignorance as aforesaid, if it thinks fit,
a. Settle a list of persons so liable to contribute, and
b. Make and enforce calls and orders on the contributories settled on the list,
as if they were ordinary contributories in a winding up.
Example 26 – Name and Interest of Mr. Nilanjan Iyer, a creditor of Modern

Furniture Limited has been kept outside the list of creditor while company went
into reduction of its capital; later when Mr. Iyer came to know about this he wish
to take legal action against company under IBC 2016, as limitation period is not

a
expired yet. Mr. Iyer entitled to do so, exclusion of his name construe as offence
under IBC as well.
Note: Period of limitation is a maximum period set by statute within which a legal
action can be brought or a right enforced. The Limitation Act 1963 governing the
provisions regarding period of limitation.
Rights of Contributories not affected [Sub-section 9]

Sub-section 9 is overriding provision that prevent the rights of contributories
inter-se. Nothing in sub-section 8 shall affect the rights of the contributories
among themselves.
Liability of Officers [Sub-section 10]
Officer of the company shall be liable for punishment under section 447, if he:
a. Knowingly conceals the name of any creditor entitled to object to the
reduction or abets or is privy to any such concealment; or
b. Knowingly misrepresents the nature or amount of the debt or claim of any
creditor or abets or is privy to any such misrepresentation.
Note:
1. Abet means to encourage or incite another to commit a crime
2. Privy signify a coparticipant; one who has an interest in a matter
3. The provisions contained in Section 447 which describe ‘punishment for
fraud’ are stated in the earlier Chapter 3 relating to ‘Prospectus and
Allotment of Securities’.
RESTRICTION ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT

FOR PURCHASE OF ITS SHARES [SECTION 67]
Conservation of capital is one of the main principles of company law, because the
share capital of a company is the only security on which the creditors rely.
Therefore, a company cannot buy its own shares because reduction of capital,
results in diminishing of the fund out of which creditor are to be paid; hence
adversely affect the creditors. However, this restriction is not absolute.

Reduction according to the applicable Provisions [Sub-section 1]
‘Company limited by shares’ or ‘company by guarantee that having a share capital’

shall not buy its own shares unless the consequent reduction of share capital is
effected under the provisions of this Act.
Restriction on giving Loan, Guarantee or provision of Security, etc. [Sub-

section 2]
Public company shall not give any financial assistance;
a. Whether directly or indirectly and whether by means of a loan, guarantee, the

provision of security or otherwise
b. For the purpose of, or in connection with, a purchase or subscription made

or to be made, by any person of or for any shares in the company or in its
holding company.
Exceptions [Sub-section 3]
Company may provide the financial assistance, in following case;
a. Lending of money by a banking company in the ordinary course of its

business;
Note:
1. The words "lending in the ordinary course of business" are not defined
2. Banks have to make loans in the ordinary course of their business and they
can hardly supervise the purpose for which the borrower uses the loan
money. Hence if a borrower from a bank uses the money for purchasing
the bank's shares, the bank and its officers will be protected from liability.
3. An English court held that where money is given for the very purpose of
purchasing the bank's shares that would not be lending in the ordinary
course of business, then the provision would said to be violated.
b. The provision of money for the purchase of fully paid shares in the company
or its holding company by trustees for and on behalf of the company's
employees in accordance with any scheme (Employee share schemes)
approved by company through special resolution with such requirements

a
as may be prescribed in Rule 16 of the Companies (Share Capital and

Debentures) Rules, 2014,
Note:
1. In case the shares of the company are listed - Such purchase of shares shall
be made only through a recognized stock exchange and not by way of private
offers or arrangements.
2. Where shares of a company are not listed - the valuation at which shares are
to be purchased shall be made by a registered valuer.
3. The value of shares to be purchased or subscribed in the aggregate shall
not exceed five percent of the aggregate of paid up capital and free reserves
of the company;
4. Disclosures in respect of voting rights not exercised directly by the
employees in respect of shares to which the scheme relates shall be made in the
Board’s report for the relevant financial year, namely:
(a) Names of the employees who have not exercised the voting rights
directly;
(b) Reasons for not voting directly;
(c) Name of the person who is exercising such voting rights;
(d) Number of shares held by or in favour of, such employees and the
percentage of such shares to the total paid up share capital of the
company;
(e) Date of the general meeting in which such voting power was exercised;
(f) Resolutions on which votes have been cast by persons holding such
voting power;
(g) Percentage of such voting power to the total voting power on each
resolution;
(h) Whether the votes were cast in favour of or against the resolution.
c. Lending money by a company to its employees (other than its directors or key
managerial personnel), not exceeding six month salary of the employees to
enable them to buy or subscribe fully paid shares in the company or its holding
company and to hold them by way of beneficial ownership.

Redemption of Preference Shares Permitted [Sub-section 4]
Nothing in Section 67 shall affect the right of a company to redeem any preference
shares issued under this Act or under any previous company law.
Punishment for Contravention [Sub-section 5]
If a company contravenes the provisions of this section, the punishment shall be;
Liable Penalty
Company Fine which shall not be less than one lakh rupees but may
extend to twenty-five lakh rupees
Every officer of Imprisonment for a and Fine which shall not be less
the company term which may than one lakh rupees but may
who is in default extend to three years extend to twenty-five lakh
rupees.
1. Section 67 shall not apply to private companies 39 (if not defaulted in filing
its financial statements under Section 137 and Annual Return under Section
92) and Specified IFSC Public Company 40 in whose case all of following 3
condition fulfilled;
a. in whose share capital no other body corporate has invested any

money;
b. if the borrowings of such a company from banks or financial institutions
or anybody corporate is less than twice its paid-up share capital or fifty
crore rupees, whichever is lower; and
c. such a company is not in default in repayment of such borrowings
subsisting at the time of making transactions under this section.
39
40

a
2. Section 67 (1) shall not apply to Nidhi Companies, when shares are
purchased by the company from a member on his ceasing to be a depositor
or borrower and it shall not be considered as reduction of capital under
Section 66 of the Companies Act, 2013. While complying with such exception,
the Nidhi Companies shall ensure that the interests of their shareholders are
protected.41
POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES [SECTION 68] -

BUY BACK OF SECURITIES
Buy back is the re-acquisition by a company of its own securities. It is a way of
returning money to its investors. Section 68 contains provisions which describe the
power of a company to purchase its own securities subject to the applicable
conditions.
Sources of Funds for Buy-Back of Shares [Sub-section 1]
A company may purchase its own shares or other specified securities. The purchase
should be made out of its:
a. Free reserves; or
b. Securities premium account; or
c. Proceeds of the issue of any shares or other specified securities.
However, buy-back of shares or other specified securities cannot be made out of
the proceeds of earlier issued shares or other specified securities of same kind.
Specified securities includes employees’ stock option or other securities as may be

notified by the Central Government from time to time (Explanation I to section 68)
Conditions for Buy-Back [Sub-section 2]

A company may purchase its own shares or other specified securities, if met with
following conditions, namely;
a. The buy-back is authorised by its articles;
b. A special resolution authorising the buy-back is passed in general meeting
of the company;
41
GSR 465 (E), dated 5th June, 2015

A special resolution is not necessary where:

1. The buy-back is, not exceeding ten percent of the total paid-up equity
capital and free reserves of the company; and
2. Such buy-back has been authorised by the Board resolution passed at its
meeting;
c. The amount involved in buy-back should not be more 25% of the aggregate
of paid-up capital and free reserves of the company; further in case of
buyback of equity shares, the maximum limit is 25% of its total paid-up
equity capital in any financial year.
d. After the buyback, the ratio between the debts (secured and unsecured)
owed by the company should not be more than twice the paid-up capital
and free resources of the company (Central Government may prescribe a
higher ratio for a class or classes of companies).
e. Shares or other specified securities for buy-back shall be fully paid-up;
f. The buy-back should be in accordance with the Rule 17 of the Companies
(Share Capital and Debentures), Rules, 2014; but in case of listed shares or
other specified securities should be in accordance with regulations made by
the Securities and Exchange Board of India in this behalf.
No offer of buy-back shall be made within one year reckoned from the date of the
closure of the preceding offer of buy back [Proviso to section 68(2)]
Free reserves includes securities premium account (Explanation II to section 68)
Illustration – MCQ
Buy-back with board resolution is allowed, if amount involved is
a. Not exceeding twenty five percent of the total paid-up equity capital and free
reserves of the company
b. Not exceeding twenty five percent of the total paid-up equity capital
c. Not exceeding ten percent of the total paid-up equity capital and free reserves
of the company
d. Not exceeding ten percent of the total paid-up equity capital
Answer– c [refer Section 68(2)]

a
Procedure before Buy-Back [Sub-section 3]

The notice of the meeting at which special resolution is proposed to be passed shall
be accompanied by an explanatory statement stating -
a. a full and complete disclosure of all the material facts;
b. the necessity for the buy-back;
c. the class of shares or securities intended to be purchased under the buy back;
d. the amount to be invested under the buy-back; and
e. the time limit for completion of buy-back.
Rule 17(1) of the Companies (Share Capital and Debentures), Rules, 2014 specify
list of 14 matters, regarding which particulars shall be stated in explanatory
statement.
Securities to be purchased under ‘Buy-Back’ [Sub-section 5]
The buy-back may be from;
a. the existing shareholders or security holders on a proportionate basis; or
b. the open market; or
c. the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity.
Declaration of Solvency [Sub-section 6]
A declaration of solvency has to be filed, before the resolution for buying back is
implemented; with the Registrar and also with SEBI, if such shares of such company
are listed on any stock exchange.
Declaration of solvency has to be on a Form SH-9 and verified by an affidavit,
stating that the Board of directors has made a full inquiry into the affairs of the
company and have found that it is capable of meeting all its liabilities and will not
be rendered insolvent for a period of 12 months from the date of the declaration.
It has to be signed by at least two directors of the company, one of whom should
be the managing director, if any.
Example 27 – Form SH-9 filed by a listed company, Rainbow Sports Limited with
registrar as well as SEBI stating Board of directors has made a full inquiry into the
affairs of the company and have found that it is capable of meeting all its liabilities
and will not be rendered insolvent for a period of 6 months from the date of the

declaration. Declaration was duly signed by 3 directors, none of them being MD, as
MD is out of country to attend FIFA world cup event in Qatar (being one of the
sponsors).
There are two lacuna in compliance to sub-section 6, first being declaration shall
be for period of 12 months; secondly if managing director is appointed then he
shall sign the declaration of solvency.
Time limit for Completion of Buy-Back [Sub-section 4]
Every buy-back shall be completed within twelve months from the date of passing
the special resolution or board resolution authorising the buy-back.
Time Check Points and Procedural aspects of Buy-Back

The company before the buy-back of shares, file with the Registrar a letter of
offer in Form No. SH.8, along with the fee. The letter of offer shall be dispatched
to the shareholders or security holders immediately after filing the same with the
Registrar of Companies but not later than twenty days from its filing with the
Registrar of Companies.
The offer for buy-back shall remain open for a period of not less than fifteen
days and not exceeding thirty days from the date of dispatch of the letter of
offer, but where all members of a company agree, the offer for buy-back may
remain open for a period less than fifteen days.
In case the number of shares or other specified securities offered by the
shareholders or security holders is more than the total number of shares or
securities to be bought back by the company, the acceptance per shareholder
shall be on proportionate basis out of the total shares offered for being bought
back.
The company shall complete the verifications of the offers received within
fifteen days from the date of closure of the offer and the shares or other
securities lodged shall be deemed to be accepted unless a communication of
rejection is made within twenty one days from the date of closure of the offer.
The company shall make payment within seven days of verification process
and make payment in cash to those shareholders or security holders whose
securities have been accepted. Company will return the share certificates to the
shareholders or security holders whose securities have not been accepted at all
or the balance of securities in case of part acceptance.

a
Extinguishment of Securities [Sub-section 7]
Where a company buy’s back its own securities or other specified securities, it shall
extinguish and physically destroy the shares or securities so bought-back within
seven days of the last date of completion of buy-back.
Cooling Period – No fresh Issue [Sub-section 8]

Where a company completes a buy-back of its shares or other specified securities,
it shall not make further issue of same kind of shares or other specified securities
within a period of six months.
It may, however, make a bonus issue and discharge its existing obligations such as
conversion of warrants, stock option schemes, sweat equity or conversion of
preference shares or debentures into equity shares.
Note: This restriction applies only to the type of securities bought back. The
company is free to issue other types of security.
Register of Buy Back [Sub-section 9]

The company, shall maintain a register of shares or other securities which have
been bought-back in Form No. SH.10 containing details of;
a. Shares or securities so bought,
b. Consideration paid for the shares or securities bought-back,
c. Date of cancellation of shares or securities,
d. Date of extinguishing and physically destroying the shares or securities and
e. Such other particulars as may be prescribed.
Note:
1. This register shall be maintained at the registered office in the custody of the
secretary of the company or any other person authorized by the board in this
behalf.
2. The entries in the register shall be authenticated by the secretary of the
company or by any other person authorized by the Board for the purpose.

Filing of Return of Buy-back [Sub-section 10]
A return of buy-back in Form No. SH.11 along with the fee shall be filled with;
a. The Registrar and also SEBI, if shares of company are listed on any recognised
stock exchange
b. Containing such particulars relating to the buy-back

c. Within thirty days of such completion.
Note: Along with return, a certificate in Form No. SH.15 signed by two directors of
the company including the managing director, if any, certifying that the buy-back
of securities has been made in compliance with the provisions of the Act and the
rules made thereunder.
Penalty for Default [Sub-section 11]
If a company makes default in complying with the provisions of this section or any
regulations made by Securities Exchange Board of India specified for the purposes
of section 68(2)(f), the company shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to three lakh rupees and every
officer of the company who is in default shall be punishable with fine which shall
not be less than one lakh rupees but which may extend to three lakh rupees.
Summary of punishment
Liable Minimum Fine Maximum Fine
Company One lakh rupee Upto three lakh

rupee
Every officer of the company who is in default
Illustration – True and False
Passing an ordinary resolution is sufficient where the buy-back is, not exceeding ten
percent of the total paid-up equity capital and free reserves of the company.
Answer - False, such buy-back has to be authorised by the Board resolution passed
at its meeting.

a
TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE

ACCOUNT [SECTION 69]
Section 69 requires certain amount to be transferred to the capital redemption

reserve (CRR) account in case a company buys back its own shares.
Amount to be transferred to CRR Account [Sub-section 1]

Where a company purchases its own shares out of free reserves or securities
premium account, then;
a. Sum equal to the nominal value of the share so purchased shall be
transferred to the capital redemption reserve account; and
b. Details of such transfer shall be disclosed in the balance sheet.
Application of CRR Account [Section 2]
The capital redemption reserve account may be applied by the company, in paying
up unissued shares of the company to be issued to members of the company as
fully paid bonus shares.
Similar use of CRR is also specified under-section 55(4) of this Act, that created
when preference shares redeemed out of profit, as provided under section 55(2)(c).
CRR can be used to issue partly paid bonus shares or finance discount portion of
sweat equity shares.
Answer - False, the capital redemption reserve account may be applied by the
company, in paying up unissued shares of the company to be issued to members
of the company as fully paid bonus shares.
PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES [SECTION 70]
Sub-section 1 states no company shall directly or indirectly purchase its own
shares or other specified securities;
a. Through any subsidiary company including its own subsidiary companies; or
b. Through any investment company or group of investment companies; or
c. If a default, is made by the company, in
i. repayment of deposits or interest thereon, or
ii. redemption of debentures, or

iii. redemption of preference shares or

iv. payment of dividend to any shareholder or
v. repayment of any term loan or interest thereon to any financial

institutions or banking company
Note:
1. Specified securities includes employees’ stock option or other securities as

may be notified by the Central Government from time to time (Explanation I
to section 68)
2. Where the default is remedied and a period of three years has lapsed after
such default ceased to subsist, such buy-back is not prohibited.
Further sub-section 2 prohibit the company from directly or indirectly to purchase

its own shares or other specified securities in case such company has not complied
with provisions of
a. Section 92 (Annual Report),
b. Section 123 (Declaration and Payment of Dividend),
c. Section 127 (Punishment for failure to distribute dividends), and
d. Section 129 (Financial Statement).
Example 28 – Sigma Electronic Limited (SEL) was financial unstable in 2018 due to
economic slowdown, finally it made default in repayment of loan that it has taken
from public finance corporation in June 2020 pursuant to cash crunch caused by
nation-wide lock down. SEL’s account was marked in defaulters list by lender and
classified in NPA category. But stimulus package helped SEL to pass the high
turbulence phase, it able to repay the due amount on December 2020. In February
2021 SEL account removed from NPA category. SEL won a tender in mid of 2021
and become supplier to military retail canteens. SEL accumulate reasonable amount
of reserve and attain the position cash surplus. SEL decided to Buy-back 10% of its
equity shares in December 2022.
Consider the facts stated in case, SEL shall not be allowed to buy-back it securities
as 3 years has not been elapse since when default is remedied.

a
12. DEBENTURE [SECTIONS 71]
DEFINITION AND FEATURES OF DEBENTURE

Definition [Section 2(30)]
Debenture includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company
or not
Provided that following shall not be treated as debenture
a. the instruments referred to in Chapter III-D of the Reserve Bank of India Act,
1934; and
b. such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India, issued by a company,
Debenture Includes Debenture Excludes
Debenture stock Instruments referred to in

Chapter III-D of the Reserve
Bonds
Bank of India Act, 1934
Any other instrument of a
and
company evidencing a debt
Such other instrument, as may
be prescribed by the Central
Whether constituting a charge on Government
the assets of the company or not
Features of Debentures
a. A debenture is the smallest unit of a sizeable amount of loan.
b. When debentures are issued, the applicants are given certificates
representing the money they have lent to the company.

c. A debenture certificate is issued by the company under its common seal, if

any, or under the signatures of two directors or a director and the company
secretary, if he has been appointed.
d. The company pays periodic interest on the amount raised by issuing
debentures till they are fully redeemed.
e. A debenture is generally pre-fixed with the rate of interest which the
company intends to pay.
Example 29 - The name ‘10% Debentures’ indicates that the company shall pay
interest at the rate of 10% on the outstanding amount till maturity of such
debentures.
f. Voting rights are not available in case of debentures as section 71 (2) of
the Act, clearly states that no company shall issue any debentures carrying
any voting rights.
g. As per section 44 of the Act, a debenture is in the nature of movable
property which is transferable as per the provisions contained in the Articles
of the company issuing the debentures.
h. A debenture may be secured or unsecured. In case of secured debentures, a
charge is created on the assets of the company in favour of debenture trustee.
i. As per the terms of the issue of debentures, they may be redeemed (i.e.
repaid) at the end of full term or in installments, say yearly or bi-yearly or
any other period like in two installments.
j. The terms of issue may also provide for conversion of debentures at maturity
into equity shares at the option of the debenture holders.
k. The debenture certificates are required to be delivered within a period of
six months under section 56(4)(d) of the Act, from the date of allotment
of debentures, unless the company is prohibited by any provision of law or
any order of Court, Tribunal or any other authority.
Example 30 - Sigma Computers Limited desires to borrow ` 50,00,000 from the
public by issuing 7% debentures. It is intended that each unit of debenture shall be
of ` 100. Thus, it can issue 50,000 debentures of ` 100 each carrying 7% rate of
interest which can be paid at the end of every quarter. If such debentures (secured
by a charge on the assets of the company) are issued for six-year duration, the

a
principal amount shall be repaid by the end of sixth year. The terms of issue may
even allow repayment of principal amount in equal yearly instalments, in which case
a portion of debentures shall be redeemed on yearly basis and the company shall
be required to pay interest only on the outstanding amount. The debenture holders
may also be given the option of converting their debentures into equity shares at
the time of maturity.
Thus, Sigma Computers Limited is able to borrow a large sum of money from
different borrowers with the help of debentures and it is not required to approach
a single borrower for such a big amount.
In other words, ‘issue of debentures’ is the most convenient way of borrowing large
sums of money and at the same time the debenture holders do not exert any
influence over the ownership and working of the company unless their interest is
jeopardized by certain decisions.
Type of Debentures
On the basis of
On the basis of On the basis of
convertibility to
security redeemability
shares
Convertible
Secured (mandatorily or Redeemable
optionally;
partially or fully)
Un-secured Irredeemable
Non-convertible
MANNER OF ISSUE OF DEBENTURES AND APPLICABLE PROVISION

THERETO [SECTION 71]
Issue of Debentures with an Option to Convert [Sub-section 1]
A company if authorised by passing special resolution at general meeting, then it
may issue debentures with an option to convert such debentures into shares,
either wholly or partly at the time of redemption.

