REVISION OF OLD CONCEPTS study material created/ compiled by - Commander RK Singh...

Mgmt study material created/ compiled by - Commander RK Singh [email protected]

Page 1 of 67 - Business Law - II

Jamnalal Bajaj Institute of Mgmt Studies

Date: 20 Jan 2006

Book – Corporate Law and Practices By Kapoor and Majumdar (Taxman Publication)

REVISION OF OLD CONCEPTS

What is a Corporate – Any business incorporated under some law.

Difference between Company and an Ownership/Partnership Firm

1. Any company is a separate legal entity. It can hold property in its own name. It can

sue or be sued.

2. A company has perpetual succession unlike an ownership or partnership firm. Even

in case all the directors and shareholders of a company die, the company continues.

During the WW-II, a small company was having a meeting attended by the

directors and all the shareholders. The building was bombed and all the

shareholders and directors died. The court gave the verdict that the company will

continue with legal heirs of original shareholders becoming the new shareholders

and electing a Board of Directors.

3. Shareholders in a Limited Company have limited liability to the extent of unpaid

share capital.

However, in specific circumstances the liability of Shareholders can become

unlimited. Like: -

(a) If the number of members in the company fall below the minimum

stipulated (2 for Pvt Ltd Company and 7 for Public Ltd Company)

(b) Remaining members should have knowledge of above shortfall in

membership

(c) The business is carried on for more than 6 months with reduced

membership.

Also, the liability of any individual shareholder/s can become unlimited when a

company is being wound up due to fraudulent activity of that member/s. However,

if the company is not being wound up, such liability is of the company and

company can take action against the fraudulent members under the existing laws.

4. In a company, day to day decisions are taken by the directors and shareholders do

not involve in the process.




What is a Private Ltd Company?

A Pvt Ltd Co. has three restrictions: -

(a) No of members of such company can not exceed 50.

(b) Shares of such company can not be issued to public.

(c) Free transfer of shares is not allowed. Any member wishing to withdraw

from the company has to first offer his shares for sale to the existing

members and if no one is willing to purchase can he sell it to a person

outside the existing membership.

A Pvt Ltd company must have an authorized capital of Rs 1,00,000.

What is Public Ltd Company?

As per company law definition, “A company that is not a Pvt Ltd Company is Public Ltd

Company”.

Different Types of Companies

1. Company Limited by Shares – A normal company as we generally find in the

market.

2. Company Ltd by Guarantee – Such companies do not have shareholders but only

members. The members give guarantee that in case of shortfall of assets of

company to meet the liabilities at the time of winding up, they would provide the

sum as guaranteed by them. BSE was a company “Limited by Guarantee” till

recently. Now it has become normal company.

3. Demutualisation

4. Company Limited by Guarantee also having Share Capital.

5. Foreign Company –

(a) Company should not be incorporated in India but incorporated in some other

country.

(b) Company should have place of business in India.

6. Govt Company – Any company wherein minimum 50% shares are held by

State/Central Govt individually or collectively.

7. Non Profit Companies – Charitable companies, NGO. These companies are

governed by Section 25 of the Companies Act, 1956 and therefore they are also

called Section 25 companies.




8. Unlimited Liability Companies – Liability of Shareholders of such companies is

unlimited.

9. Investment Companies – Principal business of such companies is dealing in trade

of securities.

10. Producers’ Companies – This is an option available to people who would

otherwise form Co-operative Societies. Co-operative societies follow the concept of

one member, one vote, irrespective of their contribution to the capital of society. It

acts as dis-incentive for large stake holders. In Producers’ companies, voting rights

are proportional to contribution.

11. Listed Companies – Any company whose shares or debentures are listed in any

recognized stock exchange of the country is called Listed company. Please note that

it is not the companies which are listed in the stock exchanges but their shares and

debentures are listed. It is, therefore, possible that shares of a particular company

are listed but not the debentures. It is also possible that a particular series of

debenture is listed but not others.

12. Illegal Association – A partnership firm having more than 20 partners or a

partnership banking firm having more than 10 members is illegal association. If

such a firm is defrauded by some one, they can not seek a legal remedy because

courts will refuse to admit existence of such company.

What is the difference between Partnership Firms and Unlimited

Liability Companies?