No Voting Rights [Sub-section 2]

No company shall issue any debentures carrying any voting rights.
Issue of Secured Debentures [Sub-Section 3]
Secured debentures may be issued by a company subject to such terms and conditions
as are prescribed in Rule 18 (1) of the Companies (Share Capital and Debentures) Rules,
2014; which are explained below;
a. Maximum Period of Secured Debenture
The tenor of secured debenture shall not be more than 10 years from the date of
issue, except in following cases where tenor can be upto 30 years
i. Companies engaged in setting up of infrastructure projects;
ii. Infrastructure Finance Companies as defined in clause (viia) of sub direction
(1) of direction 2 of Non-Banking Financial (Non-deposit accepting or
holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;
iii. Infrastructure Debt Fund NBFCs’ as defined in clause (b) of direction 3 of
Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank)
Directions, 2011;
iv. Companies permitted by a Ministry or Department of the Central
Government or by Reserve Bank of India or by the National Housing Bank
or by any other statutory authority to issue debentures for a period
exceeding ten years.
b. Appointment of Debenture Trustee
Debenture trustee shall be appointed by company before the issue of prospectus
or letter of offer for subscription of its debentures.
c. Security by Creation of Charge

Security for the debenture can be provided by way of creating a charge or
mortgage in favour of debenture trustee, on;
i. Specified movable of the company or its subsidiaries or its holding

company or its associates companies, or
ii. Specified immovable properties wherever situate, or any interest therein.

a
Note:
1. Value of such assets or properties upon which charge is created shall be
sufficient for the due repayment of the amount of debentures and interest
thereon.
2. In case of NBFCs, the charge or mortgage may be created on any movable
property.
3. In case of any issue of debentures by a Government company which is fully
secured by the guarantee, given by the Central Government or one or
more State Government or by both, as per the requirement for creation of
charge under rule 18(1) of the Companies (Share Capital and Debentures)
Rules, 2014 shall not apply.
d. Debenture Trust Deed

Debenture trust deed shall be executed in Form SH-12 to protect the interest of
the debenture holders, within three months of closure of the issue or offer.
Creation of Debenture Redemption Reserve (DRR) Account [Sub-section 4
read with Rule 18 (7) of the Companies (Share Capital and Debentures) Rules,
2014]
Company shall create a debenture redemption reserve (DRR) account out of the
profits of the company available for payment of dividend.
The amount credited to such DRR account shall not be utilised by the company
except for the redemption of debentures.
a. Requirement of DRR
Category Publicly placed Privately places

debenture debenture
All India Financial Exempted Exempted
Institutions (regulated by
RBI)
Banking Companies Exempted Exempted
Listed companies (other Exempted Exempted
than All India Financial except except
Institutions and Banking NBFCs not registered NBFCs not registered

Companies covered with RBI u/s 45IA of RBI with RBI u/s 45IA of RBI
above) Act, and for Act,
House Finance House Finance
companies not registered companies not registered
with National Housing with National Housing
bank bank
Unlisted Companies DRR equal to 10% of DRR equal to 10% of
(other than All India Outstanding Debenture Outstanding Debenture
Financial Institutions and Except
Banking Companies
NBFCs registered with
covered above)
RBI u/s 45IA of RBI
House Finance
Companies registered
with National Housing
bank
Note:
1. The main purpose of these relaxations was introduced by the MCA for the
reduction of the cost of borrowings incurred by companies.
2. Other Financial Institution covered under 2(72) of the Companies Act 2013
for purpose of creating and maintaining DRR shall be dealt in manner as Non–
Banking Finance Companies registered with Reserve Bank of India
3. In case of partly convertible debentures, Debenture Redemption Reserve shall

be created in respect of non-convertible portion of debenture
b. Amount and methods of Investment or deposits for debentures maturing

during the fiscal
By 30 th April of each year, the in case of;
Company In case of
Listed Company, other than All Publicly placed debenture

India Financial Institutions and
Banking Companies

a
Unlisted companies, other Publicly placed debenture

than All India Financial &
Institutions, Banking
Privately placed debenture (other than those by
Companies
NBFCs registered with RBI u/s 45IA of RBI and
House Finance companies registered with
National Housing bank)
An amount equal to 15% of its debentures maturing during the financial year,
ending on the 31st day of March of the next year, shall be invested or deposited in
any of following methods of deposits or investments, namely;
a. Deposits with any scheduled bank, free from any charge or lien;
b. Unencumbered securities of the Central Government or any State Government;
c. Unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section
20 or unencumbered bonds issued by any other company which is notified under
sub-clause (f) of section 20 of the Indian Trusts Act, 1882
The amount remaining invested or deposited, as the case may be, shall not any
time fall below fifteen percent of the amount of the debentures maturing during
the year ending on 31st day of March of that year. Meaning thereby that amount
shall be invested or deposited by 30 th April and maintained there after till end of
financial year (or till maturity if fall earlier).
Restrictions on the Issue of Prospectus/Offer/Invitation to the public [Sub-

section 5]
Prior to issue a prospectus or make an offer or invitation to the public or to its
members exceeding five hundred for the subscription of its debentures, the
company shall appoint one or more debenture trustees. Except in case of public
offer of debenture, in all other cases appointment and removal of debenture trustee
governed by provisions prescribed in Rule 18 (2) of the Companies (Share Capital
and Debentures) Rules, 2014; namely;
a. Name and Consent of Denture Trustee

The names of the debenture trustees shall be stated in offer related letters and
notices or subsequent thereto.

Written consent before the appointment of debenture trustee must be obtain and
statement to that effect shall appear in the letter of offer.
b. Who can be denture trustee?
Following persons shall not be appointed as a debenture trustee,
i. A beneficiary holders of shares in the company;

ii. A promoter, director or key managerial personnel or any other officer or
an employee of the company or its holding, subsidiary or associate
company;
iii. Relative of any promoter, director or key managerial personnel of the
company;
iv. A beneficiary entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
v. Who is indebted to the company, or its subsidiary, holding or associate
company or a subsidiary of such holding company;
vi. Who has furnished any guarantee in respect of the principal debts secured
by the debentures or interest thereon;
vii. Who has any pecuniary relationship with the company amounting to two
per cent or more of its gross turnover or total income or fifty lakh rupees
or such higher amount as may be prescribed, whichever is lower, during the
two immediately preceding financial years or during the current financial
year;
c. Removal of debenture trustee prior to his term
Any debenture trustee may be removed from office before the expiry of his term
only if it is approved by the holders of not less than three fourth in value of the
debentures outstanding, at their meeting.
d. Filling of vacancy of debenture trustee
Nature of vacancy How to fill

Casual Vacancy* Board themselves may fill any casual vacancy
With the written consent of the majority of the
Caused by the resignation
debenture holders.

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*While any such vacancy continues, the remaining trustee or trustees, if any, may
act till appointment made.
Debenture Trustee to protect Interest of Debenture Holders [Sub-section 6]
A debenture trustee shall take steps to protect the interests of the debenture-
holders and redress their grievances. Duties of debenture trustee enumerated
under rule 18(3) of the Companies (Share Capital and Debentures) Rules, 2014.
Further, Rule 18 (4) of the Companies (Share Capital and Debentures) Rules, 2014
requires debenture holders to convene the meeting of all the debenture holders
on:
a. Receiving a request (duly signed and in writing) from debenture holders
holding at least one-tenth in value of the debentures
b. Happening of any such event, which constitutes a breach, default or which in

the opinion of the debenture trustees affects the interest of the debenture
holders.
Note: Rule 18(3) and 18(4) are not applicable in case of public offer of debenture
Example 31 – Roshan Bulb Limited took a bank loan in contravention to covenant

regarding permissible debt-equity ratio, stated in offer document issued for
subscription of its debentures. In this case debenture trustee bound to convene the
meeting of all the debenture holder as decision of taking loan by company is not
only breach but also a default that will affect the interest of the debenture holders.
Liability of Debenture Trustee [Sub-section 7]
Where debenture trustee fails to show the degree of care and due diligence
required of him as a trustee.
Any provision, that exempt or indemnify a debenture-trustee from any liability

for breach of trust; as contained in;
a. A trust deed for securing the issue of debentures or
b. Any contract with debenture holders secured by a trust deed
Shall be void.

Note: Exemptions given to debenture trustee, shall be agreed upon by debenture

holders holding at least 75% value of debentures at time of meeting held for this
purpose.
How to determine the reasonable degree of care and due diligence – Means a
yardstick to determine failure – One have to determine in regard to the provisions
of the trust deed conferring any power, authority or discretion on such debenture
trustee.
Example 32 – Debenture trustee fails in keeping a close watch on change in value

of asset against which such debenture are secured, which is specified a preliminary
responsibility marked upon him; it can be said debenture trustee fails to show
degree of care and due diligence required of him as a trustee.
To pay Interest and Redeem Debentures [Sub-section 8]
A company shall pay interest and redeem the debentures in accordance with the
terms and conditions of their issue.
Filing of Petition before Tribunal by Debenture Trustee [Sub-section 9]
Where debenture trustee reach to conclusion that the assets of the company are
insufficient or are likely to become insufficient to discharge the principal amount
as and when it becomes due, may file a petition before the Tribunal.
The tribunal may pass order:
a. To impose restrictions on the incurring of any further liabilities by the
company as it may consider necessary in the interests of the debenture-
holders.
b. After hearing the company and any other person interested in the matter
Order of Tribunal on Failure to Redeem Debentures/Pay Interest [Sub-section
10]
Tribunal may direct by order;
a. On the company to redeem the debentures forthwith on payment of principal
and interest due thereon
b. After hearing the parties concerned, on the application of any or all of the
debenture-holders, or debenture trustee

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c. Where a company fails to redeem the debentures on the date of their

maturity or fails to pay interest on the debentures when it is due,
Specific Performance of the Contract [Sub-section 12]
A contract with the company to take up and pay for any debentures of the company
may be enforced by a decree for specific performance.
Debenture holder has right to seek relief under the Specific Relief Act, 1963 for
specific performance. Court may pass decree (in favour of denture holder in this
case) under 2(2) of the Civil Procedure Code, 1908 (CPC) and same can be executed
under order 21 of CPC.
Specific performance means, forcing other party (company in this case) of contract
to perform his part of contract (repayment of debenture) through court’s decree.
Decree is final order passed by court as outcome of adjudication, explaining right
of parties.
Procedure to be prescribed by Central Government [Sub-section 13]

Sub-section 13 empowers the Central Government to prescribe the:
a. Procedure for the securing the issue of debentures,
b. Procedure for the debenture-holders to inspect the trust deed and to obtain
copies thereof
c. Form of debenture trust deed,
d. Quantum of debenture redemption reserve required to be created and
e. Such other matters.
If interest to debenture holder remain un-paid for two years then they may vote on
resolution affecting their interests.
Answer – False, no debenture holder can never assume voting right, unless their
debenture is converted in equity as per terms of issue. Though similar provision exist
in case of preference dividend remain unpaid for two year to preference shareholder.

Note:
1. If issue results in debt-equity ratio more than 1 - In case of company other
than private company, the Board of Directors of the company shall obtain
approval of the shareholders through special resolution, if the borrowings by
issuing debentures together with the amount already borrowed exceed the
aggregate of company’s paid-up share capital, free reserves and securities
premium amount, then prior to the issue of debentures.
Note – Borrowing shall not include short term or temporary loan in nature.
2. Pursuant to rule 12 (1) of the companies (Prospectus and allotment of
securities) Rules 2014, a company having share capital, when makes
allotment of any debentures (falls within the definition of ‘securities’), it is
required to file a Return of Allotment in form No. PAS-3 within thirty days
of such allotment with the jurisdictional Registrar.
SUMMARY
 There are two kinds of long-term capital to run a business viz., owners’ capital
and lender’s capital.
 Each type of capital is denominated by different securities with applicable

rights which can be varied by following the legal procedure.
 Most of the requirements applicable to a company are to be in accordance

with its Articles of Association and Memorandum of Association or with the
decisions taken by the shareholders at the general meetings but they must
be legally valid as per the provisions of the Companies Act.
 There are mandated provisions relating to the application of securities

premium amount.
 Companies are not permitted to issue shares at a discount except when such
shares are issued as sweat equity.
 No company can issue irredeemable preference shares. Maximum tenor of

redeemable share also capped upto twenty years with exception in case
infrastructure project, where it can be issued for maximum upto thirty years.
 Only fully paid-up preference shares are eligible for redemption.

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 When preference shares are redeemed out of profits, the company is required
to create Capital Redemption Reserve Account.
 Capital Redemption Reserve Account may be applied for issuing fully paid
bonus shares.
 Power to alter share capital by a limited company having a share capital is

envisaged under Section 61.
 Companies can issue rights shares to their existing shareholders in

accordance with Section 62.
 Issue of bonus shares is governed by Section 63.
 After following the prescribed legal procedure, a company is permitted to

bring about reduction in its share capital.
 A company is restricted to purchase or give loans for purchase of its shares

except where buy-back is resorted to in accordance with the applicable
provisions.
 Buy-back of shares is prohibited under certain circumstances.
 Debenture Redemption Reserve account is created to ring - fence funds

requirement for redemption of Debentures.
TEST YOUR KNOWLEDGE

1. Sarvodhaya Urban Nidhi Limited has ` 14 Crore and ` 6 Crore as paid-up equity
and preference share capital respectively. Balance in retain earnings account is
` 2.4 Crore. Equity share capital having face value of ` 10 each, while preference
share has face value of 100 each. Mr. Surya and Mr. Chandan own 11,20,000
and 5,60,000 shares respectively. In context of resolution placed before the
company which directly affect the rights attached to his preference shares, the
voting right of Mr. Surya and Mr. Chandan in percentage term shall be:
(a) 8% and 4% respectively
(b) 5.6% and 2.8% respectively

(c) 5% and 2.8% respectively
(d) 5% and 2.5% respectively

2. In a litigation regarding title of shares, a share certificate issued in physical form
by Modern Furniture Limited, an unlisted private company that doesn’t have a
common seal submitted as evidence of the title. The same shall be clear and
convincing evidence of title, if signed by;
i. two directors
ii. two directors, out of which one shall be managing director
iii. two directors and the Company Secretary, wherever the company has
appointed a Company Secretary
iv. a director and the Company Secretary, wherever the company has appointed
a Company Secretary
(a) By i or iii only
(b) By i or iv only
(c) By ii or iii only
(d) By ii or iv only
3. Mr. Bahu has received a notice from Mahishmati Private Limited on 2 nd March,
2023 intimating that Mr. Bali has submitted a transfer deed duly signed by him for
transfer of 1000 partly paid shares (` 8 paid-up out of Face Value of ` 10 per share)
in his (Mr. Bahu) name. Mr. Bahu as transferee must raise his objection to the
proposed transfer of partly paid shares latest by
(a) 9th March, 2023
(b) 16th March, 2023
(c) 17th March, 2023
(d) 31st March, 2023
4. Section 67 of the Companies Act, 2013 impose a restriction on public company
from giving any financial assistance whether directly or indirectly and whether by
means of a loan, guarantee, the provision of security or otherwise for the purpose
of, or in connection with, a purchase or subscription made or to be made, by any
person of or for any shares in the company or in its holding company. Star
Engineering Limited which is not covered by any of exemptions specified under

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said section, contravene the restrictive provisions stated above. Every officer of the
company who is in default shall be liable for;
(a) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees
(b) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees or Imprisonment for a term which may extend to three years
or both
(c) Fine which may extend to twenty-five lakh rupees or Imprisonment for a
term which may extend to three years or both
(d) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees and Imprisonment for a term which may extend to three
years
5. Modern Furniture an unlisted company receive a request for issue of duplicate
share certificate. Complete documents in this regards submitted with the company
on 30th December 2022. Modern furniture shall issue the duplicate share
certificates by:
(a) 29th January 2023
(b) 13th February 2023

(c) 28th February 2023
(d) 29th March 2023
1. VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd.
The Board of Directors of SV Company Ltd. (incorporated on January 1, 201 9)
decided to raise the share capital by issuing further equity shares. The Board of
Directors resolved not to offer any shares to VRS Company Ltd., on the ground
that it was already holding a high percentage of the total number of shares
issued by SV Company Ltd. The Articles of Association of SV Company Ltd.
provided that the new shares should first be offered to the existing shareholders
of the company. On March 1, 2019 SV Company Ltd. offered new equity shares
to all the shareholders, except VRS Company Ltd.

Referring to the provisions of the Companies Act, 2013 examine the validity of
the decision of the Board of Directors of SV Company Ltd. of not offering any
further shares to VRS Company Limited.
2. The Directors of Mars Motors India Ltd. desire to alter Capital Clause of the
Memorandum of Association of their company. Advise them about the ways in
which the said clause may be altered under the provisions of the Companies
Act, 2013.
3. Ramesh, a resident of New Delhi, sent a transfer deed duly signed by him as
transferee and his brother Suresh as transferor, for registration of transfer of
shares to Ryan Entertainment Private Limited at its Registered Office in
Mumbai. He did not receive the transferred shares certificates even after the
expiry of four months from the date of dispatch of transfer deed. Is there any
liability of company and officer in default in the said matter?
4. Due to insufficient profits, Silver Robotics Limited is unable to redeem its
existing preference shares amounting to ` 10,00,000 (10,000 preference shares
of ` 100 each) though as per the terms of issue they need to be redeemed within
next two months. It did not, however, default in payment of dividend as and
when it became due. What is the remedy available to the company in respect
of outstanding preference shares as per the Companies Act, 2013?
5. Trisha Data Security Limited was incorporated just a year ago with a paid- up
share capital of ` 200 crore. Within such a small period of about year in
operation, it has earned sizeable profits and has topped the charts for its high
employee-friendly environment. The company wants to issue sweat equity to
its employees. A close friend of the CEO of the company has told him that the
company cannot issue sweat equity shares as minimum 2 years have not
elapsed since the time company commenced its business. The CEO of the
company has approached you to advise about the essential conditions to be
fulfilled before the issue of sweat equity shares especially since their company
is just about a year old.
6. Walnut Foods Limited has an authorized share capital of 2,00,000 equity shares
of ` 100 per share and an amount of ` 2 crore in its Securities Premium Account
as on 31-3-2020. The Board of Directors seeks your advice about the
application of securities premium account for its business purposes. Please give
your advice.

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7. OLAF Limited, a subsidiary of PQR Limited, decides to give a loan of

` 4,00,000 to its Human Resource Manage,r Mr. Surya Nayan, who does not fall
in the category of Key Managerial Personnel and draws a salary of
` 40,000 per month, to buy 500 partly paid-up equity shares of ` 1000 each in
OLAF Limited. Examine the validity of company's decision under the provisions
8. Shilpi Developers India Limited owed to Sunil ` 10,000. On becoming this debt
payable, the company offered Sunil 100 shares of ` 100 each in full settlement
of the debt. The said shares were allotted to Sunil as fully paid-up in lieu of his
debt. Examine the validity of this allotment in the light of the provisions of the
Companies Act, 2013
9. What are the provisions of the Companies Act, 2013 relating to the
appointment of ‘Debenture Trustee’ by a company? Whether the following can
be appointed as ‘Debenture Trustee’:
(i) A shareholder who has no beneficial interest.
(ii) A creditor whom the company owes ` 499 only.
(iii) A person who has given a guarantee for repayment of amount of
debentures issued by the company?
10. Mr. Nilesh has transferred 1000 equity shares of Perfect Vision Private Limited
to his sister, Ms. Mukta. The company did not register the transfer of shares and
also did not send a notice of refusal to Mr. Nilesh or Ms. Mukta within the
prescribed period. Discuss as per the provisions of the Companies Act, 2013,
whether aggrieved party has any right(s) against the company?
11. Shankar Portland Cement Limited is engaged in the manufacture of different
types of cements and has got a good brand value. Over the years, it has built a
good reputation and its Balance Sheet as at March 31, 2020 showed the
following position:
1. Authorized Share Capital (25,00,000 equity shares of ` 10/- each)
` 2,50,00,000
2. Issued, subscribed and paid-up Share Capital (10,00,000 equity shares of
` 10/- each, fully paid-up) ` 1,00,00,000
3. Free Reserves ` 3,00,00,000

The Board of Directors are proposing to declare a bonus issue of 1 share for
every 2 shares held by the existing shareholders. The Board wants to know the
conditions and the manner of issuing bonus shares under the provisions of the
12. State the legal provisions in respect of ‘Declaration of Solvency’, which an
unlisted public company needs to adhere to while taking steps to buy-back its
own shares.
ANSWERS
1. (c) 5% and 2.8% respectively
2. (b) two directors, out which one shall be managing director
3. (c) 16th March, 2023
4. (d) Fine which shall not be less than one lakh rupees but may
extend to twenty-five lakh rupees and Imprisonment for
a term which may extend to three years
5. (d) 29 th March 2023

1. The legal issues involved herein are covered under Section 62 (1) of the
Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a
company having a share capital proposes to increase its subscribed capital by
issue of further shares, such shares should first be offered to the existing
equity shareholders of the company as at the date of the offer, in proportion
to the paid-up capital on those shares. Hence, the company cannot ignore
a section of the existing shareholders and must offer the shares to the existing
equity shareholders in proportion of their holdings.
As per facts of the case, the Articles of SV Company Ltd. provide that the new
shares should first be offered to the existing shareholders. However, the

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company offered new shares to all shareholders excepting VRS Company Ltd.,
which held a major portion of its equity shares. It is to be noted that under
the Companies Act, 2013, SV Company Ltd. did not have any legal
authority to do so.
Therefore, in the given case, decision of the Board of Directors of SV Company

Ltd. not to offer any further equity shares to VRS Company Ltd. on the ground
that VRS Company Ltd. already held a high percentage of shareholding in SV
Company Ltd. is not valid. Such a decision violates the provisions of Section
62 (1) (a) as well as Articles of the issuing company.
2. Alteration of Capital: Under section 61 (1) a limited company having a share
capital may, if authorised by its Articles, alter its Memorandum in its general
meeting to:
(i) increase its authorized share capital by such amount as it thinks
expedient;
(ii) consolidate and divide all or any of its share capital into shares of a
larger amount than its existing shares;
However, no consolidation and division which results in changes in the
voting percentage of shareholders shall take effect unless it is approved
by the Tribunal on an application made in the prescribed manner.
(iii) convert all or any of its paid- up shares into stock and reconvert that
stock into fully paid shares of any denomination.
(iv) sub-divide its shares, or any of them, into shares of smaller amount than
is fixed by the Memorandum;
(v) cancel shares which, at the date of the passing of the resolution in that
behalf, have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled.
Further, under section 64 where a company alters its share capital in any of
the above-mentioned ways, the company shall file a notice in the Form No.
SH-7 as per Rule 15 of the Companies (Share Capital and Debentures) Rules,
2014 with the Registrar, along with an altered memorandum within thirty
days of alteration The capital clause of memorandum, if authorised by the
Articles, shall be altered by passing an ordinary resolution as per Section 61

(1) of the Companies Act, 2013.

3. According to Section 56 (4) of the Companies Act, 2013 every company,
unless prohibited by any provision of law or of any order of court, Tribunal or
other authority, shall deliver the certificates of all shares transferred within a
period of one month from the date of receipt by the company of the
instrument of transfer.
Further, as per Section 56 (6), where any default is made in complying with
the provisions of sub-sections (1) to (5), the company and every officer of the
company who is in default shall be liable to a penalty of fifty thousand rupees.
4. According to Section 55(3) of the Companies Act, 2013, where a company is
not in a position to redeem any preference shares or to pay dividend, if any,
on such shares in accordance with the terms of issue (such shares hereinafter
referred to as unredeemed preference shares), it may—
➢ with the consent of the holders of three-fourths in value of such
preference shares, and
➢ with the approval of the Tribunal on a petition made by it in this behalf,
issue further redeemable preference shares equal to the amount due,
including the dividend thereon, in respect of the unredeemed preference
shares, and on the issue of such further redeemable preference shares, the
unredeemed preference shares shall be deemed to have been redeemed.
Provided that the Tribunal shall, while giving approval under this sub-section,
order the redemption forthwith of preference shares held by such persons
who have not consented to the issue of further redeemable preference shares.
In view of the provisions of Section 55 (3), Silver Robotics Limited can initiate
steps for the issue of further redeemable preference shares equal to the
amount due i.e. ` 10,00,000. For this purpose, it shall obtain the consent of
the holders of three-fourths in value of such preference shares and also seek
approval of the Tribunal by making a petition. In case, there are certain
preference shareholders who have not accorded their consent for the
proposal of issuing further redeemable preference shares, the Tribunal may
order the company to redeem forthwith such preference shares. Accordingly,
Silver Robotics Limited must be ready with sufficient funds for the redemption
of preference shares held by those who have not consented.

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On the issue of such further redeemable preference shares by the company,

the unredeemed preference shares shall be deemed to have been redeemed.
5. Sweat equity shares of a class of shares already issued.
According to section 54 of the Companies Act, 2013, a company may issue
sweat equity shares of a class of shares already issued, if the following
conditions are fulfilled, namely—
(i) the issue is authorised by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees
to whom such equity shares are to be issued;
(iii) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf
and if they are not so listed, the sweat equity shares are issued in
accordance with such rules as prescribed under Rule 8 of the Companies
(Share and Debentures) Rules, 2014,
The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares
issued under Section 54 and the holders of such shares shall rank pari passu
with other equity shareholders.
Trisha Data Security Limited can issue Sweat equity shares by following the
conditions as mentioned above. It does not make any difference that the
company is just about a year old, because there is no such age (time since
commencement of business) requirement under Section 54.
6. Amount lying to the credit of Securities Premium Account is required to be
utilised for certain prescribed purposes.
According to section 52 of the Companies Act, 2013, where a company issues

shares at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount of the premium received on those shares shall be
transferred to a "securities premium account" and the provisions of this Act
relating to reduction of share capital of a company shall, except as provided
in this Section, apply as if the securities premium account were the paid-up
share capital of the company.

The securities premium account may be applied by the company—
(a) towards the issue of unissued shares of the company to the members
of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount
allowed on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
The securities premium account may be applied by such class of companies, as
may be prescribed and whose financial statement comply with the accounting
standards prescribed for such class of companies under section 133,—
(a) in paying up unissued equity shares of the company to be issued to
members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount
allowed on any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.
Keeping the above points in view Walnut Foods Limited should proceed to
utilise the amount of Securities Premium Account.
7. Restrictions on purchase by company or giving of loans by it for
purchase of its share: As per section 67 (3) of the Companies Act, 2013 a
company is allowed to give a loan to its employees subject to the following
limitations:
(a) The employee must not be a director or Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six
months’ salary of the employee.
(c) The loan must be extended for subscribing fully paid-up shares.
In the given instance, Human Resource Manager Mr. Surya Nayan is not a Key
Managerial Personnel of the OLAF Limited. Further, he is drawing a salary of
` 40,000 per month and wants to avail loan for purchasing 500 partly paid-
up equity shares of ` 1000 each of OLAF Limited in which he is employed.

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Keeping the above facts and legal provisions in view, the decision of OLAF
Limited in granting a loan of ` 4,00,000 for purchase of its partly paid-up
shares to Human Resource Manager is invalid due to the following reasons:
i. The amount of loan is more than 6 months’ salary of Mr. Surya Nayan,
the HR Manager. It should have been restricted to ` 2,40,000 only.
ii. The loan to be given by OLAF Limited to its HR Manager Mr. Surya
Nayan is meant for purchase of partly paid shares.
8. Under Section 62 (1) (c) of the Companies Act, 2013 where at any time, a
company having a share capital proposes to increase its subscribed capital by
the issue of further shares, either for cash or for a consideration other than
cash, such shares may be offered to any persons, if it is authorised by a special
resolution and if the price of such shares is determined by a empowered to
allot the shares to Sunil in settlement of its debt to him. This valuation report
of a registered valuer, subject to the compliance with the applicable
provisions of Chapter III and any other conditions as may be prescribed.
In the present case, Shilpi Developers India Limited’s allotment, to be
classified as shares issued for consideration other than cash, must be
approved by the members by a special resolution. Further, the valuation
of the shares must be done by a registered valuer, subject to the compliance
with the applicable provisions of Chapter III and any other conditions as may
be prescribed.
9. Appointment of Debenture Trustee: Under section 71 (5) of the Companies
Act, 2013, no company shall issue a prospectus or make an offer or invitation
to the public or to its members exceeding five hundred for the subscription
of its debentures, unless the company has, before such issue or offer,
appointed one or more debenture trustees and the conditions governing the
appointment of such trustees shall be such as may be prescribed.
Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014,
framed under the Companies Act for the issue of secured debentures provide
that before the appointment of debenture trustee or trustees, a written
consent shall be obtained from such debenture trustee or trustees proposed
to be appointed and a statement to that effect shall appear in the letter of
offer issued for inviting the subscription of the debentures.

Further according to the rules, no person shall be appointed as a debenture

trustee, if he-
(i) beneficially holds shares in the company;
(ii) is a promoter, director or key managerial personnel or any other officer
or an employee of the company or its holding, subsidiary or associate
company;
(iii) is beneficially entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
(iv) is indebted to the company, or its subsidiary or its holding or associate
(v) has furnished any guarantee in respect of the principal debts secured
by the debentures or interest thereon;
(vi) Has any pecuniary relationship with the company amounting to two
percent. or more of its gross turnover or total income or fifty lakh
rupees or such higher amount as may be prescribed, whichever is lower,
during the two immediately preceding financial years or during the
current financial year;
(vii) is a relative of any promoter or any person who is in the employment
of the company as a director or key managerial personnel;
Thus, based on the above provisions answers to the given questions are as
follows:
(i) A shareholder who has no beneficial interest, can be appointed as a
debenture trustee.
(ii) A creditor whom company owes ` 499 cannot be appointed as a
debenture trustee. The amount owed is immaterial.
(iii) A person who has given guarantee for repayment of principal and
interest thereon in respect of debentures also cannot be appointed as
a debenture trustee.
10. The problem given in the question is governed by Section 58 of the
Companies Act, 2013 dealing with the refusal to register transfer and appeal
against such refusal.

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In the present case, the company has committed the wrongful act of not
sending the notice of refusal to register the transfer of shares.
Under section 58 (1), if a private company limited by shares refuses to register
the transfer of, or the transmission by operation of law of the right to any
securities or interest of a member in the company, then the company shall send
notice of refusal to the transferor and the transferee or to the person giving
intimation of such transmission, within a period of thirty days from the date on
which the instrument of transfer, or the intimation of such transmission, was
delivered to the company.
According to Section 58 (3), the transferee may appeal to the Tribunal against
the refusal within a period of thirty days from the date of receipt of the notice or
in case no notice has been sent by the company, within a period of sixty days
from the date on which the instrument of transfer or the intimation of
transmission, was delivered to the company.
In this case, as the company has not sent even a notice of refusal, Ms.
Mukta being transferee can file an appeal before the Tribunal within a period
of sixty days from the date on which the instrument of transfer was
delivered to the company.
11. According to Section 63 of the Companies Act, 2013, a company may issue
fully paid-up bonus shares to its members, in any manner whatsoever, out of
-
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
Provided that no issue of bonus shares shall be made by capitalising reserves
created by the revaluation of assets.
Conditions for issue of Bonus Shares: No company shall capitalise its profits
or reserves for the purpose of issuing fully paid-up bonus shares, unless—
(i) it is authorised by its Articles;

(ii) it has, on the recommendation of the Board, been authorised in the
general meeting of the company;
(iii) it has not defaulted in payment of interest or principal in respect of

fixed deposits or debt securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the

employees, such as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any, outstanding on the date of allotment,
are made fully paid-up;
(vi) it complies with such conditions as are prescribed by Rule 14 of the
Companies (Share Capital and debentures) Rules, 2014 which states that
the company which has once announced the decision of its Board
recommending a bonus issue, shall not subsequently withdraw the
same.
Further, the company has to ensure that the bonus shares shall not be issued
in lieu of dividend.
For the issue of bonus shares Shankar Portland Cement Limited will require
reserves of ` 50,00,000 (i.e. half of ` 1,00,00,000 being the paid-up share
capital), which is readily available with the company. Hence, after following
the above conditions relating to the issue of bonus shares, the company may
proceed for a bonus issue of 1 share for every 2 shares held by the existing
shareholders.
12. According to Section 68 (6), where an unlisted public company has passed a
special resolution under Section 68 (2) (b) or the Board has passed a
resolution under item (ii) of the proviso to Section 68 (2) (b) to buy-back its
own shares, it shall, before making such buy-back, file with the Registrar a
‘Declaration of Solvency’ in Form SH-9.
The declaration shall be verified by an affidavit to the effect that the Board
has made a full inquiry into the affairs of the company as a result of which
they have formed an opinion that it is capable of meeting its liabilities and
will not be rendered insolvent within a period of one year from the date of
declaration of solvency adopted by the Board. The declaration shall be signed
by at least two directors of the company, one of whom shall be the managing
director, if any.

CHAPTER a
5
ACCEPTANCE OF
DEPOSITS BY
COMPANIES
LEARNING OUTCOMES

 Explain the meaning of the term ‘Deposit’.
 Comprehend the requirements for and restrictions on
acceptance of deposits from members and public.
 Grasp the concept of ‘eligible companies’ which can accept
deposits from public in addition to their members.
 Identify the punishment for contravention of the provisions
relating to acceptance of deposits by companies.


CHAPTER OVERVIEW
Acceptance of Deposits
Acceptance of
Prohibition on Repayment of Punishment for
deposits from
acceptance deposits contravention
public
[Sec. 73] [Sec. 74] [Sec. 76A]
[Sec. 76]
1. INTRODUCTION
Chapter V Consists of sections 73 to 76A as well as the Companies
(Acceptance of Deposits) Rules, 2014.
Acceptance of deposits from the members as well as public at large is an

important source of finance for the corporate sector. It is, therefore, necessary to
control the companies which invite deposits in order to safeguard the general and
wider interest of all those persons who offer deposits out of their precious savings.
The statutory provisions as contained in sections 73 to 76A of the Companies Act,
2013 (hereinafter referred to as ‘the Act’) and the Companies (Acceptance of
Deposits) Rules, 2014 (hereinafter referred to as ‘the Rules’) govern the acceptance
of deposits and also renewal thereof.
2. CERTAIN IMPORTANT TERMS EXPLAINED

A. DEPOSIT
Definition: According to section 2 (31) of the Act, the term

‘deposit’ includes any receipt of money by way of deposit or loan
or in any other form, by a company, but does not include such
categories of amount as may be prescribed in consultation with the Reserve bank
of India.

ACCEPTANCE OF DEPOSITS BY COMPANIES 5.3
5.3 a
Features:
(i) The above definition of ‘deposit’ is inclusive one.
(ii) It includes any money received by way of:

a) deposit; or
b) loan; or
c) in any other form.
(iii) Repayment of ‘deposit’ is time-bound.
(iv) It can be secured or unsecured.
(v) It does not include prescribed categories of

amounts (as stated in the ‘Acceptance of Deposits’
Rules).
(vi) It may be accepted in joint names not exceeding

three persons.
(vii) A depositor may nominate any person at any

time.
(viii) Every deposit accepted by the company shall be

repaid with interest.
(ix) Premature repayment of a deposit can be made by

the company.
(x) A private company can accept deposits from its

members only.
(xi) A public company can accept deposits from its

members and also from the public if it fulfills certain
parameters.

Types of Deposits
Unsecured
Secured deposits
deposits
(fully secured by
(partial or no
creating charge on
security made
tangible assets)
available)
B. AMOUNTS NOT CONSIDERED AS DEPOSIT

Following categories of amounts are not considered as deposit [Rule 2 (1) (c)]:
(i) Any amount received from:
• the Central Government; or
• a state Government; or
• any other source whose repayment is guaranteed by the Central
Government or a State Government; or
• local authority; or
• a statutory authority constituted under an Act of Parliament or a State
Legislature;
(ii) Any amount received from:
• foreign Governments,
• foreign or international banks,
• multilateral financial institutions (including, but not limited to,
International Finance Corporation, Asian Development Bank,
Commonwealth Development Corporation, and International Bank for
Industrial and Financial Reconstruction),
• foreign Governments owned development financial institutions,
• foreign export credit agencies,
• foreign collaborators,
• foreign bodies corporate and foreign citizens,

5.5 a
• foreign authorities or persons resident outside India;

The receipt of funds shall be subject to the provisions of Foreign Exchange
Management Act, 1999 and rules and regulations made thereunder;
(iii) Any amount received as a loan or facility from:

• any banking company, or
• State Bank of India or its subsidiary banks, or
• a notified banking institution, or
• a corresponding new bank (as defined in the Banking Companies
(Acquisition and Transfer of Undertakings) Acts of 1970 and 1980), or
• any co-operative bank;
(iv) Any amount received as a loan or financial assistance from:
• Public Financial Institutions, or
1
• any regional financial institutions, or

• Insurance companies, or
• Scheduled banks (as defined in Reserve bank of India Act, 1934;
(v) Any amount received against issue of commercial paper or any other
instruments issued in accordance with the guidelines or notification issued
by the Reserve Bank of India;
(vi) Any amount received by a company from any other company (Mainly known
as Inter Company Deposit (ICD));
(vii) Any amount received and held towards subscription to any securities
(including share application money or advance towards allotment of
securities, pending allotment), so long as such amount is appropriated only
against the amount due on allotment of the securities applied for;
Notes:
(a) It is clarified by way of Explanation that if the securities for which
application money or advance for such securities was received cannot
1
Such PFI’s as notified by the Central Government in this behalf in consultation with the
Reserve Bank of India.

be allotted within 60 days from the date of receipt of the application

money or advance for such securities and such application money or
advance is not refunded to the subscribers within 15 days from the
date of completion of 60 days, such amount shall be treated as a
deposit under these rules.
(b) Further, it is clarified that any adjustment of the amount for any other
purpose shall not be treated as refund.
(viii) Any amount received from a person who, at the time of the receipt of the
amount, was a director of the company or a relative of the director of the
private company;
However, the director of the company or relative of the director of the private
company, as the case may be, from whom money is received, is required to
furnish to the company at the time of giving the money, a declaration in writing
to the effect that the amount is not being given out of funds acquired by him
by borrowing or accepting loans or deposits from others and the company shall
disclose the details of money so accepted in the Board's report;
(ix) Any amount raised by the issue of:
• bonds or debentures secured by a first charge or a charge ranking pari
passu with the first charge on any assets referred to in Schedule III 2 of the
Companies Act, 2013 excluding intangible assets of the company, or
• bonds or debentures compulsorily convertible into shares of the
company within 10 years;
However, if such bonds or debentures are secured by the charge of any
assets referred to in Schedule III of the Companies Act, 2013, excluding
intangible assets, the amount of such bonds or debentures shall not exceed
the market value of such assets as assessed by a registered valuer.
(ixa) Any amount raised by issue of non-convertible debenture not constituting a
charge on the assets of the company and listed on a recognised stock
exchange as per applicable regulations made by Securities and Exchange
Board of India;
2
Schedule III contains format of Balance Sheet.

5.7 a
Example 1: Soorya Ltd. has raised ` 20,00,000 through issue of non-

convertible debentures (20,000 NCDs of ` 100 each) not constituting a
charge on the assets of the company. The NCDs are listed on a recognised
stock exchange as per applicable regulations made by Securities and
Exchange Board of India. The said amount will not be considered as deposit
in terms of the rule stated above [Sub-clause (ixa)]
(x) any amount received from an employee of the company not exceeding his
annual salary under a contract of employment with the company in the
nature of non-interest bearing security deposit;
Example 2: Ratnakar was appointed as Supervisor by Siddhi Transporters

and Logistics Limited on an annual salary of ` 6,00,000. He was required to
deposit a sum of ` 6,50,000 under the contract of employment with the
company as security deposit on which no interest was payable to him.
In the above case, the amount so received by Siddhi Transporters and
Logistics Limited from Ratnakar under the contract of employment with the
company being non-interest bearing security deposit, will be considered as
deposit in terms of sub-clause (x), since the amount is more than his annual
salary. Had the amount of non-interest bearing security deposit received by
the company under the contract of employment been limited to ` 6,00,000
or less, it would not have been considered as deposit.
(xi) Any non-interest bearing amount received and held in trust;
(xii) Any amount received in the course of, or for the purposes of, the business of
the company–
(a) as an advance for the supply of goods or provision of services
accounted for in any manner whatsoever provided that such advance is
appropriated against supply of goods or provision of services within
three hundred and sixty-five days from the date of acceptance of
such advance:
However, in case of any advance which is subject matter of any legal
proceedings before any court of law, the said time limit of three
hundred and sixty-five days shall not apply.
(b) as advance, accounted for in any manner whatsoever, received in
connection with consideration for an immovable property under an

agreement or arrangement, provided that such advance is

adjusted against such property in accordance with the terms of
agreement or arrangement;
(c) as security deposit for the performance of the contract for supply of
goods or provision of services;
(d) as advance received under long term projects for supply of capital
goods except those covered under item (b) above;
(e) as an advance towards consideration for providing future services in
the form of a warranty or maintenance contract as per written
agreement or arrangement, if the period for providing such services
does not exceed the period prevalent as per common business practice
or five years, from the date of acceptance of such service whichever is
less;
(f) as an advance received and as allowed by any sectoral regulator or in
accordance with directions of Central or State Government;
(g) as an advance for subscription towards publication, whether in print or
in electronic to be adjusted against receipt of such publications;
However, it is clarified that if the amount received under items (a), (b) and (d)
above becomes refundable (with or without interest) due to the reasons that
the company accepting the money does not have necessary permission or
approval, wherever required, to deal in the goods or properties or services
for which the money is taken, then the amount received shall be deemed to
be a deposit under these rules.
Further, by way of Explanation it is clarified that for the purposes of this sub-
clause the amount shall be deemed to be deposits on the expiry of fifteen
days from the date they become due for refund.
(xiii) any amount brought in by the promoters of the company by way of
unsecured loan in pursuance of the stipulation of any lending financial
institution or a bank subject to the fulfillment of following conditions:
(a) the loan is brought because of the stipulation imposed by the lending
institutions on the promoters to contribute such finance;

5.9 a
(b) the loan is provided by the promoters themselves or by their relatives

or by both; and
(c) such exemption shall be available only till the loans of financial
institution or bank are repaid and not thereafter.
(xiv) any amount accepted by a Nidhi company in accordance with the rules made
under section 406 of the Act;
(xv) any amount received by way of subscription in respect of a chit under the
Chit Fund Act, 1982;
(xvi) any amount received by the company under any collective investment
scheme in compliance with regulations framed by the Securities and
Exchange Board of India;
(xvii) an amount of twenty-five lakh rupees or more received by a start-up
company, by way of a convertible note (convertible into equity shares or
repayable within a period not exceeding ten years from the date of issue) in
a single tranche, from a person;
By way of Explanation it is clarified that:
1. ‘‘Start-up company” means a private company incorporated under the
Companies Act, 2013 or Companies Act, 1956 and recognised as such
in accordance with Notification Number G.S.R. 127 (E), dated 19-02-
2019 issued by the Department for Promotion of Industry and Internal
Trade ;
2. ‘‘Convertible note” means an instrument evidencing receipt of money
initially as a debt, which is repayable at the option of the holder, or
which is convertible into such number of equity shares of the start-up
company upon occurrence of specified events and as per the other
terms and conditions agreed to and indicated in the instrument.
Example 3: Greedwood limited (‘the company) which is register as start-up
company register under Companies Act, 2013 has received an amount of
` 20 lacs and ` 10 lakh on different date by way of a convertible note.
Though the company has received an amount of twenty-five lakh rupees or
more, the said amount will be considered as deposit since the aggregate
amount has not received in single tranche in terms of the rule stated above
Sub-clause (xvii)].