In case of partnership firms, the liability is joint and several, which means that any

creditor can approach the “partners as group” or even approach any individual partner for

recovery of full amount owed to him by the partnership firm. However, in case of

Unlimited liability companies, debtors can not approach the shareholders for payment of

dues and will have to approach the company only. Company can then demand any sum,

without any limit, from its shareholders to settle the dues.

What is a Holding Company and a Subsidiary Company?

A company is called a Holding company if –

(a) It holds more than 50% shares of other company, or

(b) Majority of directors of Holding company are also director in subsidiary

company.

(c) Company can control composition of directors of other company

(d) Company can control directors of other company.




THIS SEMESTER’S SYLLABUS

Law and Procedure of Formation of a New Company

Following activities are involved in the formation of new company –

1. Promotion

2. Incorporation

3. Floatation

4. Commencement of Business

1. Promotion: Promotion involves feasibility study and taking steps for incorporation

of new company.

(a) Promoter – Any one involved with the process of promotion in any way,

like providing the initial capital.

(b) Beginning and End of Promotion – Promotion begins when promoters

start acting on behalf of proposed company and ends when Board of

Directors takes charge of business.

(c) Legal Position of Promoter – He stands in the fiduciary capacity. Thus, he

can not make any secret profits. This also means that he is allowed to make

profits after due disclosure.

(d) Disclosure – He has to disclose all transactions and profits earned.

(e) Status of Contracts Signed in the Pre-incorporation Period – Those

contracts which are necessary for bringing a company into incorporation are

automatically valid. Validity of other contracts is dependent on acceptance

by Board of Directors.

2. Incorporation: Steps involved in incorporation –

(a) Application for Availability of Name – Four choices of names are to be

given to the Registrar who would check their availability to ensure that the

same name is not already in use or the proposed names are not deceptively

similar to any names already approved. Dos and Don’ts about names: -

(i) Name should be unique and not spelled or sounding like name of any

existing company.




(ii) Name should be consistent with proposed business of company. A

business intended to trade in wooden furniture can not assume names

like the ones of software or technology company.

(iii) For including words like International, Global, India etc, following

guidelines have been promulgated: -

(aa) India – Should have a min Rs 50 lakh authorized capital.

(bb) Global – Should have min Rs 1 Cr as authorized capital.

(cc) Corporation – Should have min Rs 5 Cr as authorized capital.

(b) Memorandum of Association (MOA) and Article of Association (AOA) – These two documents are collectively called as constitution of company.

Memo defines company’s relationship with outside world while Articles of

Association defines internal relationships between company and the

employees and among employees themselves.

These documents are public documents and should be made

available to any person on payment of nominal fees. In this case, the

Doctrine of Constructive Notice is applicable. Doctrine of constructive

notice favours the company and assumes that any other company or person

dealing with the firm would have read particular document. Thus, ignorance

of any clause in these documents can not be taken as refuge in case of any

dispute.

(i) Clauses of MOA

(aa) Name

(bb) Domicile

(cc) Objects

(dd) Capital

(ee) Liability

(ff) Association

Above six clauses are minimum clauses to be included in a Memorandum of

Association. Company is free to include any other clause.

Domicile – The state in which registered office is located is called

the Domicile state of that company.

Objects – Object defines the scope of business of any company.

There is no limit as to how many businesses can be listed in

the object of the company. However, a company can not

undertake a business that is not listed unless the objects are

amended. Else, it will attract “Ultra Vires” clause. Company




is free to amend any clause or article by passing a special

resolution by ¾ majority of members present in person or

through proxy and voting.

Association – Name of the people who formed the company. They

are called the subscribers of the MOA. For a private Ltd

company, minimum two and for a Public Ltd Co. minimum 7

members are required.

Doctrine of Indoor Management – Doctrine of indoor management

is exception to Doctrine of Constructive Notice. According to

doctrine of constructive notice, any one who deals with the company

is assumed to have read and have knowledge about the object and

power of the company. If any transaction with company is later

found to be out of the ambit of its MOA & AOA (Ultra Vires), the

third party can not claim anything from company as matter of right.

It means that, before entering into contract you must verify the

memorandum of the company and check out whether company is

authorised to perform this kind of act.... But at the same time you are

not suppose to verify the internal proceeding carried out by the

company nor is company duty bound to reveal the internal

proceeding to outsiders. Thus, an outsider or party to the contract can

safely assume that everything required to be performed by the

company or its officer as part of internal proceeding has been duly

complied with. If it is revealed at a later date that some internal

actions as necessitated by MOA/AOA prior signing of contract were

omitted by its officials, the contract would remain valid and

enforceable.