(xviii) any amount received by a company from Alternate Investment Funds,

Domestic Venture Capital Funds, Infrastructure Investment Trusts, Real Estate
Investment Trusts 3 and Mutual Funds registered with the Securities and
Exchange Board of India in accordance with regulations made by it.
Note: Clarification regarding amounts received by private companies from their

members, directors or their relatives before 1st April, 2014 – whether to be
considered as deposits or not under the Companies Act, 2013 (General Circular No.
5/2015, dated 30-03-2015)
It is clarified that such amounts received by private companies prior to 1st April,
2014 shall not be treated as ‘deposits’ subject to the condition that relevant
private company shall disclose in the notes to its financial statement the figure of
such amounts and the accounting head in which such amounts have been shown.
However, any renewal or acceptance of fresh deposits on or after 1st April, 2014
shall be in accordance with the Companies Act, 2013 and the rules made
thereunder.
C. DEPOSITOR
Definition:
As per Rule 2 (1) (d) of the Companies (Acceptance of Deposits) Rules, 2014, the
term ‘Depositor’ means:
(i) any member of the company who has made a deposit with
the company in accordance with the provisions of sub-
section (2) of section 73 of the Act, or
(ii) any person who has made a deposit with a public company
in accordance with the provisions of section 76 of the Act.
In other words:
• any member of a private or public company who has deposited money with
his company is a ‘depositor’.
3
The words ‘Real Estate Investment Trusts’ have been inserted vide the Companies
(Acceptance of Deposits) Amendment Rules, 2019 w.e.f. 22-01-2019.

5.11 a
• any person (even if not a member of the company) who has deposited
money with a public company is also a ‘depositor’.
D. ELIGIBLE COMPANY
Definition:
As per Rule 2 (1) (e) the term “eligible company” means a public company as
referred to in section 76 (1), having a net worth of not less than one hundred crore
rupees or a turnover of not less than five hundred crore rupees and which has
obtained the prior consent in general meeting by means of a special resolution
and also filed the said resolution with the Registrar of Companies before making
any invitation to the public for acceptance of deposits:
However, an eligible company, which is accepting deposits within the limits
specified under section 180 (1) (c), may accept deposits by means of an ordinary
resolution.
A public company is ‘eligible’ to accept deposits from the public at large only if it
meets the above-mentioned criteria.
Accordingly,
(a) It should a public company.
(b) It should have net worth of minimum ` 100 Crore or a turnover of

minimum ` 500 Crore.
(c) It has obtained the prior consent by means of a special resolution

passed in the general meeting.
(d) The special resolution has been filed with the Registrar of Companies .
(e) An ordinary resolution is sufficient if an eligible company is accepting deposits

within the limits specified under section 180(1)(c).

3. PROHIBITIVE PROVISIONS AND EXEMPTED

COMPANIES
A. Prohibitive Provisions
According to section 73 (1) of the Act, no company can accept or renew deposits
from public unless it follows the manner provided under Chapter V of the Act for
acceptance or renewal of deposits from public. Manner of acceptance of deposits
from public is explained later in the Chapter.
B. Exempted Companies
According to Section 73 (1), on and after the commencement of this Act, no
company shall invite, accept or renew deposits under this Act from the public
except in a manner provided under this Chapter:
Provided that nothing in this sub-section shall apply to a banking company and
non-banking financial company as defined in the Reserve Bank of India Act, 1934
and to such other company as the Central Government may, after consultation
with the Reserve Bank of India, specify in this behalf.
Besides above exempted companies, Rule 1 (3) also states that ‘Deposit Rules’ shall
not apply to any Housing Finance Company registered with National Housing Bank
established under the National Housing Bank Act, 1987.
In nutshell, following are the exempted companies to which ‘deposit provisions’
are not applicable:
(i) any banking company;
(ii) any Non-banking Financial Company (NBFC);
(iii) any Housing Finance Company (HFC); and
(iv) such other company as may be notified by the Central Government.
This brings out the fact that ‘deposit provisions’ as contained in the Companies
Act, 2013 and ‘Deposit Rules’ have been enacted to regulate acceptance of
deposits by non-banking non-financial companies (i.e. manufacturing
companies, trading companies, etc.) only.

5.13 a
4. PROVISIONS REGARDING ACCEPTANCE OF

DEPOSITS FROM MEMBERS
Any company may accept or renew deposits from its members by following the
provisions as set out below:
(1) Passing of a Resolution: A company is required to pass a resolution in
general meeting for acceptance of deposits from its members [Section 73
(2)].
(2) Issuance of a Circular containing Statement: The company is required to
issue a circular to its members including therein a statement showing the
financial position of the company, the credit rating obtained, the total
number of depositors and the amount due towards deposits in respect of
any previous deposits accepted by the company and such other particulars in
the prescribed form and manner. [Section 73 (2) (a)]
According to Rule 4, the company shall issue such circular to all its members
by registered post with acknowledgement due or speed post or by electronic
mode in Form DPT-1.
Further, the circular may be published in English language in an English
newspaper and in vernacular language in a vernacular newspaper having wide
circulation in the State in which the registered office of the company is situated.
In addition, a certificate of the statutory auditor of the company shall be
attached in Form DPT-1, stating that the company has not committed
default in the repayment of deposits or in the payment of interest on such
deposits accepted either before or after payment of interest on such
deposits accepted either before or after the commencement of the Act.
In case a company had committed a default in the repayment of deposits
accepted either before or after the commencement of the Act or in the
payment of interest on such deposits, a certificate of the statutory auditor of
the company shall be attached in Form DPT-1, stating that the company had
made good the default and a period of five years has lapsed since the date
of making good the default as the case may be.
Such Circular shall be issued on the authority and in the name of Board of
Directors of the company.

The Circular shall remain valid till the earliest of the following dates:
(a) up to six months from the closure of the financial year in which it is
issued; or
(b) the date on which the financial statements are laid before the company
at the Annual General Meeting (AGM), or in case no AGM has been
held, the latest day on which the AGM should have been held as per
the relevant statutory provisions.
A fresh circular shall be issued, in each succeeding financial year, for inviting
deposits during that financial year.
Example 4: Ray Pharmaceuticals Limited issued a Circular inviting ‘deposits’
from its members on 14-02-2022. Its Annual General Meeting (AGM) was
held on 07-09-2022. Since, six months from the closure of FY 2021-22 end on
30-09-2022, the Circular remains valid till 07-09-2022 only. After this date, a
fresh Circular shall be issued if the company wants to invite further deposits
from its members.
(3) Filing of Circular: The company is required to file a copy of the circular
containing the statement with the Registrar within 30 days before the date
of issue of the circular. [Section 73 (2) (b)]
(4) Requirement of Deposit Repayment Reserve Account: The company is

required to deposit, on or before 30th of April each year, at least 20% of the
amount of its deposits maturing during the following financial year and
kept in a scheduled bank in a separate bank account to be called deposit
repayment reserve account. [Section 73 (2) (c)]
According to Rule 13 (Maintenance of Liquid Assets and Creation of Deposit
Repayment Reserve Account), every company referred to in sub-section (2)
of section 73 and every eligible company shall on or before the 30 th day of
April of each year deposit the sum as specified in clause (c) of the said sub-
section with any scheduled bank and the amount so deposited shall not be
utilised for any purpose other than for the repayment of deposits:
Provided that the amount remaining deposited shall not at any time fall
below twenty per cent of the amount of deposits maturing during the
financial year.

5.15 a
4
(5) Certification as to No default in Repayment: The company needs to certify
that it has not committed any default in the repayment of deposits accepted
either before or after the commencement of this Act or payment of interest
on such deposits.
In case a default had occurred, the company made good the default and a
period of five years had lapsed since the date of making good the default.
[Section 73 (2) (e)]
Exemption to certain Private Companies 5:

Clauses (a) to (e) of sub-section (2) of section 73 with respect to issue of
circular, filing the copy of such circular with the Registrar, depositing of
certain amount and certification as to no default committed, shall not apply
to a private company:
(A) which accepts from its members monies not exceeding one
hundred per cent of aggregate of the paid-up share capital,
free reserves and securities premium account; or
(B) which is a start-up, for five years from the date of its
incorporation; or
(C) which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any
other company;
(b) if the borrowings of such a company from banks or
financial institutions or any body corporate is less than
twice of its paid-up share capital or fifty crore rupees,
whichever is lower; and
(c) such a company has not defaulted in the repayment of
such borrowings subsisting at the time of accepting
deposits under this section.
4
Clause (d) relating to ‘deposit insurance’ was omitted vide the Companies (Amendment) Act,
2017 w.e.f. 15th August, 2018.
5
In terms of Notification No. GSR 464 (E), dated 05-06-2015 as amended from time to
time. Further, in terms of Notification No. GSR 8(E), dated 04 -01-2017, clauses (a) to (e) of
section 73 (2) shall not apply to a Specified IFSC public company which accepts from its
members, monies not exceeding 100% of aggregate of the paid -up share capital and free
reserves, and such company shall file the details of monies so accepted with the Registrar
in such manner as may be specified (i.e. in Form DPT-3).

However, such a company [as referred to in clauses (A), (B) or (C)] shall file
the details of monies accepted to the Registrar in the specified manner (i.e.
in Form DPT-3).
(6) Provision of Security: The company may provide security, if any, for the due
repayment of the amount of deposit or the interest thereon. Further, if
security is provided, the company shall take steps for the creation of charge
on the property or assets of the company.
It may be noted that in case a company does not secure the deposits or
secures such deposits partially, then, the deposits shall be termed as
‘unsecured deposits’. Accordingly, it shall be so quoted in every circular,
form, advertisement or in any document related to invitation or acceptance
of deposits. [Section 73 (2) (f)]
(7) Repayment of deposit: Every deposit accepted by a company shall be
repaid with interest in accordance with the terms and conditions of the
agreement. [Section 73 (3)]
(8) Application to National Company Law Tribunal (NCLT) if the Company
fails to repay: In case a company fails to repay the deposit or part thereof or
any interest thereon, the depositor concerned may apply to the NCLT for an
order directing the company to pay the sum due or for any loss or damage
incurred by him as a result of such non-payment and for such other orders
as the NCLT may deem fit. [Section 73 (4)]
(9) Utilising the Amount of Deposit Repayment Reserve Account: The
Deposit Repayment Reserve Account shall not be used by the company for
any purpose other than repayment of deposits. [Section 73 (5)]
Rule 13 also states that the amount so deposited in the Account shall not be
used by the company for any purpose other than repayment of deposits.
(10) Tenure for which Deposits can be Accepted 6: A company is not permitted
to accept or renew deposits (whether secured or unsecured) which is
repayable on demand or in less than six months. Further, the maximum
period of acceptance of deposit cannot exceed thirty-six months.
Example 5: Arpit, a member of Swapnil Traders Private Limited deposited
₹1,00,000 with his company on 1st April, 2022. The earliest repayment date in
6
As per Rule 3 (1).

5.17 a
this case shall be 30 th September, 2022 and the latest repayment date shall
be 31 st March, 2025. Thus, the tenure will range between six months and
thirty-six months, as per the policy of Swapnil Traders Private Limited.
Exception to the rule of tenure of six months: For the purpose of meeting
any of its short-term requirements of funds, a company may accept or renew
deposits for repayment earlier than six months subject to the condition that:
(i) such deposits shall not exceed ten per cent of the aggregate of
the paid-up share capital, free reserves and securities premium
account of the company; and
(ii) such deposits are repayable only on or after three months from the
date of such deposits or renewal.
Example 6: Continuing the example of Swapnil Traders Private Limited, it is
assumed that aggregate of its paid-up share capital, free reserves and
securities premium account is ` 2,00,00,000. In order to meet its short-term
requirement of funds, it can raise deposits maximum up to ` 20,00,000
(being 10% of ` 2,00,00,000) whose repayment tenure can be less than six
months; but such tenure cannot be less than three months.
Therefore, Swapnil Traders Private Limited must ensure that the short-term
deposits so accepted are repaid only on or after three months from the date
of such deposits.
(11) Maximum Amount of Deposits from Members 7: A company is permitted
to accept or renew any deposit from its members including other such
deposits outstanding as on the date of acceptance or renewal maximum up
to 35% of the aggregate of its paid-up share capital, free reserves and
securities premium account.
However, as an exception, a Specified IFSC Public company 8 and a private
company may accept from its members monies not exceeding 100% of
aggregate of the paid-up share capital, free reserves and securities premium
7
As per Rule 3 (3).
8
A Specified IFSC Public company means an unlisted public company which is licensed to
operate by the Reserve Bank of India or the Securities and Exchange Board of India or the
Insurance Regulatory and Development Authority of India from the International Financial
Services Centre located in an approved multi services Special Economic Zone set-up under the
Special Economic Zones Act 2005 read with the Special Economic Zones Rules, 2006.

account. Further, such company shall file the details of monies so accepted
with the Registrar in Form DPT-3.
In addition, the maximum limit in respect of deposits to be accepted from
members shall not apply to the following classes of private companies:
(i) a private company which is a start-up, for ten years from the date of its
incorporation;
(ii) a private company which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other
company;
(b) the borrowings of such a company from banks or financial
institutions or any body-corporate is less than twice of its paid-
up share capital or fifty crore rupees, whichever is less; and
(c) such a company has not defaulted in the repayment of such
borrowings subsisting at the time of accepting deposits under
section 73:
Note: It may be noted that all the companies accepting deposits shall
file the details of monies so accepted with the Registrar in Form DPT-3.
(12) Appointment of Trustee for Depositors: As regards appointment of

trustee, refer provisions given under ‘Acceptance of Deposits from Public ’
because same provisions are applicable.
(13) Trustee to call Meeting of Depositors 9: The trustee for depositors shall call
a meeting of all the depositors in the following cases:
(a) on receipt of a requisition in writing signed by at least one-tenth of the
depositors in value for the time being outstanding;
(b) on the happening of any event, which constitutes a default or which, in
the opinion of the trustee for depositors, affects the interest of depositors.
(14) Ceiling on Rate of Interest and Brokerage Payable on Deposits 10: A
company is permitted to invite or accept or renew any deposit at any rate of
interest or pay any amount of brokerage but in no case, it shall exceed the
9
As per Rule 9.
10
As per Rule 3 (6).

5.19 a
maximum rate of interest or brokerage prescribed by the Reserve Bank of

India in case of non-banking financial companies (NBFCs) for acceptance of
deposits.
Further, no brokerage shall be paid to any person except the person who is
authorised in writing by the company to solicit deposits on its behalf and
through whom deposits are actually procured. Payment of brokerage to any
other person for procuring deposits shall be deemed to be in violation of
‘deposit rules’.
(15) Filling of Application Form for making Deposits11: A company shall accept
or renew any deposit, whether secured or unsecured, only when an
application, as specified by the company, is submitted by the intending
depositor for the acceptance of deposit.
The application shall contain a declaration made by the intending depositor
to the effect that the deposit is not being made out of any money borrowed
by him from any other person.
(16) Deposits in Joint Names 12: In case the depositors so desire, deposits may
be accepted by the company in joint names not exceeding three. A joint
deposit may be accepted with or without any of the clauses, namely,
“Jointly”, “Either or Survivor”, “First named or Survivor”, “Anyone or Survivor”.
These clauses operate on maturity of deposits.
Example 7: A, B and C have jointly deposited ` 3,00,000 in a company.
• In case of ‘Jointly’ clause:
the repayment of deposit on maturity shall be made to all the three
together i.e. A, B and C or the survivors.
• In case of ‘Either or Survivor’ clause:
the repayment of deposit on maturity shall be made to either of the
three i.e. either A or B or C or the survivor.
• In case of ‘First named or Survivor’ clause:
the repayment of deposit on maturity shall be made to the first named
person i.e. A if he is the first named person or the survivor.
11
As per Rule 10.
12
As per Rule 3 (2).

• In case of ‘Anyone or Survivor’ clause:

the repayment of deposit on maturity shall be as in the case of ‘Either
or Survivor’.
(17) Nomination13: Every depositor may nominate any person at any time. The
nominee shall be the person to whom his deposits shall vest in the event of
his death.
(18) Deposit Receipt 14: Within a period of twenty-one days from the date of
receipt of money or realization of cheque or date of renewal, the company is
required to furnish a deposit receipt to the depositor or his agent. The
receipt shall be signed by an officer duly authorised by the Board and state
the date of deposit, the name and address of the depositor, the amount of
deposit, the rate of interest and the maturity date.
(19) Register of Deposits 15: As regards Register of Deposits, refer provisions
given under ‘Acceptance of Deposits from Public’ because same provisions
are applicable.
(20) Premature Repayment of Deposits 16: As regards premature repayment of

deposits, refer provisions given under ‘Acceptance of Deposits from Public’
because same provisions are applicable.
(21) Filing of Return of Deposits with the Registrar 17: A duly audited Return of
Deposits in DPT-3 (containing particulars as on 31 st March of every year)
shall be filed with the Registrar of Companies along with requisite fee on or
before 30th June of that year and declaration to that effect shall be submitted
by the auditor in Form DPT-3.* It is clarified by way of Explanation that DPT-3
shall be used to include particulars of deposits or particulars of transactions
not considered as deposits or both by every company (other than a
Government company).
13
As per Rule 11.
14
As per Rule 12.
15
As per Rule 14.
16
As per Rule 15.
17
As per Rule 16.
* Inserted by Companies (Acceptance of Deposits) Amendment Rules, 2022

5.21 a
(22) No Right to Alter any Terms and Conditions of Deposit 18: The company
has no right to alter, either directly or indirectly, any of the terms and
conditions of the deposit, deposit trust deed and deposit insurance contract
which may prove disadvantageous to the interest of the depositors after
circular or circular in the form of advertisement is issued and deposits are
accepted.
(23) Disclosures in Financial Statements 19: A public company shall disclose in its
financial statements by way of note about the money received from its
directors.
In case of a private company it shall disclose in its financial statements by

way of note about the money received from the directors or the relatives of
directors.
(24) Penal Rate of Interest 20: In case the company fails to repay deposits (both
secured and unsecured) on maturity, after they are claimed, it shall pay penal
rate of interest of eighteen per cent per annum for the overdue period.
(25) Punishment for Contravention21: If any company inviting deposits or any

other person contravenes any of the ‘deposit rules’ for which no punishment
is provided in the Act, the company and every officer-in-default shall be
punishable as under:
• with fine extendable to five thousand rupees; and
• in case the contravention is a continuing one, with a further fine which

may extended to five hundred rupees for every day after the first day
during which the contravention continues.
18
As per Rule 3 (7).
19
As per Rule 16A. — Vide Rule 16A (3), as a onetime measure, every company (other than a
Government company) was required to file a onetime return of outstanding receipt of money or
loan by a company not considered as deposits from 1 st April 2014 till 31st March, 2019 in Form
DPT-3 with the Registrar of Companies within ninety days from 31 st March, 2019 along with
requisite fee.
20
As per Rule 17.
21
As per Rule 21.

5. PROVISIONS REGARDING ACCEPTANCE OF

DEPOSITS FROM PUBLIC BY ELIGIBLE
COMPANIES [SECTION 76]
Only ‘eligible companies’ are permitted to accept deposits from the public, in
addition to their members.
It means not all the companies can access the public at large for raising deposits
though they can accept deposits from their members.
Section 76 of the Act and the Companies (Acceptance of Deposits) Rules, 2014 deal
with acceptance of deposits from public by eligible companies.
The acceptance of deposits from public shall be subject to compliance with section
73 (2) and the prescribed rules.
These provisions are stated as under:
(1) Net Worth/Turnover Criterion 22: A public company, having net worth of
not less than one hundred crore rupees or turnover of not less than five
hundred crore rupees, may accept deposits from persons other than its members.
Such type of public company is known as ‘eligible company’.
(2) Passing of Special Resolution 23: The ‘eligible company’ is required to obtain
the prior consent by means of a special resolution in general meeting and also
file the said resolution with the Registrar of Companies before making any
invitation to the public for acceptance of deposits.
However, an ‘eligible company’, which is accepting deposits within the limits
specified under section 180 (1) (c), may accept deposits by means of an ordinary
resolution.
(3) Obtaining of Credit Rating 24: The ‘eligible company’ shall be required to
obtain the rating (including its net-worth, liquidity and ability to pay its deposits
on due date) from a recognised credit rating agency. The given rating ensuring
‘adequate safety’ shall be informed to the public at the time of invitation of
22
As per Rule 2 (1) (e).
23
As per Rule 2 (1) (e).
24
As per first Proviso to section 76 (1).

5.23 a
deposits from the public. Further, the rating shall be obtained every year during
the tenure of deposits.
As per Rule 3 (8), a copy of the credit rating which is being obtained at least once
in a year shall be sent to the Registrar of Companies along with the Return of
Deposits in Form DPT-3.
Further, the credit rating shall not be below the minimum investment grade rating
or other specified credit rating for fixed deposits. It shall be obtained from any one
of the approved credit rating agencies as specified for Non-Banking Financial
Companies in the Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 1998, as amended from time to time.
(4) Charge Creation on Assets Necessary if the Deposits are Secured 25: Every
company which accepts secured deposits from the public shall within thirty days
of such acceptance, create a charge on its assets. The amount of charge shall not
be less than the amount of deposits accepted. The charge shall be created in
favour of the deposit holders in accordance with the prescribed rules.
In respect of creation of security, Rule 6 states that the company accepting
secured deposits shall create security by way of charge on its tangible assets only.
The other notable points are:
• The company cannot create charge on intangible assets (i.e. goodwill, trade-
marks, etc.).
• Total value of security should not be less than the amount of deposits
accepted and interest payable thereon.
• The market value of assets subject to charge shall be assessed by a
registered valuer.
• The security shall be created in favour of a trustee for the depositors on
specific movable and immovable property of the company.
(5) Tenure for which Deposits can be Accepted 26 : A company is not
permitted to accept or renew deposits (whether secured or unsecured) which is
repayable on demand or in less than six months. Further, the maximum period of
acceptance of deposit cannot exceed thirty-six months.
25
As per second Proviso to section 76 (1).
26
As per Rule 3 (1).