(ii) Vetting of MOA and AOA - Draft copies of MOA and AOA are

required to be submitted to the Registrar of the Companies office for

vetting to ensure that the rules framed are within the ambit of the

Company Law and nothing of substance has been omitted. Along

with the MOA and AOA, following additional documents are

required to be submitted: -

(aa) Availability of name - Form 1A

(ab) Notice of Registered Office - Form 18

(ac) Consent of persons for directorship – Form 29

(ad) Particulars of directors – Form 32

(ae) Statutory Declaration – Letter from High Court Advocate

or Company Secretary, etc, stating that he has checked the

documents and they have been found to be correct.




Once Registrar is satisfied with above documents, he can issue

Certificate of Registration (Birth of Company). Once the Certificate

of Registration is issued, there is no invalidation clause which means

that even if there was any error in the process, it still remains valid.

3. Floatation – Raising of Capital. Capital can be raised by one of the following

methods: -

(a) Public Offer – Public Offer can be made only by Public Ltd Companies.

Pvt Ltd companies can not make a public offer. Public Offers are governed

by very stringent regulations. Issue of prospectus is necessary condition.

Prospectus should include details of the company and Offer.

(i) IPO – Initial Public Offer – First ever public issue of company is

called IPO.

(ii) FPO – Follow-on Public Offer. Any subsequent public issue is

called FPO, though popularly every public issue is called IPO by the

common people.

(iii) Pvt Placement – When shares are offered to selected few with no

clause to relinquish the offer in favour of some one else, it is called

Pvt Placement. Pvt Placement is goverened by few regulations

unlike Public Offers where the rules are very stringent. However,

there is limit imposed as to how many people can be approached for

Pvt Placement. The number can not exceed 50. This limit is imposed

so that this route is not misused to disguise a public offer as Pvt

Placement offer by mass mailing.

(iv) Offer for Sale – A company unwilling to go through the grind of

Public Issue can sell all its shares to one entity who in turn can sell

the shares to the public. Such an arrangement is called offer for sale.

This route was used to con the public. Seller disowned the

responsibility stating that he was like any other seller with no

responsibility towards functioning of the company. Company also

disowned the responsibility saying that it never made any promises

to the public as it sold the shares to a single individual. Therefore,

now same rules as Public Offer apply in case of sale of shares by

such individuals also.

4. Commencement of Business – A Pvt Limited Company can commence business as

soon as Certificate of Incorporation is issued. However, in case of Public Ltd

Companies, business can be commenced only when Certificate of Commencement

of Business is issued by the Registrar. Before awarding Certificate of

Commencement of Business, he needs following documents and information: -




(a) In Case of Public Offer -

(i) Confirmation about minimum subscription of 90% of the offer

amount.

(ii) Application money is returned to the entitled applicants.

(iii) Confirmation that all stock exchanges applied to by the company

have agreed to list the share. In case, even one of the stock

exchanges where application for listing was made refuses to list the

stock for any reason what so ever, the Public Issue is null and void

and entire money of applicants is to be returned. It is mandatory to

list the company in the Stock Exchange nearest to the company’s

registered office.

(iv) Proof of Directors having paid money for their shares.

(v) Declaration to the above effects is to be made by any one director or

the company secretary.

(b) In Case of Pvt Placement – Only conditions (iv) and (v) above are required

to be complied with.

Status of Provisional Contracts – Before a company comes into existence, the promoters get into

various contracts for IPO, Advtg, etc. What is the status of these contracts?

Such contracts are called Provisional Contracts. In case the company does not get the

certificate of business, these contracts are cancelled. In case the certificate is awarded, the Board of

Directors will decide on the status of contracts. In case of a long term contract of pre-incorporation

period, Board will decide whether such contract was necessary and in the interest of the company

and can accept or reject.




Date: 27 Jan 2006

Share Capital

What is a share?

A “share” is a share in capital of company. Shareholders are not part owners of the

company as is commonly believed. A company is a separate legal entity and thus there is

no ownership in a company even if some one owns literally all the shares in the company.

Any shareholder can not act on behalf of the company.

A share in a company is a bundle of rights that shareholder enjoys for providing money to

the company. He is more like a creditor of the company who enjoys certain rights for

having provided the company with the capital. But like a bank which finances the company

can not call it self to be owner of the enterprise, a shareholder can not call himself to be

owner/part owner of the company.

Shareholders’ Rights – Shareholders rights can be grouped in two batches:

Individual Rights

Collective Rights

1. Right to receive notice of GBM

2. Right to receive information in the

form of Annual Report.

3. Right to attend General Body

meetings

4. Right to appoint proxy on his behalf

for attending GBM.

5. Right to vote

6. Right to receive dividend when

declared.

7. Right to inspect certain registers like

membership register. (But not books

of account).

8. Right of Pre-emption. (Right to be

offered proportionate amount of

shares corresponding to current

holding before being offered to other

people).

9. Right to seek remedy against any

Ultra Vires act by the company.

1. To call for an Extra Ordinary General

Meeting if a group of shareholders

holding either 10% voting rights or

100 shareholders demand for it. If

EGM is not conducted within

stipulated period by the directors,

then the group can organize the EGM

itself and get the reimbursement for

expenses from company account.

2. In case of any mismanagement or

oppression, the shareholders can

petition Central Govt (Ministry of

Company Affairs) to intervene. Govt

can change MOA and AOA and

appoint its own directors etc.




Share certificate is not a share. A share certificate is merely an evidence that the holder of

the certificate holds the number of shares in the company as listed in the share certificate.

What is a Stock and how do you differentiate a share from a stock?

When the capital of a company is divided into number of units of a definite face value,

such units are called shares.

When capital of the company is not split into units of any definite amount, such money is

called stock.

A company can not issue stock in the first instance. It has to first issue shares and later can

convert them into stock.

Types of Shares

1. Equity Shares

(a) Ordinary Equity Shares

(b) Equity Shares with Differential Voting rights.

2. Preferential Shares

(a) Cumulative Preferential Shares

(b) Non Cumulative Preferential Shares.

The primary difference between Equity shares and preferential shareholders lies in fact

that:

(a) Any dividend to Equity Shareholders can be paid only after Preferential

Shareholders are paid theirs. The dividend to Preferential Shareholders is

paid at a pre-specified rate when given. (Declaration of dividend is not

mandatory but when declared, minimum rate as pre-specified would have to

be paid).

(b) Again, during winding up, Preferential Shareholders will have the first claim

over the money realized from liquidation.

(c) Preferential Shareholders do not have voting rights. However, they get

voting rights under following conditions:

(i) Cumulative Preferential Shareholders – If dividend is not paid during

last two financial years.

(ii) Non Cumulative Preferential Shares – If dividend is not paid in three

out of past six years.




Also, there are Participating Preference Shares. Such shares get extra dividend, over and

above pre-specified rate, in case company pays dividend to its Equity Shareholders at rates

higher than a pre-agreed rate.

Preferential shares in India should be redeemable not exceeding 20 years.

Equity Shares with Differential Voting Rights. These are the shares where,

voting rights are not there, all other things remaining same. The question here is why

should any one accept Differential Voting Rights?

The companies offer inducement in terms of extra dividend to such Sharesholders. Most of

the shareholders in any case don’t attend the AGMs due to reasons like location of AGM

venue (AGM can only be held in the city of Registered Office), and therefore don’t exercise their

right to vote. Those who do attend, can hardly make any difference against the majority

shareholders. Thus, absence of voting rights does not make any material difference to small

Shareholders. For the promoters and majority shareholders, it provides a safety net against

hostile bids for take over through market route of acquisition of shares.

Guidelines for issue of Equity Shares with Differential Voting Rights

(ESDVR)-

1. First issue of shares has to be ordinary equity shares. ESDVR can be offered only

on subsequent issues.

2. Proportion of ESDVR can not exceed 25%.

3. Company should have track record of divisible profit in last 3 years. (Company should

be profit making. Declaration of dividend is not necessary)

4. Any company defaulting on repayment of deposits or interest can not issue ESDVR.

Issue of Shares: -

1. Pvt Placement

2. Public Offer

(a) IPO

(b) FPO

3. Offer for sale

Pvt Placement – Issue of prospectus is not necessary. Merely filing of statement in lieu of

prospectus is adequate.