Exception to the rule of tenure of six months: For the purpose of meeting any of
its short-term requirements of funds, a company may accept or renew deposits for
repayment earlier than six months subject to the condition that—
(i) such deposits shall not exceed ten per cent. of the aggregate of the paid-up
share capital, free reserves and securities premium account of the company;
and
(ii) such deposits are repayable only on or after three months from the date of
such deposits or renewal.
(6) Appointment of Trustee for Depositors 27 : Following provisions are
required to be observed in this respect:
• One or more trustees for depositors need to be appointed by the company
for creating security for the deposits.
• A written consent shall be obtained from the trustees before their
appointment.
• A statement shall appear in the advertisement with reasonable prominence
to the effect that the trustees for depositors have given their consent to the
company for such appointment.
• The company shall execute a Deposit Trust Deed in Form DPT-2 at least
seven days before issuing the circular or circular in the form of
advertisement.
• No person including a company that is in the business of providing
trusteeship services shall be appointed as a trustee for the depositors, if the
proposed trustee:
(a) is a director, key managerial personnel or any other officer or an
employee of the company or of its holding, subsidiary or associate
company or a depositor in the company;
(b) is indebted to the company, or its subsidiary or its holding or associate
(c) has any material pecuniary relationship with the company;
27
As per Rule 7.

5.25 a
(d) has entered into any guarantee arrangement in respect of principal

debts secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
No trustee for depositors shall be removed from office after the issue of
circular or advertisement and before the expiry of his term except with the
consent of all the directors present at a meeting of the board. In case the
company is required to have independent directors, at least one independent
director shall be present in such meeting of the Board.
(7) Meeting of Depositors to be called by Trustee 28 : The trustee for
depositors shall call a meeting of all the depositors in the following cases:
(a) on receipt of a requisition in writing signed by at least one-tenth of the
depositors in value for the time being outstanding;
(b) on the happening of any event, which constitutes a default or which, in the
opinion of the trustee for depositors, affects the interest of depositors.
(8) Maximum Amount of Deposits 29: An eligible company is permitted to
accept or renew deposits as under:
• From its Members: The amount of such deposit together with outstanding
deposits from the members as on the date of acceptance or renewal can be
maximum ten per cent. of the aggregate of its paid-up share capital, free
reserves and securities premium account;
• From Persons other than its Members: The amount of such deposits
together with the amount of outstanding deposits (excluding deposits from
members) on the date of acceptance or renewal can be maximum twenty-
five per cent. of the aggregate of its paid-up share capital, free reserves and
securities premium account.
(9) Maximum Amount of Acceptable Deposit in case of an Eligible
Government Company30: Such a company is permitted to accept or renew any
deposit together with the amount of other outstanding deposits as on the date of
28
As per Rule 9.
29
As per Rule 3 (4).
30
As per Rule 3 (5).

acceptance or renewal maximum up to thirty-five per cent. of the aggregate of

its paid-up share capital, free reserves and securities premium account.
(10) Issuance of Circular in the Form of Advertisement 31: An ‘eligible company’
intending to invite deposits is required to issue a circular in the form of an
advertisement in DPT-1.
Such advertisement shall be published in English in an English newspaper and in
vernacular language in a vernacular newspaper. Both newspapers should have
wide circulation in the State in which the registered office of the company is
situated.
If the company has its website, the circular shall also be placed on the website.
Such advertisement shall be issued on the authority and in the name of Board of
Directors of the company.
• Filing with the Registrar: At least thirty days before the issue of the
advertisement, its copy duly signed by a majority of the directors who
approved the advertisement or otherwise signed by their duly authorised
agents is required to be delivered to the Registrar of Companies for
registration.
• Validity of the Advertisement: The advertisement shall remain valid till the
earliest of the following dates:
(a) up to six months from the closure of the financial year in which it is
issued; or
(b) the date on which the financial statements are laid before the company
at the Annual General Meeting (AGM), or in case no AGM has been
held, the latest day on which the AGM should have been held as per
the relevant statutory provisions.
• Fresh Advertisement: A fresh advertisement shall be issued, in each
succeeding financial year, for inviting deposits during that financial year.
• Issue and Effective dates: The date on which the advertisement appeared in
the newspaper shall be taken as the date of the issue of advertisement.
Further, the effective date of issue of circular shall be the date on which the
circular was dispatched.
31
As per Rule 4.

5.27 a
(11) Maintenance and Using the Amount of Deposit Repayment Reserve

Account: The company is required to deposit, on or before 30th April of each year,
at least 20% of the amount of its deposits maturing during the following financial
year and kept in a scheduled bank in a separate bank account to be called Deposit
Repayment Reserve Account. [Section 73 (2) (c)]
Rule 13 states that the amount so deposited in the account shall not be used by
the company for any purpose other than repayment of deposits. Further, it states
that such amount shall not at any time fall below twenty percent of the amount
of deposits maturing during the financial year.
(12) Ceiling on Rate of Interest and Brokerage Payable on Deposits 32: An

eligible company is permitted to invite or accept or renew any deposit at any rate
of interest or pay any amount of brokerage but in no case, it shall exceed the
maximum rate of interest or brokerage prescribed by the Reserve Bank of India in
case of non-banking financial companies (NBFCs) for acceptance of deposits.
Further, no brokerage shall be paid to any person except the person who is
authorised in writing by the company to solicit deposits on its behalf and through
whom deposits are actually procured.
(13) Filling of Application Form for making Deposits33: A company shall accept
or renew any deposit, whether secured or unsecured, only when an application, as
specified by the company, is submitted by the intending depositor for the
acceptance of deposit.
The application shall contain a declaration made by the intending depositor to the
effect that the deposit is not being made out of any money borrowed by him from
any other person.
(14) Deposits in Joint Names 34: In case the depositors so desire, deposits may
be accepted in joint names not exceeding three. A joint deposit may be accepted
with or without any of the clauses, namely, “Jointly”, “Either or Survivor”, “First
named or Survivor”, “Anyone or Survivor”. These clauses operate on maturity of
deposit.
32
As per Rule 3 (6).
33
As per Rule 10.
34
As per Rule 3 (2).

(15) Nomination35: Every depositor may nominate any person at any time. The
nominee shall be the person to whom his deposits shall vest in the event of his
death.
(16) Deposit Receipt 36: Within a period of twenty-one days from the date of
receipt of money or realization of cheque or date of renewal, the company is
required to furnish a deposit receipt to the depositor or his agent. The receipt shall
be signed by the duly authorised officer and state the date of deposit, th e name
and address of the depositor, the amount of deposit, the rate of interest and the
maturity date.
(17) Register of Deposits 37:
• Every company accepting deposits shall maintain one or more separate

registers for deposits accepted or renewed at its registered office.
Following particulars shall be entered separately in the case of each

depositor:
(a) name, address and PAN of the depositor/s;
(b) particulars of the guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is
repayable;
(g) rate of interest on such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) mandate and instructions for payment of interest and for non-
deduction of tax at source, if any;
(j) date or dates on which the payment of interest shall be made;
35
As per Rule 11.
36
As per Rule 12.
37
As per Rule 14.

5.29 a
(l)
38
particulars of security or charge created for repayment of deposits;
(m) any other relevant particulars.
• The entries shall be made within seven days from the date of issuance of the
receipt duly authenticated by a director or secretary of the company or by
any other officer authorised by the Board for this purpose.
• The said register shall be preserved in good order for a period of not less than
eight years from the financial year in which the latest entry is made in the
register.
(18) Premature Repayment of Deposits 39: After the expiry of six months but
before the actual date of maturity, if a depositor requests for premature
repayment, the rate of interest payable shall be one percent less than the rate
which would be payable for the period for which the deposit has actually run.
In this respect it is to be noted that the period for which the deposit has run, if it
contains any part of the year which is less than six months then it shall be
excluded; otherwise if that part is six months or more it shall be taken as one year.
Reduction of rate of interest is not applicable in the following cases:
• Where the deposit is prematurely repaid to comply with Rule 3 i.e. premature
repayment made in order to reduce the total amount of deposits to bring it
within the permissible limits; or
• Where the deposit is prematurely repaid to provide for war risk or other
related benefits to the personnel of naval, military or air forces or to their
families during the period of emergency declared under Article 352 of the
Constitution.
(19) Premature Closure of Deposit to Earn Higher Rate of Interest 40: In case a
depositor desires to avail higher rate of interest by renewing the deposit before its
actual maturity date, the company shall pay him the higher rate of interest only if
the deposit is renewed for a period longer than the unexpired period of deposit.
38
Clause (k) relating to details of deposit insurance was omitted by the Companies
(Acceptance of Deposits) Amendment Rules, 2018, w.e.f. 15-08-2018. [Notification No. G.S.R.
612 (E), dated 5th July, 2018 w.e.f. 15-08-2018]
39
As per Rule 15.
40
As per Rule 15 (Second Proviso).

(20) Filing of Return of Deposits with the Registrar 41: A duly audited Return of
Deposits in DPT-3 (containing particulars as on 31 st March of every year) shall be
filed with the Registrar of Companies along with requisite fee on or before 30 th
June of that year.
It is clarified by way of Explanation that DPT-3 shall be used to include particulars
of deposits or particulars of transactions not considered as deposits or both by
every company (other than a Government company).
(21) Disclosures in Financial Statements 42: A public company shall disclose in its
financial statement by way of note about the money received from its directors.
(22) Penal Rate of Interest 43: In case the company fails to repay deposits (both
secured and unsecured) on maturity, after they are claimed, it shall pay penal rate
of interest of eighteen per cent per annum for the overdue period.
(23) No Right to Alter any Terms and Conditions of Deposit44: The company
has no right to alter any of the terms and conditions of the deposit, deposit trust
deed and deposit insurance contract which may prove detrimental to the interest
of the depositors after circular or circular in the form of advertisement is issued
and deposits are accepted.
(24) Punishment for Contravention45: If any eligible company inviting deposits
or any other person contravenes any of the ‘deposit rules’ for which no
punishment is provided in the Act, the company and every officer-in-default shall
be punishable as under:
• with fine extendable to five thousand rupees; and
• in case the contravention is a continuing one, with a further fine up to five
hundred rupees for every day after the first day during which the
contravention continues.
41
As per Rule 16.
42
As per Rule 16A. — Vide Rule 16A (3), as a onetime measure, every company (other than a
Government company) was required to file a onetime return of outstanding receipt of money
or loan by a company not considered as deposits from 1 st April 2014 till 31st March, 2019 in
Form DPT-3 with the Registrar of Companies within ninety days from 31 st March, 2019 along
with requisite fee.
43
As per Rule 17.
44
As per Rule 3 (7).
45
As per Rule 21.

5.31 a
(25) Applicability of Section 73 and 74 to Eligible Companies: Rule 19 states

that pursuant to provisions of sub-section (2) of section 76 of the Act, the
provisions of sections 73 and 74 shall, mutatis mutandis, apply to acceptance of
deposits from public by eligible companies.
Note: Besides Rule 19, section 76 (2) of the Act states that the provisions of
Chapter V shall, mutatis mutandis, apply to the acceptance of deposits from public
under section 76.
6. PUNISHMENT FOR CONTRAVENTION OF

SECTION 73 OR SECTION 76 [SECTION 76A]
According to section 76A of the Act, in case a company accepts or invites or allows
any other person to accept or invite on its behalf any deposit in contravention of
the manner or the conditions prescribed under section 73 or section 76 or rules
made thereunder or if a company fails to repay the deposit or part thereof or any
interest within the time specified under section 73 or section 76 or rules made
thereunder or such further time as may be allowed by the Tribunal under section
73, then the following consequences will follow:
(a) Punishment for the company: The company shall, in addition to the
payment of the amount of deposit or part thereof and the interest due, be
punishable with fine which shall not be less than one crore rupees or twice
the amount of deposit accepted by the company, whichever is lower but
which may extend to ten crore rupees; and
(b) Punishment for officer-in-default: Every officer of the company who is in
default shall be punishable with imprisonment which may extend to seven
years and with fine which shall not be less than twenty-five lakh rupees but
which may extend to two crore rupees.
Further, if it is proved that the officer of the company who is in default, has
contravened such provisions knowingly or wilfully with the intention to
deceive the company or its shareholders or depositors or creditors or tax
authorities, he shall be liable for action under section 447 (Punishment for
fraud).

7. REPAYMENT OF DEPOSITS ACCEPTED BEFORE

COMMENCEMENT OF THE COMPANIES ACT,
2013 [SECTION 74]
The provisions regarding repayment of deposits accepted before commencement
of the Companies Act, 2013, have been dealt with in section 74. These provisions
are explained as under:
(i) Filing of Statement of Deposits with the Registrar of Companies and
Repayment thereafter: As per section 74 (1), in case any deposit was
accepted by a company before the commencement of this Act (i.e. before 1-
4-2014), and the amount of such deposit or any interest remains unpaid as
on 1-4-2014 or becomes due at any time thereafter, the company shall take
the following steps:
(a) file, within a period of 3 months from such commencement or from the
date on which such payments are due, with the Registrar:
• a statement of all the deposits accepted by the company and
sums remaining unpaid on such amount with the interest payable
thereon along with the arrangements made for such repayment.
This is to be done notwithstanding anything contained in any
other law for the time being in force or under the terms and
conditions subject to which the deposit was accepted or any
scheme framed under any law; and
(b) repay within three years from such commencement or on or before

expiry of the period for which the deposits were accepted, whichever is
earlier.
Note 1: As per Explanation to Rule 19 if the company has been repaying such
deposits and interest thereon without any default on due dates for the
remaining period of such deposit in accordance with the terms and
conditions, point (b) above shall be deemed to have been complied with.
Note 2: It is to be noted that renewal of any such deposits shall be done in
accordance with the provisions of Chapter V and the rules made thereunder.
(ii) Extension of Time for Repayment of Deposits by the Tribunal: As per
section 74 (2), the Tribunal may, on an application made by the company,

5.33 a
after considering the financial condition of the company, the amount of

deposit and the interest payable thereon and such other matters, allow
further time as considered reasonable to the company to repay the deposit.
(iii) Punishment for Non-Repayment of Deposits: As per section 74 (3), if a
company fails to repay the deposit or part thereof or any interest thereon
within the time specified in section 74 (1) or such further extended time
allowed by the Tribunal under section 74 (2), the company shall, in addition
to the payment of the amount of deposit or part thereof and the interest
due, be punishable as under:
• company: with fine minimum of one crore rupees and maximum of ten
crore rupees; and
• every officer-in-default: with imprisonment extendable to seven years
or with fine minimum of twenty-five lakh rupees and maximum of two
crore rupees, or with both.
8. POWER OF CENTRAL GOVERNMENT TO

DECIDE CERTAIN QUESTIONS
As per Rule 18, If any question arises as to the applicability of these rules to a
particular company, such question shall be decided by the Central Government
in consultation with the Reserve Bank of India.
SUMMARY
 Deposit includes any receipt of money by way of (i) deposit or (ii) loan or (iii)
in any other form by a company.
But it does not include such categories of amount which are prescribed in
the ‘Acceptance of Deposits’ Rules.
 Depositor means any member of the company who has made a deposit with
the company.
Depositor also means any other person (not being a member of the
company) who has made a deposit with a public company categorised as
‘eligible company’.

 A public company, having net worth of not less than one hundred crore
rupees or turnover of not less than five hundred crore rupees, is known as
‘eligible company’. It can accept deposits both from the public and its
members.
 Section 73 prohibits a company to invite, accept or renew deposits from

public if they are not accepted or renewed in the prescribed manner. This
prohibition however shall not apply in case of certain exempted companies
i.e.:
• banking company;
• non- banking financial company;
• a housing finance company registered with NHB;

• such other company as the Central Government may specify.
 A company may accept deposits from its members on mutually agreed terms
and conditions subject to the passing of a resolution in general meeting.
 Every company referred to in section 73 (2) intending to invite deposits from

its members shall issue a circular to all its members in Form DPT-1.
Exemption is available to certain private companies.
 An ‘eligible company’ shall obtain the prior consent of the company in

general meeting by means of a special resolution and also file the same with
the Registrar of Companies before making any invitation to the public for
acceptance of deposits.
 An ‘eligible company’ accepting deposits within the limits specified under

section 180 (1) (c) may accept deposits by means of an ordinary resolution.
 Every ‘eligible company’ intending to invite deposits shall issue a circular in

the form of advertisement in Form DPT-1.
 Deposits shall be accepted by the companies within the specified limits.
 Deposits may be accepted by a company in joint names not exceeding three.
 The Deposit Repayment Reserve Account shall not be used by the company
for any purpose other than repayment of deposits.
 In case of secured deposits, the company is required to create security of

equivalent amount by way of charge on its tangible assets.

5.35 a
 A company shall not issue any circular or advertisement for inviting secured
deposits unless it appoints one or more trustees.
 Every company accepting deposits shall maintain at its registered office one
or more separate registers for deposits accepted or renewed.
 A public company shall disclose in its financial statements by way of note

about the money received from its directors.
 A private company shall disclose in its financial statements by way of notes,

about the money received from the directors, or relatives of directors.
 A ‘Deposit Receipt’ shall be issued by the company to the depositor or his

agent within twenty-one days from the date of receipt of money or
realisation of cheque or date of renewal.
 Nomination facility shall be available to every depositor.
 Premature repayment of deposits is permissible.
 Every company shall pay a penal rate of interest of 18% p.a. for the overdue
period in case of default in repayment.
 The Return of Deposits shall be filed in Form DPT-3 with the Registrar.
 If a company fails to repay the deposit or part thereof or any interest

thereon, the depositor concerned may apply to the National Company Law
Tribunal (NCLT) for an order directing the company to pay the sum due or
for any loss or damage incurred by him as a result of such non-payment and
for such other orders as the NCLT may deem fit.
 In case of default in repayment, a company is punishable with fine and every

officer-in-default shall be punishable with imprisonment and also fine. In case
of willful default committed with the intention to deceive various
stakeholders, he shall be liable for action under section 447.
TEST YOUR KNOWLEDGE

1. Varsha Limited decides to raise deposits of ` 20.00 lakh from its members.
However, it proposes to secure such deposits partially by offering a security
worth ` 15.00 lakh. Which of the following options best describe such deposits:

(a) Fully secured deposits (except a small portion)

(b) Unsecured deposits
(c) Partially secured deposits
(d) These cannot be classified as deposits

2. What is the maximum tenure for which a company can accept or renew
deposits from its members as well as public?
(a) 12 months
(b) 24 months
(c) 36 months
(d) 48 months
3. Fin Limited is accepting deposits of various tenures from its members from
time to time. The current Register of Deposits, maintained at its registered
office is complete. State the minimum period for which it should mandatorily
be preserved in good order.
(a) Four years from the financial year in which the latest entry is made in
the Register.
(b) Six years from the financial year in which the latest entry is made in the
Register.
(c) Eight years from the financial year in which the latest entry is ma de in
the Register.
(d) Ten years from the latest date of entry.
4. Every company shall pay a penal rate of interest of ----------------- per annum
for the overdue period in case of deposits, whether secured or unsecured,
matured and claimed but remaining unpaid:
(a) 9%
(b) 14%
(c) 18%
(d) 24%

5.37 a
5. As per the provisions of the Companies Act, 2013 and relevant rules
thereunder, an eligible company is not permitted to accept from public or
renew the same deposits (whether secured or unsecured) which is repayable on
demand or in less than ______________ months. Further, the maximum period of
acceptance of deposit cannot exceed ________________ months. But, for the
purpose of meeting any of its short- term requirements of funds, a company
may accept or renew deposits for repayment earlier than ______________ months
subject to certain conditions.
(a) six, thirty six, six
(b) three, twenty four, three

(c) six, sixty, six
(d) three, sixty, six
1. Enumerate the amounts which when received by a company in the ordinary
course of business are not to be considered as deposits.
2. State the procedure to be followed by companies for acceptance of deposits
from its members according to the Companies Act, 2013. What are the
exemptions available to a private limited company?
3. Explain the provisions for 'Appointment of Trustee for Depositors' under the
Companies Act, 2013 read with the ‘Acceptance of Deposits’ Rules, 2014.
4. What are the provisions relating to ‘Credit Rating’ which an ‘eligible company’
must follow if it wants to raise public deposits?
5. Discuss the following situations in the light of ‘deposit provisions’ as contained
in the Companies Act, 2013 and the Companies (Acceptance of Deposits)
Rules, 2014, as amended from time to time.
(i) Samit, one of the directors of Zarr Technology Private Limited, a start-up
company, requested his close friend Ritesh to lend to the company
` 30.00 lakh in a single tranche by way of a convertible note repayable
within a period six years from the date of its issue. Advise whether it is a
deposit or not.