Offer for Sale – Deal is struck with a single entity, an individual or company, who

purchases all the shares on offer and pays money. Such entity is called Issue House. He

sells those shares subsequently to public. As brought out earlier, this method was being

used as a route to evade stringent regulations applicable in case of public issues. The rules




have now been made equally stringent even in cases of sale of shares by Issue House. Ever

since, this method has fallen into disuse.

Public Offer – Appoint various entities: -

(a) Merchant Bankers – Appointment of Merchant Bankers, also called Lead

Managers to the Issue, is mandatory as per SEBI rules. They act as advisors

for the issue and carry a great deal of responsibility. They provide various

services and in case of any problems, they are the ones to be held

responsible along with company.

(b) Appoint Brokers

(c) Appoint Bankers – For acceptance of applications and application money.

(d) Appointment of Underwriters – It is not compulsory and can be done as a

safety net in case management and Merchant Bankers are not certain about

receiving minimum 90% subscription. Underwriters charge a certain

percentage commission (max 2.5% of the amount underwritten in case of

shares and 5% in case of debentures) and purchase unsubscribed portion of

issue. There are two types of underwriting –

(aa) Hard Underwriting – Buy the shares using public issue route

(ab) Soft Underwriting – Buy the unsubscribed portion in case of

shortfall in subscription.

(e) Appoint Registrars and Transfer Agent – These are the people who do the

back office job during the public offer. They process the applications, send

allotment letters, send refund cheques, etc.

Except for the Advertising Agency and Bankers, all others should be registered with SEBI.

Different Kinds of Prospectus: -

1. Abridged Prospectus – Abridged prospectus contains only salient points with note

that full prospectus can be obtained from issuing company or Merchant Banker.

2. Shelf Prospectus – In case of company coming up with multiple issues of shares or

Debentures or bonds at short notices, (remember, IDBI and ICICI Infrastructure

funds coming up with a new series of Tax Saving Infrastructure Bond every

month???), such prospectus are issued. Every time a new issue is offered, an

information memorandum about changes applicable in Shelf Prospectus is attached

rather than issuing a full prospectus. This is applicable only to Banking Companies

and Financial Institutions.




3. Red Herring Prospectus – Such prospectus are issued in case of Book Building

Issues. The only difference in case of regular prospectus and red herring prospectus

is declaration of offer price which is not contained in the Red Herring Prospectus.

All other things are common.

SEBI Guidelines for Making Public Offer – This is also called DIP

Guidelines (Disclosure for Investor Protection)

1. General Requirements –

(a) Issue of Offer Document

(b) Prohibited companies can not make a public offer

(c) Make an application for listing of securities to as many stock exchanges as

desired by company but mandatorily to local Stock Exchange (Region in

which company’s registered office is located).

(d) Enter into depository agreement.

Rules are different regarding eligibility norms for companies making

IPO.

(a) Unlisted Companies

(i) Pre issue net worth of company should be minimum Rs 1 Cr.

(ii) Track record of distributable profit for minimum 3 of last 5 years.

(iii) Issue size can not exceed 5 times the net worth of the company.

In case a company is not eligible by above criteria, then company can go for Book

Building Issue and therein minimum 60% should be invested by QIBs (Qualified

Institutional Bidders).

(b) Listed Companies – In such companies only last criteria, ie issue size

applies.

2. Pricing of Issues – Companies are free to price their issue. They can demand any

amount as long as investors are willing to purchase. In the Pre SEBI days, the price

of issues was decided by SEBI’s predecessor, Controller of Capital Issues.

3. Promoters’ Contribution –

Who is a promoter?

Any person who is owning 10% or more shares through family and friends,

except QIBs, FIs and FIIs is termed as promoter. Promoters are required to

subscribe minimum 20% of the issue and such shares carry a lock-in period of 3




years, which means that such shares can not be sold for 3 years. As said earlier, this

rule is not applicable in case of Banks, Financial Institutions and Infrastructure

companies.

Promoters should bring their minimum 20% money before the issue opens.

Promoters’ contribution in excess of statutory 20% will also have a lock-in period

of 1 year.

Public Offer of Securities

Pubic Offer of Securities by unlisted companies is called Initial Public Offer (IPO)

Public Offer by listed companies is called Follow on Public Offer (FPO).

Any Public Offer is guided by two sets of guidelines

(a) Guidelines listed by Companies’ Act

(b) SEBI’s guidelines.