(ii) Polestar Traders Limited received a loan of ` 30.00 lakh from Rachna
who is one of its directors. Advise whether it is a deposit or not.
(iii) City Bakers Limited failed to repay deposits of ` 50.00 crore and interest
due thereon even after the extended time granted by the Tribunal. Is the
company or Swati, its officer-in-default, liable to any penalty?
(iv) Shringaar Readymade Garments Limited wants to accept deposits of
` 50.00 lakh from its members for a tenure which is less than six months.
Is it a possibility?
(v) Is it in order for the Diamond Housing Finance Limited to accept and
renew deposits from the public from time to time?
6. ABC Limited having a net worth of ` 120 crore wants to accept deposit from its
members. The directors of the company have approached you to advise them
as to what special care has to be taken while accepting such deposit from the
members in case their company falls within the category of an ‘eligible
company’.
7. Define the term 'deposit' under the provisions of the Companies Act, 2013 and
comment quoting relevant provisions whether the following amounts received
by a company will be considered as deposits or not:
(i) ` 5,00,000 raised by Rishi Confectionaries Limited through issue of non-

convertible debentures not constituting a charge on the assets of the
company and listed on a recognised stock exchange as per the
applicable regulations made by the Securities and Exchange Board of
India.
(ii) ` 2,00,000 received by Raja Yarns Limited from its employee Mr. Tarun,
who draws an annual salary of ` 1,50,000, as a non-interest bearing
security deposit under a contract of employment.
(iii) ` 3,00,000 received by a private company from one of the relatives of a
Director. The said relative has furnished a declaration that the amount
was received by him from his mother as a gift.
8. State, with reasons, whether the following statements are ‘True or False’?

5.39 a
(i) ABC Private Limited may accept deposits from its members to the extent
of ` 50.00 lakh, if the aggregate of its paid-up capital, free reserves and
security premium account is ` 50.00 lakh.
(ii) A Government Company, which is eligible to accept deposits under
Section 76 of the Companies Act, 2013, cannot accept deposits from
public exceeding 25% of the aggregate of its paid-up capital, free
reserves and security premium account.
9. Answer the following citing relevant provisions:
(a) Prayas Electricals Limited having paid-up capital of ` 1 crore availed a
term loan of ` 10,00,000 from Beta Bank Limited to purchase electrical
items. Mr. Sambhav, one of the directors of the company, is of the
opinion that it shall be considered as ‘deposit’. Is his contention correct?
(b) Eklavya Publishing Company Limited facing acute cash crunch wants to
utilise a portion of ‘Deposit Repayment Reserve Account’ to pay off its
short-term creditors who are pressing hard for repayment of
` 20,00,000. Is it justified to use funds lying in ‘Deposit Repayment
Reserve Account’ in this manner?
(c) Sanjiv is a shareholder in Utsah Textiles Private Limited holding 10,000
shares of ` 10 each. His wife Sneha and his three sons Aayush, Pranav
and Himanshu are also shareholders in the company holding 1,000
shares each. In response to the invitation from the company inviting
deposits from its members, Sanjiv wants to deposit Rs. 1,00,000 for 36
months jointly with his wife and three sons. Whether Utsah Textiles
Private Limited can accede to the request of Sanjiv and accept deposit
jointly in five names since all the depositors are shareholders of the
company.
10. Shubhra Chemicals Private Limited (not a start-up company) is desirous of
accepting ‘deposits’ from its members amounting to two hundred percent of
aggregate of its paid-up share capital, free reserves and securities premium
account. What are the conditions it must fulfill before such acceptance?

ANSWERS
1. (b) Unsecured deposits
2. (c) 36 months
3. (c) Eight years from the financial year in which the latest entry is
made in the Register.
4. (c) 18%
5. (a) six, thirty six, six

1. According to Rule 2 (1) (c) (xii) of the Companies (Acceptance of Deposits)
Rules, 2014, following amounts if received by a company in the course of, or
for the purposes of, the business of the company, shall not be considered as
deposits:
(a) any amount received as an advance for the supply of goods or
provision of services accounted for in any manner whatsoever to be
appropriated within a period of three hundred and sixty-five days from
the date of acceptance of such advance:
However, in case any advance is subject matter of any legal
proceedings before any court of law, the time limit of three hundred
and sixty-five days shall not apply.
(b) any amount received as advance in connection with consideration for

an immovable property under an agreement or arrangement. However,
such advance is required to be adjusted against such property in
accordance with the terms of agreement or arrangement;
(c) any amount received as security deposit for the performance of the
contract for supply of goods or provision of services;
(d) any amount received as advance under long term projects for supply of
capital goods except those covered under item (b) above;
(e) any amount received as an advance towards consideration for
providing future services in the form of a warranty or maintenance

5.41 a
contract as per written agreement or arrangement, if the period for

providing such services does not exceed the period prevalent as per
common business practice or five years, from the date of acceptance of
such service whichever is less;
(f) any amount received as an advance and as allowed by any sectoral
regulator or in accordance with directions of Central or State
Government;
(g) any amount received as an advance for subscription towards
publication, whether in print or in electronic to be adjusted against
receipt of such publications;
However, if the amount received under items (a), (b) and (d) above becomes
refundable (with or without interest) due to the reasons that the company
accepting the money does not have necessary permission or approval,
wherever required, to deal in the goods or properties or services for which
the money is taken, then the amount received shall be deemed to be a
deposit under these rules.
Further, for the purposes of this sub-clause the amount shall be deemed to
be deposits on the expiry of fifteen days from the date it became due for
refund.
2. Acceptance of deposits by a company from its members: As per section
73 (2) of the Companies Act, 2013, a company may, subject to the passing of
a resolution in general meeting and subject to such rules as may be
prescribed in consultation with the Reserve Bank of India, accept deposits
from its members on such terms and conditions, including the provision of
security, if any, or for the repayment of such deposits with interest, as may be
agreed upon between the company and its members, subject to the
fulfilment of the following conditions, namely—
(a) Issuance of a circular to its members including therein a statement

showing the financial position of the company, the credit rating
obtained, the total number of depositors and the amount due towards
deposits in respect of any previous deposits accepted by the company
and such other particulars in such form and in such manner as may be
prescribed;

(b) Filing a copy of the circular along with such statement with the
Registrar within 30 days before the date of issue of the circular;
(c) Depositing, on or before the thirtieth day of April each year, such sum
which shall not be less than twenty per cent of the amount of its
deposits maturing during the following financial year and kept in a
scheduled bank in a separate bank account to be called deposit
repayment reserve account;
(d) Omitted
(e) Certifying that the company has not committed any default in the
repayment of deposits accepted either before or after the
commencement of this Act or payment of interest on such deposits
and where a default had occurred, the company made good the default
and a period of five years had lapsed since the date of making good
the default; and
(f) Providing security, if any for the due repayment of the amount of
deposit or the interest thereon including the creation of such charge
on the property or assets of the company.
Every deposit accepted by a company shall be repaid with interest in

accordance with the terms and conditions of the agreement. Where a
company fails to repay the deposit or part thereof or any interest thereon,
the depositor concerned may apply to the National Company Law Tribunal
(NCLT) for an order directing the company to pay the sum due or for any
loss or damage incurred by him as a result of such non-payment and for
such other orders as the NCLT may deem fit.
Exemption to certain private companies:
In terms of Notification No. GSR 464 (E), dated 05-06-2015 as amended from
time to time, Clauses (a) to (c) and (e) of sub-section (2) of section 73 with
respect to issue of circular, filing the copy of such circular with the Registrar,
depositing of certain amount and certification as to no default committed,
shall not apply to a private company:
(A) which accepts from its members monies not exceeding one hundred
per cent of aggregate of the paid-up share capital, free reserves and
securities premium account; or

5.43 a
(B) which is a start-up, for five years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:
company;
(b) if the borrowings of such a company from banks or financial
institutions or any body corporate is less than twice of its paid-up
share capital or fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such
borrowings subsisting at the time of accepting deposits under this
section.
However, such a company [as referred to in clauses (A), (B) or (C)] shall file
the details of monies accepted to the Registrar in the specified manner (i.e.
in Form DPT-3).
3. Appointment of Trustee for Depositors: In this respect following
provisions are required to be observed as mentioned in Rule 7 of the
Companies (Acceptance of Deposits) Rules, 2014:
• One or more trustees for depositors need to be appointed by the
company for creating security for the deposits.
• A written consent shall be obtained from the trustees before their
appointment.
• A statement shall appear in the circular or advertisement with
reasonable prominence to the effect that the trustees for depositors
have given their consent to the company for such appointment.
• The company shall execute a deposit trust deed in Form DPT-2 at least
seven days before issuing the circular or circular in the form of
advertisement.
• No person including a company that is in the business of providing
trusteeship services shall be appointed as a trustee for the depositors, if the
proposed trustee:
(a) is a director, key managerial personnel or any other officer or an
employee of the company or of its holding, subsidiary or
associate company or a depositor in the company;

(b) is indebted to the company, or its subsidiary or its holding or

associate company or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of
principal debts secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
• No trustee for depositors shall be removed from office after the issue
of circular or advertisement and before the expiry of his term except
with the consent of all the directors present at a meeting of the board.
In case the company is required to have independent directors, at least
one independent director shall be present in such meeting of the
Board.
4. The provisions relating to obtaining of ‘Credit Rating’ to be followed by an
‘eligible company’ are contained in Section 76 (1) of the Companies Act,
2013 and Rule 3 (8) of the Companies (Acceptance of Deposits) Rules, 2014
as amended from time to time. Accordingly, an ‘eligible company’ which
desires to raise public deposits shall be required to obtain the rating
(including its net-worth, liquidity and ability to pay its deposits on due date)
from a recognised credit rating agency. The given rating which ensures
adequate safety shall be informed to the public at the time of invitation of
deposits from the public. Further, the rating shall be obtained every year during
the tenure of deposits.
As per Rule 3 (8), copy of the credit rating which is being obtained at least
once in a year shall be sent to the Registrar of Companies along with the
Return of Deposits in Form DPT-3.
Further, the credit rating shall not be below the minimum investment grade
rating or other specified credit rating for fixed deposits. It shall be obtained
from any one of the approved credit rating agencies as specified for Non-
Banking Financial Companies in the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998, as amended
from time to time.

5.45 a
5. (i) In terms of Rule 2 (1) (c) (xvii) if a start-up company receives rupees
twenty-five lakh or more by way of a convertible note (convertible into
equity shares or repayable within a period not exceeding ten years
from the date of issue) in a single tranche, from a person, it shall not
be treated as deposit.
In the given case, Zarr Technology Private Limited, a start-up company,

received ` 3.00 lakh from Ritesh in a single tranche by way of a
convertible note which is repayable within a period of six years from
the date of its issue. In view of Rule 2 (1) (c) (xvii) which requires a
convertible note to be repayable within a period of ten years from the
date of its issue, the amount of ` 30.00 lakh shall not be considered as
deposit.
(ii) In terms of Rule 2 (1) (c) (viii), any amount received from a person who
is director of the company at the time of giving loan to the company
shall not be treated as deposit if such director furnishes to the
company at the time of giving money, a written declaration to the
effect that the amount is not being given out of funds acquired by him
by borrowing or accepting loans or deposits from others and further,
the company shall disclose the details of money so accepted in the
Board's report.
In the given case, it is assumed that Rachna was one of the directors of
Polestar Traders Limited when the company received a loan of ₹ 30.00
lakh from her. Further, it is assumed that she had furnished to the
company at time of giving money, a written declaration to the effect
that the amount was not being given out of funds acquired by her
by borrowing or accepting loans or deposits from others and in
addition, the company had disclosed the details of money so accepted
in the appropriate Board's report.
If these conditions are satisfied ` 30.00 lakh shall not be treated as

deposit.
(iii) By not repaying the deposit of ` 50.00 crore and the interest due
thereon even after the extended time granted by the Tribunal, City

Bakers Limited has contravened the conditions prescribed under

Section 73 of the Act. Accordingly, following penalty is leviable:
• Punishment for the company: City Bakers Limited shall, in addition

to the payment of the amount of deposit and the interest due
thereon, be punishable with fine which shall not be less than
rupees one crore or twice the amount of deposit accepted by the
company, whichever is lower but which may extend to rupees ten
crores.
• Punishment for officer-in-default: Swati, being the officer-in-

default, shall be punishable with imprisonment which may extend
to seven years and with fine which shall not be less than rupees
twenty-five lakh but which may extend to rupees two crore.
Further, if it is proved that Swati had contravened such provisions

knowingly or wilfully with the intention to deceive the company or its
shareholders or depositors or creditors or tax authorities, she will be
liable for action under section 447 (Punishment for fraud).
(iv) According to Rule 3 (1), a company is not permitted to accept or renew

deposits (whether secured or unsecured) which is repayable on
demand or in less than six months. Further, the maximum period of
acceptance of deposit cannot exceed thirty six months.
However, as an exception to this rule, for the purpose of meeting any of

its short-term requirements of funds, a company is permitted to accept
or renew deposits for repayment earlier than six months subject to the
conditions that:
(i) such deposits shall not exceed ten per cent. of the aggregate of
the paid-up share capital, free reserves and securities premium
account of the company; and
(ii) such deposits are repayable only on or after three months from
the date of such deposits or renewal.
In the given case of Shringaar Readymade Garments Limited, it wants

to accept deposits of ` 50.00 lakh from its members for a tenure which

5.47 a
is less than six months. It can do so if it justifies that the deposits are
required for the purpose of meeting any of its short-term requirements
of funds but in no case such deposits shall exceed 10% ten per cent of
the aggregate of its paid-up share capital, free reserves and securities
premium account and further, such deposits shall be repayable only on
or after three months from the date of such deposits.
(v) According to section 73 (1) of the Act, no company can accept or

renew deposits from public unless it follows the manner provided
under Chapter V of the Act (contains provisions regarding acceptance of
deposits by companies) for acceptance or renewal of deposits from
public. However, Proviso to Section 73 (1) states that nothing in this
sub-section shall apply to a banking company and non-banking
financial company as defined in the Reserve Bank of India Act, 1934
and to such other company as the Central Government may, after
consultation with the Reserve Bank of India, specify in this behalf.
Further, Rule 1 (3) (iii) states that the Companies (Acceptance of
Deposits) Rules, 2014 shall not apply to a housing finance company
registered with the National Housing Bank established under the
National Housing Bank Act, 1987.
In the given case, it is assumed that Diamond Housing Finance Limited

is registered with the National Housing Bank and therefore, the
‘Acceptance of Deposits’ Rules shall not apply to it.
Hence, Diamond Housing Finance Limited being an exempted

company, can accept and renew deposits from the public from time to
time without following the prescribed manner.
6. According to section 76 (1) of the Act, an “eligible company” means a public

company, having a net worth of not less than one hundred crore rupees or a
turnover of not less than five hundred crore rupees and which has obtained
the prior consent of the company in general meeting by means of a special
resolution and also filed the said resolution with the Registrar of Companies
before making any invitation to the public for acceptance of deposits.

However, an ‘eligible company’, which is accepting deposits within the limits

specified under section 180 (1) (c), may accept deposits by means of an
ordinary resolution.
According to Rule 4 (a), an ‘eligible company’ shall accept or renew any

deposit from its members, if the amount of such deposit together with the
amount of deposits outstanding as on the date of acceptance or renewal of
such deposits from members does not exceed ten per cent. of the aggregate
of the paid-up share capital, free reserves and securities premium account of
the company.
ABC Limited is having a net worth of 120 crore rupees. Hence, it falls in the
category of ‘eligible company’.
Thus, ABC Limited has to ensure that acceptance of deposits from its
members together with the amount of deposits outstanding as on the date
of acceptance or renewal of such deposits from the members, in no case,
exceeds 10% of the aggregate of the paid-up share capital, free reserves and
securities premium account of the company.
7. Deposit: According to Section 2 (31) of the Companies Act, 2013, the term
‘deposit’ includes any receipt of money by way of deposit or loan or in any
other form, by a company, but does not include such categories of amount
as may be prescribed in consultation with the Reserve bank of India.
Rule 2 (1) (c) of the Companies (Acceptance of Deposit) Rules, 2014 states various
amounts received by a company which will not be considered as deposits. In
terms of this Rule the answers to the given situations shall be as under:
(i) ` 5,00,000 raised by Rishi Confectionaries Limited through issue of

non-convertible debentures not constituting a charge on the assets of
the company and listed on recognised stock exchange as per the
applicable regulations made by the SEBI, will not be considered as
deposit in terms of sub-clause (ixa) of Rule 2 (1) (c).
(ii) ` 2,00,000 received by Raja Yarns Limited from its employee Mr. Tarun,
who draws an annual salary of ` 1,50,000, as a non-interest bearing
security deposit under a contract of employment will be considered as

5.49 a
deposit in terms of sub-clause (x) of Rule 2 (1) (c), for the amount
received is more than his annual salary of ` 1,50,000.
(iii) ` 3,00,000 received by a private company from one of the relatives of a

Director. When the relative furnishes a declaration that the said amount
was received by him from his mother as a gift, then it will not be
considered as deposit in terms of sub-clause (viii) of Rule 2 (1) (c). In
fact, the preceding sub-clause requires that any amount given by a
relative of a director of a private company shall not be considered as
deposit if the relative furnishes a declaration in writing to the effect
that the amount is not being given out of funds acquired by him
by borrowing or accepting loans or deposits from others. Thus, the
amount given to the private company out of gifted money by one of
the relatives of a director is not a ‘deposit’.
As an additional requirement, the company shall disclose the details of

money so accepted in the Board’s report. Further, according to Rule 16 (A)
(2), it shall also disclose in its financial statement, by way of notes, about the
money received from the directors, or relatives of directors.
8. (i) As per the provisions of Section 73 (2) of the Companies Act, 2013 read
with Rule 3 (3) of the Companies (Acceptance of Deposits) Rules, 2014,
as amended from time to time, a company shall accept any deposit
from its members, together with the amount of other deposits
outstanding as on the date of acceptance of such deposits not
exceeding thirty five per cent of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company.
It is provided that a private company may accept from its members
monies not exceeding one hundred per cent of aggregate of the paid-
up share capital, free reserves and securities premium account and
such company shall file the details of monies so accepted to the
Registrar in Form DPT-3.
Therefore, the given statement where ABC Private Limited is accepting

deposits from its members to the extent of ` 50.00 lakh is ‘true’.

(ii) As per Rule 3 (5) of the Companies (Acceptance of Deposits) Rules

2014, a Government Company is not eligible to accept or renew
deposits under section 76, if the amount of such deposits together with
the amount of other deposits outstanding as on the date of acceptance
or renewal exceeds thirty five per cent of the aggregate of its paid-up
share capital, free reserves and securities premium account.
Therefore, the given statement where the limit of 25% has been stated
for acceptance of deposits is ‘false’.
9. (a) In terms of Rule 2 (1) (c) (iii) of the Companies (Acceptance of Deposits)
Rules, 2014, any amount received as a loan or facility from any banking
company shall not be considered as ‘deposit’.
In view of the above, the contention of Mr. Sambhav that the term loan
of ` 10,00,000 availed by the company from Beta Bank Limited shall be
considered as ‘deposit’ is not correct.
(b) Rule 13 of the Companies (Acceptance of Deposits) Rules, 2014, states

that the amount deposited in the ‘Deposit Repayment Reserve
Account’ shall not be used by a company for any purpose other than
repayment of deposits.
Since there is a prohibition, Eklavya Publishing Company Limited is not

permitted to utilise its ‘Deposit Repayment Reserve Account’ to pay off
its short-term creditors.
(c) Rule 3 (2) of the Companies (Acceptance of Deposits) Rules, 2014,

provides that where depositors so desire, deposits may be accepted in
joint names not exceeding three.
In view of this provision, Sanjiv can deposit ` 1,00,000 with Utsah

Textiles Private Limited jointly with two other persons only irrespective
of the fact that all the five persons are members of the company.
10. According to first proviso to Rule 3 (3), a private company may accept from
its members monies not exceeding 100% of aggregate of the paid-up share
capital, free reserves and securities premium account.

5.51 a
According to second proviso to Rule 3(3), the maximum limit in respect of

deposits to be accepted from members shall not apply to the classes of
private company which fulfils all of the following conditions, namely:

company;
(b) the borrowings of such a company from banks or financial institutions

or any body-corporate is less than twice of its paid-up share capital or
fifty crore rupees, whichever is less; and
(c) such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under section 73:
According to third proviso all the companies accepting deposits shall file the
details of monies so accepted with the Registrar in Form DPT-3.
In case Shubhra Chemicals Private Limited is not an associate or a subsidiary

company of any other company and its borrowings from banks, etc. is less
than twice of its paid-up share capital or fifty crore rupees, whichever is less
and also it has not defaulted in the repayment of such borrowings subsisting
at the time of accepting deposits, then it can accept ‘deposits’ from its
members amounting to two hundred percent of aggregate of its paid-up
share capital, free reserves and securities premium account.
Further, it shall file the details of monies so accepted with the Registrar in
Form DPT-3.

CHAPTER a
6
REGISTRATION OF
CHARGES
LEARNING OUTCOMES
At the end of this Chapter, you will be able to:

 Define Charge
 Know about Fixed Charge and Floating Charge
 Explain the steps involved in Registration of Charge
 Identify the consequences of non-registration of a Charge and the
steps to be followed for registering Satisfaction of Charge
 Know the applicability of penal provisions in case of default

CHAPTER OVERVIEW
Definition of Charge [Sec 2 (16)]
Duty to Register Charges,etc [Sec 77]
Application for registration of Charge [Sec 78]

CHARGE
Date of Notice of Charge [Sec 80]
Keeping of Register of Charges [Sec 81 & 85]
Satisfaction of Charge [Sec 82 & 83]
Punishment and Rectification in Register of Charges [Sec 86 & Sec 87]
1. INTRODUCTION
Chapter VI Consists of sections 77 to 87 as well as the Companies
(Registration of Charges) Rules, 2014.
Definition of Charge
Loan taken created on the

property or assets of
a company

6.3
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REGISTRATION OF CHARGES
Section 2(16) of the Companies Act, 2013 defines “charge” as an interest or lien
created on the property or assets of a company or any of its undertakings or both
as security and includes a mortgage.
an interest or lien
created on the property or assets
•of a company or
•any of its undertakings or
•both
It is created as Security for repayment of loan
Charge includes Mortgage
Whenever a company borrows money by way of loans including term loans or

working capital loans from financial institutions or banks or any other person by
offering its property or assets as security or any of its undertakings, then a charge
is created on such property or assets in favour of the lender.
Such a charge is compulsorily registrable under the provisions of the Companies

Act, 2013 in accordance with Chapter VI and the Rules made in this regard.

Types of Charge
A charge may be either fixed or floating.
Types of Charge
Fixed Charge Floating Charge
Fixed Charge
A ‘Fixed Charge’ is a charge on specific assets of the borrowing company. These
assets are of permanent nature like land and building, machinery, office premises,
etc. Further, these assets are identified at the time of creation of charge. A fixed
charge is usually created by way of mortgage or by deposit of title deeds.
When a charge is created on such assets, the charge remains ‘fixed’ and the
borrowing company is not permitted to sell such assets during the period of
charge though it may use them.
Assets under fixed charge can be sold only with the permission or consent of the
charge-holder.
A fixed charge is vacated when the money borrowed against the assets subject to
fixed charge is repaid in full.
Example 1: Pearl Electronics Limited raised a term loan ` 10 lakh from Everest
Commercial Bank Limited, against the security of its office building. In this case,
the company shall create a charge on specific asset i.e. its office building and such
charge shall be a fixed charge. The company can sell this particular office building
either by repaying the borrowed amount in full or after seeking permission from
the charge-holder i.e. lender bank.
Floating Charge
A ‘Floating Charge’ is created on assets or a class of assets which are of
fluctuating or changing in nature- like raw material, stock-in-trade, debtors, etc. It
is a charge upon assets both present and future. The assets under floating charge
keep on changing because the borrowing company is permitted to use them for

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trading or producing final goods for sale. Thus, a floating charge is a charge that
floats above ever-changing assets.
Example 2: A retail showroom in Lajpat Nagar, New Delhi contains numerous
articles like clothes, apparels, footwears, kitchen items, cosmetics, etc. kept for
sale. The owner of the showroom might have borrowed against the security of all
these goods; but he may still sell or otherwise deal with them in the ordinary
course of business. The buyer i.e. customer will get the items purchased by him
free of charge.
Example 3: Smart Shoes Limited manufactures leather goods. The raw material in
the form of leather, which is subject matter of floating charge, may be used by
the company to manufacture leather goods without seeking any permission from
the lender.
Thus, unlike a fixed charge, the assets offered as security by the company can be
dealt with by it in the ordinary course of business. The buyer of the asset will get
it free of charge.
Crystallization of a Floating Charge
When the creditor enforces the security due to the breach of terms and
conditions of floating charge or the company goes into liquidation, the floating
charge will become a fixed charge on all the assets available on that date. This is
called crystallization of a floating charge.
A floating charge remains dormant until it becomes fixed or crystallizes. On
crystallization of charge, the security (i.e. raw material, stock-in-trade, etc.)
becomes fixed and is available for realization by the lender so that borrowed
money is repaid. Crystallization of floating charge may occur when the terms and
conditions of floating charge are violated or the company ceases to continue its
business or the company goes into liquidation or the creditors enforce the
security covered by the floating charge.
Example 4: Prism Limited had taken a loan from ABC Bank, on the security of it
stock. Now, in the event of Prism Limited failing to repay the security interest or
entering liquidation, the floating charge will change to a fixed charge. Once a
floating charge gets converted to a fixed charge, the stock can neither be sold nor
used by the company in its business operations.

2. DUTY TO REGISTER CHARGES, ETC.

[SECTION 77]
Section 77 of the Companies Act, 2013 contains provisions regarding registration
of charges with the Registrar of Companies.
A. Registration of Charges
Registration by the company creating a charge: It shall be duty of the
company creating a charge within or outside India, on its property or assets or
any of its undertakings, whether tangible or otherwise and situated in or outside
India, to register the particulars of the charge.
The subject-matter of the charge i.e. the property or assets or any of the
company’s undertakings, may be situated within India or outside India.
Accordingly, charge may be created within India or outside India depending upon
the location of the assets.
The property or assets charged may be tangible assets such as land and buildings,
machinery or financial assets like investment in shares or debentures. It may be
otherwise also, i.e. an intangible asset such as patent, copyright or trademark.
Note: The word ‘otherwise’ when used in a section would have the effect of
widening the scope and operation of the provision.
When a charge is created by deposit of title deeds (normally banks agree for this
mode of charge instead of proper mortgage), it is also registrable by the
borrowing company.1
Registration by the charge-holder: Section 78, Application for registration
of charge (explained later) provides that in case the borrowing company creating
a charge fails to register the charge within the prescribed period of 30 days, the
person in whose favour the charge is created (i.e. lender) can get the charge
registered.
Registration by the purchaser: Section 79 (explained later) covers another case

of registration of charge where a company purchased some property in whose
case a charge was already registered. In this case also, the company purchasing
1
As per Section 58 (f) of the Transfer of Property Act, 1882.

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the property shall get the charge registered in its name in place of seller in the
records of Registrar of Companies.
B. How to Register Charge 2

The particulars of the charge in the prescribed form 3 together with a copy of the
instrument, if any, creating the charge duly signed by the company and the
charge holder, shall be filed with the Registrar within 30 days of creation of
charge along with the prescribed fee.
C. Verification of Instrument of Charge4

A copy of every instrument creating (or modifying) any charge and required to be
filed with the Registrar, shall be verified as follows:
(a) Where the instrument or deed relates solely to the property
situated outside India, the copy shall be verified by a certificate
issued either-
 under the seal, if any, of the company, or
 under the hand of any director or company secretary of the company, or an
authorised officer of the charge-holder, or
 under the hand of some person other than the company who is interested in
the mortgage or charge;
(b) Where the instrument or deed relates to the property
situated in India (whether wholly or partly), the copy shall be
verified by a certificate issued under the hand of any director or
company secretary of the company or an authorised officer of the
charge holder.
Thus, in case the instrument or deed relates solely to a property situated outside
India, the copy may also be additionally verified by a certificate issued under the
hand of some person other than the company who is interested in the mortgage
2
As per Section 77 (1) and Rule 3 (1) of the Companies (Registration of Charges)
Rules, 2014.
3
As per Rule 3, Form CHG-1 or Form CHG-9 (in case of debentures) is to be filled.
4
As per Rule 3 (4).

or charge. This type of verification is not possible when the instrument or deed
relates to the property situated in India, whether wholly or partly.
D. Extension of Time Limit

The original period within which a charge needs to be registered
from the date of creation of charge is 30 days. In respect of
extension of time limit for registration of charges, following
provisions are applicable:
(i) Charges created before 02-11-2018 5: In such cases, where the charge was
created before 02-11-2018 but was not registered within the original period of 30
days, the Registrar may, on an application by the company, allow such
registration to be made within a period of 300 days of such creation.
Further, if the charge is not registered within the extended period of 300 days, it
shall be done within six months from 02-11-2018 on payment of prescribed
additional fees.
It is provided that different fees may be prescribed for different classes of
companies.
Charge Created before 02-11-2018
Register charge within 30 days of creation
If not registered within 30 days
Register within 300 days of creation on payment

of additional fees
If not registered within 300 days
Register within six months from 02-11-2018 with additional fees.

Different fees for different classes of companies are applicable.
5
As per Clause (a) of First Proviso and also Clause (a) of Second Proviso to Section 77 (1).

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(ii) Charges created on or after 02-11-20186: In cases where the charge was
created on or after 02-11-2018 but the registration of charge was not effected
within the original period of 30 days, the Registrar may, on an application by the
company, allow such registration to be made within a period of 60 days of such
creation. In other words, a grace period of another 30 days is granted after the
expiry of the original 30 days, on payment of additional fees as prescribed.
If the charge is not registered within the extended period as above, the company
shall make an application and the Registrar is empowered to allow such
registration to be made within a further period of sixty days after payment of
prescribed ad valorem7 fees.
Charge Created on or after 02-11-2018
Register the charge within 30 days
If not registered within first 30 days
Register in next 30 days (i.e. within 60 days from creation of

charge) with additional fees
If not registered in next 30 days
Register within a further period of sixty days with ad valorem fees
Procedure for Extension of Time Limit8: The company is required to make an

application to the Registrar in the prescribed form 9 for seeking extension of time.
The said application needs to be supported by a declaration from the company
6
As per Clause (b) of First Proviso and also Clause (b) of Second Proviso to Section 77 (1).
7
ad valorem means in proportion to the estimated value of the transaction concerned. In
this case it will be based on value of the charge i.e. the amount of loan advanced against
security of the property.
8
As per Rule 4.
9
As per Rule 4 (2), the application shall be made in Form CHG-1 (for other than
debentures) or in Form CHG-9 (for debentures).

signed by its company secretary or a director that such belated filing shall not
adversely affect the rights of any other intervening creditors of the company.
After receipt of application for extension of time period, the Registrar, on being
satisfied that the company had sufficient cause for not filing the particulars and
instrument of charge, if any, within the original period of thirty days, may allow
registration of charge within the extended time period. Further, requisite
additional fee or ad valorem fee, as applicable, shall also be paid.
E. Issue of Certificate of Registration 10
Where a charge or modification is duly registered by the Registrar of Companies,
a Certificate of Registration/Modification shall be issued by the Registrar in the
prescribed form11. The certificate so issued by the Registrar shall be conclusive
evidence that the requirements of Chapter VI of the Companies Act, 2013 and the
Rules made thereunder as to registration of creation of charge or modification of
charge have been complied with.
F. Section 77 not to apply to certain charges

The application of Section 77 shall not be made to certain charges
which are prescribed in consultation with the Reserve Bank of India. 12
Note: Rule 3 (5) states that nothing contained in Rule 3 shall apply to any charge
required to be created or modified by a banking company under section 77 in
favour of the Reserve Bank of India when any loan or advance has been made to
it under sub-clause (d) of clause (4) of section 17 of the Reserve Bank of India Act,
1934.
3. DEEMED NOTICE OF CHARGE [SECTION 80]

All charges registered with the respective Registrars of Companies are public
documents. It implies that any person who wishes to lend money to the company
against the security of such property or buy it can refer to the Ministry of
10
As per Section 77 (2) and Rule 6.
11
Certificate in Form No. CHG-2 shall be issued for fresh registration of charge (Where a
charge is registered with the Registrar under section 77(1) or section 78) and Certificate in
Form No. CHG-3 shall be issued for modification of charge. (Rule 6)
12
As per Fourth Proviso to Section 77 (1), inserted by the Companies (Amendment) Act,
2017, w.e.f. 7th May 2018.

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Corporate Affairs (MCA) Portal and find out if there is any charge created on that
asset.
It is to be noted that any document filed with the registrar for registration acts as
Constructive Notice. Constructive means ‘implied’ or ‘deemed’. Notice means
“knowledge”. So constructive notice means ‘implied or deemed knowledge’. This
means even though the third party has not referred to the public document, he
would still be considered or deemed to have seen it. This is because a deeming
provision creates a legal fiction.
Accordingly, section 80 of the Companies Act, 2013 states as under:

“where any charge is registered under section 77, any person acquiring such
property, assets, undertakings or part thereof or any share or interest therein shall
be deemed to have notice of the charge from the date of such registration”.
Thus, every person proposing to deal with a company should verify whether the
asset is already under any charge or not by going through the record of charges
maintained at the office of Registrar of Companies before entering into the
transaction.
In case he enters into the transaction without making any enquiry and later on
suffers loss because of charge, then he cannot claim the loss from the company,
for it shall be deemed that he had notice of charge.
It is noteworthy that compulsory registration of charge also acts as a method of
preventing a company from offering the same assets as security to borrow funds
fraudulently from a different lender.
Example 5: Vishnu Marketing Limited obtained a term loan of rupees fifty lakh
from Alpha Commercial Bank Limited by creating a charge on one of its office
buildings and got the charge duly registered. Later on, if the building is sold to
another person, say Neeraj, then he is deemed to have notice of such charge. In
other words, it shall be presumed that Neeraj knew beforehand that the building
was mortgaged to the bank for obtaining a loan. Therefore, Neeraj cannot plead
against such presumption by contending that he did not know about the charge if
he suffers any loss at a later date because of the mortgage.

4. CONSEQUENCES OF NON-REGISTRATION OF
CHARGE [SECTION 77 (3) & (4)]
No charge created by a company shall be taken into account by the liquidator
appointed under the Companies Act, 2013 or the Insolvency and Bankruptcy
Code, 2016 or any other creditor unless it is duly registered and a certificate of
registration of such charge is given by the Registrar. 13
It means that the charge will become void against the liquidator and other
creditors of the company. Simply stated, at the time of winding up, the creditor
whose charge has not been registered will be reduced to the level of an
unsecured creditor. Neither the liquidator nor any other creditor will give legal
recognition to a charge that is not registered.
However, this shall not prejudice any contract or obligation for the repayment of
the money secured by a charge. 14 It implies that the debt is valid and may be
enforced against the company through the courts by filing a suit, but the security
is lost.
Further, it may be noted that failure to register charge shall not absolve a
company from its liability in respect of any offence under Chapter VI.
Another important consequence of non-registration is that the charge-holder
loses priority. Any subsequent registration of a charge (i.e. even if it is registered
within the extended period instead of original thirty days) shall not prejudice any
right acquired in respect of any property before the charge is actually
registered.15.
Example 6: Bank A advanced ` one crore to Vasudha Medicos Limited against the
security of the company’s land and building at Mulund. The charge was created
by deposit of title deeds on 1 st June 2022. The company did not register the
charge within 30 days. Subsequently, the charge was registered on 12th August
2022 after payment of ad valorem fees and providing sufficient cause.
In the meantime, Bank B advanced ` two crore to Vasudha Medicos Limited

against the security of the same property on 18th June 2022. This charge was duly
registered on 26th June 2022.
13
As per Section 77 (3)
14
As per Section 77 (4)
15
As per Third Proviso to Section 77 (1).

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Subsequently, Vasudha Medicos Limited goes into liquidation and the property
realises only ` two crore.
In such a situation, Bank B will get repayment of its loan in full, but Bank A will
not realise anything because subsequent registration of the charge in favour of
Bank A will not prejudice the right of Bank B which obtained its right before the
charge in favour of Bank A was actually registered. Thus, Bank B gets priority over
Bank A even though its charge was created later.
5. APPLICATION FOR REGISTRATION OF

CHARGE BY CHARGE-HOLDER [SECTION 78]
It can be seen from the above discussion that non-registration or delayed
registration would seriously affect the interest of the charge-holder. Therefore,
the law provides the charge-holder an opportunity in this respect. Section 78 of
the Companies Act, 2013, empowers the holder of charge to get the charge
registered in case the company creating the charge on its property fails to do so.
The charge-holder The Registrar shall If objection is

may apply to the give a notice to the received
Registrar company
If company registers by itself

If company fails to If no objection is or sufficient cause why such
do so within 30 days received charge should NOT be
registered is provided
Registrar will register

Company creating charge within a Registrar shall not allow
charge must register period of 14 days registration by charge-
said charge after giving notice to holder
the company
Accordingly, if a charge is created but the company primarily responsible for

registering the charge fails to do so within the prescribed period of 30 days [as
provided in section 77 (1)], the person in whose favour the charge is created (i.e.

charge-holder) may apply to the Registrar for registration of the charge along
with the instrument of charge within the prescribed time, form and manner.
On receipt of application from the charge-holder, the Registrar shall give a notice
to the company and if no objection is received, allow such registration on payment
of the prescribed fees within a period of 14 days after giving notice to the
company.
However, the Registrar shall not allow such registration by the charge-holder, if
the company itself registers the charge or shows sufficient cause why such charge
should not be registered.
Recovery of fees: In case, registration is effected on an application made by the
holder of charge, such person shall be entitled to recover from the company the
amount of any fees or additional fees paid by him to the Registrar for the purpose
of registration of charge.
6. ACQUISITION OF PROPERTY SUBJECT TO

CHARGE AND MODIFICATION OF CHARGE
[SECTION 79]
The provisions of section 77 relating to registration of charges shall, so far as may
be, apply to:
a. a company acquiring any property subject to a charge within the meaning
of that section; or
b. any modification in the terms or conditions or the extent or operation of
any charge registered under that section.
The provisions contained in section 77 relating to registration of charge shall, as
far as may be, apply in both the above situations.
A. Company acquiring any Property subject to Charge [Section 79
(a)]
In case of a property where charge is already registered and if it is sold with the
permission of the holder of charge, it shall be the duty of the company acquiring
it to get the charge registered in accordance with Section 77. In other words, the
earlier charge should get vacated and, in its place, new charge should get
registered by the company which has now acquired the property.

6.15
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B. Modification of Charge when there is Change in Terms and

Conditions, etc. [Section 79 (b)]
Section 79 (b) requires any modification in charge (i.e. change in terms and
conditions or change in extent or operation of any charge, etc.) to be registered
by the company in accordance with section 77.
‘Modification’ includes variation in any of the terms and conditions of the
agreement including change in rate of interest which may be by mutual
agreement or by operation of law. Variation in extent or operation of any charge
is also a kind of modification. Even if the rights of a charge holder are assigned to
a third party, it will be regarded as a modification.
Some examples of ‘modification of charge’ are as under:
1. where the charge is modified by varying any terms and conditions of the
existing charge through an agreement;
2. where the modification is in pursuance of an agreement for enhancing or
decreasing the limits;
3. where the modification is by ceding a pari passu16 charge;
4. where there is change in the rate of interest (other than bank rate);
5. where there is change in repayment schedule of loan (not applicable in case

of working loans which are repayable on demand); and
6. where there is partial release of the charge on a particular asset or property.
Issue of Certificate of Modification
As per Rule 6, where the particulars of modification of charge is registered under
section 79, the Registrar shall issue a certificate of modification of charge in Form
CHG-3.
The certificate so issued by the Registrar shall be conclusive evidence that the
requirements of Chapter VI of the Act and the Rules made thereunder as to
registration of modification of charge have been complied with.
16
A pari passu charge-holder is entitled to a proportionate share in the mortgaged property.
When this is ceded, the charge-holder will become a second charge-holder and as such his
entitlement in the property will be subject to full satisfaction of the claim of the first charge-
holder.

7. REGISTER OF CHARGES
Register of Charges to be kept by the Registrar
Section 81 of the Companies Act, 2013 contains provisions regarding Register of
Charges to be kept by the Registrar.
Section 81 (1) states that the Registrar shall, in respect of every company, keep a
register containing particulars of the charges registered under Chapter VI in the
prescribed form and manner.
In addition, Rule 7 (1) states that the particulars of charges maintained on the
Ministry of Corporate Affairs portal (www.mca.gov.in/MCA21) shall be deemed to
be the register of charges for the purposes of Section 81.
Inspection of Register: According to section 81 (2) such register shall be open to
inspection by any person on payment of such fees as may be prescribed for each
inspection.
Similarly, Rule 7 (2) states that the Register shall be open to inspection by any
person on payment of fee.
Register of Charges to be kept by the company

Section 85 of the Companies Act, 2013 contains provisions regarding Register of
Charges to be kept by a company.
(i) According to section 85 (1):
• Every company shall keep a Register of Charges in the prescribed

form17 and manner at its registered office.
• The Register shall include all charges and floating charges affecting
any property or assets of the company or any of its undertakings,
indicating in each case the prescribed particulars.
(ii) According to Proviso to section 85 (1):
• A copy of the instrument creating the charge shall also be kept at the
registered office along with the Register of Charges.
17
As per Rule 10 (1) the Register of Charges shall be maintained in Form CHG -7.

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(iii) Provisions of Rule 10 are as under:
• According to Rule 10 (1), the company shall enter in the Register

particulars of all the charges registered with the Registrar on any of its
property, assets or undertakings and the particulars of any property
acquired subject to a charge as well as particulars of any modification
of a charge and satisfaction of charge.
• According to Rule 10 (2), the entries in the Register shall be made

forthwith after the creation, modification or satisfaction of charge, as
the case may be.
• According to Rule 10 (3), the entries in the Register shall be

authenticated by a director or the secretary of the company or any
other person authorised by the Board for the purpose.
Inspection of Register of Charges and Instrument of Charges:
As regards inspection, section 85 (2) states that the register of charges and the
instrument of charges shall be open for inspection 18 during business hours:
(a) by any member or creditor without any payment of fees; or
(b) by any other person on payment of prescribed fees. subject to such

reasonable restrictions as the company may, by its articles, impose.
Preservation of Register:
According to Rule 10 (4) the register of charges shall be preserved permanently

and the instrument creating a charge or modification thereon shall be preserved
for a period of eight years from the date of satisfaction of charge.
18
Regarding inspection, Rule 11 states that the Register of Charges and the instrument of
charges kept by the company shall be open for inspection-
(a) by any member or creditor of the company without fees;
(b) by any other person on payment of fee.

8. COMPANY TO REPORT SATISFACTION OF

CHARGE [SECTION 82]
1. Intimation regarding Satisfaction of Charge
Section 82 of the Companies Act, 2013, requires a company to give

intimation of payment or satisfaction 19 in full of any charge earlier
registered, to the Registrar in the prescribed form 20. The intimation needs to
be given within a period of 30 days from the date of such payment or
satisfaction.21
Extended period of intimation: Proviso to Section 82 (1)22 extends the
period of intimation from thirty days to three hundred days. Accordingly, it
is provided that the Registrar may, on an application by the company or the
charge holder, allow such intimation of payment or satisfaction to be made
within a period of three hundred days of such payment or satisfaction on
payment of prescribed additional fees23.
2. Notice to the Holder of Charge by the Registrar24
On receipt of intimation, the Registrar shall cause a notice to be sent to the

holder of the charge calling upon him to show cause within such time as
specified in the notice but not exceeding 14 days, as to why payment or
satisfaction in full should not be recorded.
19
Satisfaction happens when the amount is not repaid but an asset of equal value is
offered in the place of the property being released from charge.
20
As per Rule 8 Form CHG-4 is to be used.
21
(1) In case of a specified IFSC public company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 8
(E), dated 04-01-2017).
(2) In case of a specified IFSC private company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 9
(E), dated 04-01-2017).
22
Proviso inserted vide the Companies (Amendment) Act, 2017, w.e.f. 5-7-2018.
23
Rule 8 (1) has been substituted vide the Companies (Registration of Charges),
Amendment Rules, 2018 (w.e.f. 05-07-2018) to provide for giving of intimation within
three hundred days instead of thirty days.
24
As per Section 82 (2).

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If no cause is shown by the charge-holder, the Registrar shall order

entering of a memorandum of satisfaction in the register of charges kept by
him and accordingly, he shall inform the company of having done so.
However, no notice is required to be sent, in case the intimation to the Registrar

in this regard is in the specified form25 and signed by the holder of charge.
If any cause is shown by the charge-holder, the Registrar shall record a

note to that effect in the register of charges and inform the company.
3. Issue of Certificate
As per Rule 8 (2), in case the Registrar enters a memorandum of satisfaction
of charge in full, he shall issue a certificate of registration of satisfaction of
charge in Form No. CHG-5.
4. Preservation of Records 26
The instrument creating a charge or modification thereon shall be preserved
for a period of eight years from the date of satisfaction of charge by the
company.
9. POWER OF REGISTRAR TO MAKE ENTRIES

OF SATISFACTION AND RELEASE IN
ABSENCE OF INTIMATION FROM COMPANY
[SECTION 83]
Section 83 of the Companies Act, 2013 empowers the Registrar to make entries
with respect to the satisfaction and release of charges even if no intimation has
been received by him from the company.
This situation would arise where the property subject to a charge is sold to a
third-party and neither the company nor the charge-holder has intimated the
Registrar regarding satisfaction of the earlier charge.
25
As per Rule 8, Form CHG-4 is required to be filed for this purpose.
26
As per Rule 10 (4).

Accordingly, with respect to any registered charge if evidence is shown to the

satisfaction of Registrar that the debt secured by charge has been paid or
satisfied wholly or in part or that the part of the property or undertaking charged
has been released from the charge or has ceased to form part of the company’s
property or undertaking, then he may enter in the register of charges a
memorandum of satisfaction that:
 the debt has been satisfied in whole or in part; or
 part of the property or undertaking has been released from the charge or
has ceased to form part of the company’s property or undertaking.
This power can be exercised by the Registrar despite the fact that no intimation
has been received by him from the company.
According to Section 82 (4), Section 82 shall not be deemed to affect the powers
of the Registrar to make an entry in the register of charges under section 83 or
otherwise than on receipt of an intimation from the company i.e. even if no
intimation is received by him from the company.
Information to affected parties: According to Section 83 (2), the Registrar shall

inform the affected parties within 30 days of making the entry in the register of
charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a

memorandum of satisfaction of charge in full, he shall issue a certificate of
registration of satisfaction of charge in Form No. CHG-5.
10. INTIMATION OF APPOINTMENT OF

RECEIVER OR MANAGER [SECTION 84]
Section 84 of the Companies Act, 2013 deals with the appointment of a receiver
or manager and of giving intimation thereof to the company and the Registrar.
Accordingly,
 if any person obtains an order for the appointment of a receiver or a person

to manage the property which is subject to a charge, or

6.21
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 if any person appoints such receiver or person under any power contained
in any instrument,
he shall give notice of such appointment to the company and the Registrar along
with a copy of the order or instrument within 30 days from the passing of the
order or making of the appointment.
In turn, the Registrar shall, on payment of the prescribed fees, register particulars
of the receiver, person or instrument in the register of charges.
On ceasing to hold such appointment 27, the person appointed as above shall give
a notice to that effect to the company and the Registrar. In turn, the Registrar
shall register such notice.
11. PUNISHMENT FOR CONTRAVENTION

[SECTION 86]
(i) According to section 86 (1)28 of the Companies Act, 2013, if any company is
in default in complying with any of the provisions of this Chapter, the
company shall be liable to a penalty of five lakh rupees and every officer of
the company who is in default shall be liable to a penalty of fifty thousand
rupees.
(ii) According to section 86 (2)29, section 447 relating to ‘punishment for fraud’
also becomes applicable in certain cases. Accordingly, if any person wilfully
furnishes:
 any false or incorrect information; or
 knowingly suppresses any material information;
which is required to be registered under section 77, he shall be liable for
action under section 447.
27
As per Rule 9, the notice of appointment or cessation shall be filed with the Registrar in
Form No. CHG-6.
28
Substituted section 86 (1). Substitution was made by the Companies (Amendment) Act,
2020, w.e.f. 21-12-2020.
29
Section 86 (2) was inserted by the Companies (Amendment) Act, 2019 w.r.e.f. 02-11-
2018.

12. RECTIFICATION BY CENTRAL GOVERNMENT

IN REGISTER OF CHARGES [SECTION 87]
Rectification in Register of Charges
Section 8730 of the Companies Act, 2013 and Rule 1231 empowers the Central
Government32 to order rectification of Register of Charges in the following cases
of default:
(i) when there was omission in giving intimation to the Registrar with respect
to payment or satisfaction of charge within the specified time;
(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or
any modification of charge or with respect to any memorandum of
satisfaction or other entry made under Section 82 (Company to report
satisfaction of charge) or Section 83 (Power of Registrar to make entries of
satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’, the
Central Government needs to be satisfied that such default was accidental or due
to inadvertence or because of some other sufficient cause or it did not prejudice
the position of creditors or shareholders.
The application in Form CHG-8 shall be filed by the company or any interested
person.
The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
30
As substituted by the Companies (Amendment) Act, 2019 w.r.e.f. 02-11-2018.
31
As substituted by the Companies (Registration of Charges) Amendment Rules, 2019 ,
w.e.f. 30-04-2019.
32
Vide Notification No. S.O. 4090 (E), dated 19-12-2016, powers of the Central
Government with respect to Section 87 stand delegated to the Regional Directors.

6.23
a
“According to Rule 12 of the Companies (Registration of Charges) Rules, 2014:
The Central Government may on an application filed in Form No. CHG-8 in

accordance with section 87-
(a) direct rectification of the omission or misstatement of any particulars, in any

filing, previously recorded with the Registrar with respect to any charge or
modification thereof, or with respect to any memorandum of satisfaction
or other entry made in pursuance of section 82 or section 83,
(b) direct extension of time for satisfaction of charge, if such filing is not made
within a period of three hundred days from the date of such payment or
satisfaction.”
SUMMARY
 “Charge” means an interest or lien created on the property or assets of a
company or any of its undertakings or both as security and includes a
mortgage.
 A charge created by a company is required to be registered with Registrar
within 30 days of its creation.
 A charge may be created within India or outside India.
 In case a charge was created before 02-11-2018 but was not registered
within 30 days, the Registrar may, on an application by the company, allow
registration of charge within 300 days of such creation. In case registration
is not made within the extended period, it shall be made within six months
from 02-11-2018 on payment of prescribed additional fees. Different fees
may be prescribed for different classes of companies.
 In case a charge was created on or after 02-11-2018 but was not
registered within 30 days, the Registrar may, on an application by the
company, allow registration of charge within 60 days of such creation on
payment of prescribed additional fees. If the registration is not made within
the extended period, the Registrar may, on an application, allow such
registration to be made within a further period of sixty days after payment
of prescribed ad valorem fees.

 If a company fails to register the charge, the charge-holder can make an

application for registration of charge and can also recover the amount of
any fees or additional fees paid by him from the company.
 Modification in the terms and conditions, etc. of charge also requires
registration of charge afresh. On recording the particulars of modification of
charge, the Registrar shall issue a certificate of modification of charge.
 Any person acquiring a property which is subject to charge shall be deemed
to have notice of the charge from the date of such registration.
 The Registrar shall, in respect of every company, keep a register containing
particulars of the charges registered under Chapter VI.
 Every company shall keep a Register of Charges at its Registered Office.
 The company shall give intimation to Registrar of payment or satisfaction in
full of any charge within a period of 30 days from the date of such payment
or satisfaction. If no intimation is given within 30 days, the Registrar may
allow such intimation to be made within 300 days of such payment or
satisfaction on payment of prescribed additional fees.
 On receipt of intimation, the registrar shall issue a notice to the holder of
charge calling upon him to show cause within such time not exceeding 14
days as to why payment or satisfaction in full should not be recorded as
intimated to the Registrar. If no cause is shown, the Registrar shall order
recording of memorandum of satisfaction.
 In case intimation of payment or satisfaction in full of charge is in prescribed
form and signed by the holder of charge no notice shall be sent.
 In case, the company fails to send intimation of satisfaction of charge to the
Registrar, the Registrar may enter in the register of charges memorandum
of satisfaction on receipt of evidence to his satisfaction regarding the same.
 Where Registrar enters a memorandum of satisfaction of charge in full, he
shall issue a certificate of registration of satisfaction of charge.
 If a company contravenes any provision relating to the registration of
charges or modification or satisfaction of charges, the company and every
defaulting officer is punishable.
 The Central Government is empowered to order rectification of Register of
Charges in certain cases of default.

6.25
a
TEST YOUR KNOWLEDGE

1. Any person acquiring property, on which charge is registered under section
77, shall be deemed to have notice of the charge from:
(a) the expiry of thirty days of such charge
(b) the date of application for registration of the charge
(c) the date of acquiring the property
(d) the date of such registration
2. A charge was created by Cygnus Softwares Limited on its office premises to
secure a term loan of ` 1 crore availed from Next Gen Commercial Bank
Limited through an instrument of charge executed by both the parties on 16 th
February, 2023. Inadvertently, the company could not get the charge
registered with the concerned Registrar of Companies (ROC) within the first
statutory period permitted by law and the default was made known to it by
the lending banker with a stern warning to take immediate steps for
rectification. The latest date within which the company must register the
charge with the ROC so as to avoid paying ad valorem fees for registration of
the charge is:
(a) 27th April, 2023
(b) 17th April, 2023
(c) 2nd May, 2023
(d) 16th June 2023
3. The instrument creating a charge or modification thereon shall be preserved
for a period of ______ years from the date of satisfaction of charge by the
company.
(a) 5
(b) 7
(c) 8
(d) 15

4. An interest or lien created on the property or assets of a company or any of its

undertakings or both as security is known as:
(a) Debt
(b) Charge
(c) Liability
(d) Hypothecation
5. Who cannot inspect the register of charges and instrument of charges, during
business hours, without paying any fees:
(a) Any member of the company
(b) The Creditor of the company
(c) Persons other than member and creditor of the company
(d) No person is allowed to inspect the register of charges
1. How will a copy of an instrument evidencing creation of charge and required
to be filed with the Registrar be verified?
2. What is ‘Floating Charge’? When does it get crystallised?
3. Define the term “charge” and also explain what is the punishment for default
with respect to registration of charge as per the provisions of the Companies
Act, 2013.
4. Renuka Soaps and Detergents Limited realised on 2nd May, 2022 that
particulars of charge created on 10th March, 2022 in favour of a Sankalp
Commercial Bank Limited were not registered with the Registrar of
Companies. What procedure should the company follow to get the charge
registered? Would the procedure be different if the company realised its
mistake of not registering the charge on 7th June, 2022 instead of 2nd May,
2022? Explain with reference to the relevant provisions of the Companies Act,
2013.
5. Mr. Antriksh purchased a commercial property in Delhi belonging to NRT
Limited after entering into an agreement with the company. At the time of
registration, Mr. Antriksh came to know that the title deed of the company
was not free and the company expressed its inability to get the title deed

6.27
a
transferred in Antriksh’s name contending that he ought to have the

knowledge of charge created on the property of the company. Explain,
whether the contention of NRT Limited is correct?
6. ‘A company is required to keep a Register of Charges at its Registered Office’.
Considering this statement, mention the provisions of the Companies Act,
2013 in respect of keeping of Register of Charges by the companies.
7. ABC Limited created a charge in favour of OK Bank which was duly
registered. Later on, the Bank enhanced the facility by another ` 20 crore. Due
to inadvertence, the modification in the original charge was not registered.
Advise the company as to the course of action to be pursued in this regard.
8. Ranjit acquired a property from PQR Limited which was mortgaged to
Pyramid Bank. He settled the dues to Pyramid Bank in full and the same was
registered with the sub-registrar who noted that the mortgage had been
settled. But neither the company nor Pyramid Bank filed particulars of
satisfaction of charge with the jurisdictional Registrar of Companies. Can
Ranjit approach the Registrar and seek any relief in this regard? Discuss this
matter in the light of provisions of the Companies Act, 2013.
ANSWERS
1. (d) the date of such registration
2. (b) 17th April, 2023
3. (c) 8
4. (b) Charge
5. (c) Persons other than member and creditor of the company

1. A copy of every instrument evidencing any creation or modification of
charge and required to be filed with the Registrar shall be verified as
follows:

(a) in case property is situated outside India: where the instrument or

deed relates solely to the property situated outside India, the copy
shall be verified by a certificate issued either under the seal, if any, of
the company, or under the hand of any director or company secretary
of the company or an authorised officer of the charge holder or under
the hand of some person other than the company who is interested in
the mortgage or charge;
(b) in case property is situated in India (whether wholly or partly):
where the instrument or deed relates to the property situated in India
(whether wholly or partly), the copy shall be verified by a certificate
issued under the hand of any director or company secretary of the
company or an authorised officer of the charge holder.
2. A ‘Floating Charge’ is a type of charge that is created on assets or a class of
assets which are of fluctuating or changing in nature. The assets which are
under floating charge may include raw material, stock-in-trade, debtors, etc.
It is a charge created upon a class of assets both present and future.
The assets under floating charge keep on changing because the borrowing
company is permitted to use them in the ordinary course of business.
The buyers of the assets covered under floating charge will get them free of
charge.
Crystallization of a Floating Charge
In the following events, a floating charge will get crystallised or fixed:
(i) When the creditor enforces the security due to the breach of terms
and conditions of floating charge like there is non-payment of interest
or default in repayment of instalments as per the terms of agreement.
(ii) When the company ceases to continue its business.
(iii) When the borrowing company goes into liquidation.

A floating charge remains dormant until it becomes fixed or crystallised. On
crystallisation of charge, the security (i.e. raw material, stock-in-trade, etc.)
becomes fixed and is available for realization so that borrowed money is
repaid.

6.29
a
3. The term charge has been defined in section 2 (16) of the Companies Act,
2013 as ‘an interest or lien created on the property or assets of a company
or any of its undertakings or both as security and includes a mortgage’.
Punishment for contravention – According to section 86 of the Companies
Act, 2013, if any company is in default in complying with any of the
provisions of Chapter VI, the company shall be liable to a penalty of five
lakh rupees and every officer of the company who is in default shall be
liable to a penalty of fifty thousand rupees.
Further, if any person willfully furnishes any false or incorrect information or

knowingly suppresses any material information which is required to be
registered under section 77, he shall be liable for action under section 447
(punishment for fraud).
4. The charge in the present case was created after 02-11-2018. The relevant
provisions of the Companies Act, 2013 applicable in the present case are as
explained below:
Initially, the prescribed particulars of the charge together with the
instrument of charge, if any, by which the charge is created or evidenced, or
a copy thereof, duly verified by a certificate, are to be filed with the
Registrar within 30 days of its creation. [Section 77 (1)]. In this case
particulars of charge were not filed within the prescribed period of 30 days.
However, the Registrar is empowered under clause (b) of first proviso to
section 77 (1) to extend the original period of 30 days by another 30 days
(i.e. sixty days from the date of creation) on payment of prescribed
additional fee. Taking advantage of this provision, Renuka Soaps and
Detergents Limited should immediately file the particulars of charge with
the jurisdictional Registrar of Companies after satisfying him through
making an application that it had sufficient cause for not filing the
particulars of charge within 30 days of its creation.
If the company realises its mistake of not registering the charge on 7th
June, 2022 instead of 2nd May, 2022, it shall be noted that a period of sixty
days has already expired from the date of creation of charge. However,
Clause (b) of Second Proviso to Section 77 (1) provides another opportunity
for registration of charge by granting a further period of sixty days but the
company is required to pay ad valorem fees. Since the first sixty days from

creation of charge have expired on 9th May, 2022, Renuka Soaps and
Detergents Limited can still get the charge registered within a further period
of sixty days from 9th May, 2022 after paying the prescribed ad valorem fees.
The company is required to make an application to the Registrar in this
respect giving sufficient cause for non-registration of charge.
5. According to section 80 of the Companies Act, 2013, where any charge on
any property or assets of a company or any of its undertakings is registered
under section 77 of the Companies Act, 2013, any person acquiring such
property, assets, undertakings or part thereof or any share or interest
therein shall be deemed to have notice of the charge from the date of
such registration.
Thus, Section 80 clarifies that if any person acquires a property, assets or
undertaking in respect of which a charge is already registered, it would be
deemed that he has complete knowledge of charge from the date of its
registration. Mr. Antriksh, therefore, ought to have been careful while
purchasing property and should have verified beforehand that NRT Limited
had already created a charge on the property.
In view of above, the contention of NRT Limited is correct.

6. In respect of keeping of Register of Charges by a company, Section 85 of
the Companies Act, 2013 and Rules 10 as well as 11 of the Companies
(Registration of Charges) Rules, 2014 are relevant.
(i) According to section 85 (1):
• Every company shall keep a Register of Charges in the
prescribed form and manner at its registered office.
Note: Rule 10 (1) specifies Form CHG-7 in which the Register of
Charges shall be maintained.
• The Register shall include all charges and floating charges
affecting any property or assets of the company or any of its
undertakings, indicating in each case the prescribed particulars.
(ii) According to Proviso to section 85 (1):
• A copy of the instrument creating the charge shall also be kept
at the registered office along with the Register of Charges.

6.31
a
(iii) Provisions of Rule 10 are as under:

• Entry of Particulars of all Charges: According to Rule 10 (1), the
company shall enter in the Register particulars of all the charges
registered with the Registrar on any of its property, assets or
undertakings and the particulars of any property acquired
subject to a charge as well as particulars of any modification of a
charge and satisfaction of charge.
• When to make Entries: According to Rule 10 (2), the entries in the
Register shall be made forthwith after the creation, modification
or satisfaction of charge, as the case may be.
• Who can authenticate Entries: According to Rule 10 (3), the
entries in the Register shall be authenticated by a director or the
secretary of the company or any other person authorised by the
Board for the purpose.
Inspection of Register of Charges and Instrument of Charges: As regards
inspection, section 85 (2) states that the register of charges and the
instrument of charges shall be open for inspection during business hours:
(a) by any member or creditor without any payment of fees; or
(b) by any other person on payment of prescribed fees.
Similarly, regarding inspection, Rule 11 states that the Register of Charges
and the instrument of charges kept by the company shall be open for
inspection-
(a) by any member or creditor of the company without fees;
(b) by any other person on payment of fee.
Preservation of Register: According to Rule 10 (4) the Register of Charges
shall be preserved permanently. However, the instrument creating a charge
or modification thereon shall be preserved for a period of eight years from
the date of satisfaction of charge.
7. ABC Limited is advised to immediately file an application for rectification of
the Register of Charges in Form No. CHG-8 with the Central Government in
accordance with Section 87 of the Companies Act, 2013.

Section 87 and Rule 12 empower the Central Government to order

rectification of Register of Charges in the following cases of default:
(i) when there was omission in giving intimation to the Registrar with
respect to payment or satisfaction of charge within the specified time;
(ii) when there was omission or mis-statement of any particulars in any
filing previously made to the Registrar. Such filing may relate to any
charge or any modification of charge or with respect to any
memorandum of satisfaction or other entry made under Section 82
(Company to report satisfaction of charge) or Section 83 (Power of
Registrar to make entries of satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or
satisfaction shall be extended’ or the ‘omission or mis-statement shall be
rectified’, the Central Government needs to be satisfied that such default
was accidental or due to inadvertence or because of some other sufficient
cause or it was not of a nature to prejudice the position of creditors or
shareholders of the company.
The application in Form CHG-8 shall be filed by the company or any
interested person. Therefore, OK Bank can also proceed under Section 87
as aforesaid.
The order of rectification shall be made by the Central Government on such
terms and conditions as it deems just and expedient.
8. Section 83 of the Companies Act, 2013 empowers the Registrar to make
entries with respect to the satisfaction and release of charge even if no
intimation has been received by him from the company. Accordingly, with
respect to any registered charge if an evidence is shown to the satisfaction
of Registrar that the debt secured by charge has been paid or satisfied in
whole or in part or that the part of the property or undertaking charged has
been released from the charge or has ceased to form part of the company’s
property or undertaking, then he may enter in the register of charges a
memorandum of satisfaction that:
 the debt has been satisfied in whole or in part; or
 the part of the property or undertaking has been released from the
charge or has ceased to form part of the company’s property or
undertaking.

6.33
a
This power can be exercised by the Registrar despite the fact that no
intimation has been received by him from the company.
Information to affected parties: The Registrar shall inform the affected

parties within 30 days of making the entry in the Register of Charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a
memorandum of satisfaction of charge in full, he shall issue a certificate of
registration of satisfaction of charge in Form No. CHG-5.
Therefore, Ranjit can approach the Registrar and show evidence to his
satisfaction that the charge has been duly settled and satisfied and request
the Registrar to enter a memorandum of satisfaction noting the release of
charge.


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