There is substantial variation in requirements stipulated by the two guidelines for each

matter. Since every company has to satisfy both the authorities, more stringent of the two

rules is followed. In most cases, SEBI stipulations are more stringent than Companies’ Act.

Issues

1. Draft and Issue a Prospectus –

(a) As Per Companies’ Act – Not necessary to call it prospectus. In can be a

circular, notice, letter. Two elements should be present in any such

document to be construed as prospectus –

(i) Should invite to subscribe for Equity Shares/debentures/Public

Deposit.

(ii) Invitation to public (Any offer is termed private in case the offer is

made to a specific person and is not transferable. Else it is called a

public offer). Also a private offer to more than 50 persons is deemed

to be a public offer.

Every prospectus should be dated and registered with Registrar of

Companies at least a day prior to offer.

(b) As Per SEBI Guidelines – Company should deposit draft prospectus at

least 21 days before going public through Merchant Banker. Draft

Prospectus is a public document and put up on SEBI’s Website for any one

to raise any objections. SEBI can suggest any changes and they will have to

be complied with by company and the merchant banker in final prospectus.




2. Contents of Prospectus –

Companies’ Act

(a) Schedule II of the Act mandates

Details like what should be on cover

page, back page etc.

(b) Part I – General Information

(c) Part II – Specific Information

(i) General

(ii) Financial

(iii)Statutory

(d) Part III – Explanation of terms

SEBI

(a) Company’s name, address, contact

details

(b) First Issue Risk

(c) Issuers absolute liability

(d) Issue details

(e) Name and detail of lead managers.




Date: 03 Feb 2006

Allotment of Shares

1. General Rules.

(a) Proper Authority – Who is authorized to issue the shares? It is normally

mentioned in the MOA. In case there is no mention of authority for issue of

shares, then the power rests with the Board of Directors. (The Shareholders

enjoy only listed privileges. Board of Directors enjoy the Residual Privileges, which means

that any powers not vested with some one else will automatically fall on Board of

Directors).

(b) Allotment against Written Application – Any allotment of shares can be

done only against written application from the applicant. No allotment of

shares can be made unless a person had made a written request.

(c) Allotment of shares can be done only if it is not in contravention of any

other law of the land. For example – Minors are not entitled by the law of

the land to enter into any contract. Since allotment of shares is against a

contract, shares can not be allotted to any minor who is not eligible to enter

into a contract. Any allotments made on misrepresentation of age by a minor

would become null and void when the facts are discovered. Similarly, there

are limitations imposed on allotment of shares to foreigners. Any allotment

in violation of FEMA rules or any other rules, would be nullified.

(d) Allotment should be made within reasonable time of application. The

law does not define the reasonable time and has been left to the courts to

interpret on case to case basis. In a judgment, Supreme Court had ruled six

months as unreasonable time.

(e) Communication of allotment of shares to allottee is mandatory

condition. Even though the Board of Directors may have taken the decision

to allot the shares, unless the same is communicated to the person

concerned, allotment is not valid. In a particular case, the Board approved

allotment of partly paid shares and same was duly minuted also. Soon after,

the company went into liquidation and the person was asked to pay up the

balance amount. However, he contested the demand on the ground that he

never received the intimation, which was upheld.

(f) Revocation of Offer – Any application for allotment of shares can be

withdrawn any time before allotment of shares. However, in case of Public

Offers (IPO or FPO), withdrawal is not permitted for 5 days from the issue

opening date. This window period is basically a grace period given due to

hectic activity level during the Public Issue days. However, this grace period

to the company is not available in case any of the experts associated with the




prospectus withdraw his/their consent to the public issue for what so ever

reason. In such situations, applicants are allowed to withdraw their

application any time till the allotment of shares without the five day’s

window/grace period.

(g) The offer should be absolute and unconditional.

2. Statutory Rules.

(a) Prospectus must be deposited with the Registrar of the Issues minimum 21

days before opening of the Public Issue.

(b) A minimum amount of application money should be collected along with

the application. This rule is not applicable for institutional investors. As per

Company Law, minimum amount is 5% of Issue Price while SEBI has

stipulated minimum 25% of Issue Price.

(c) Application Money to be kept in a separate account in a scheduled

bank. Money so collected as application money for allotment of shares

must be kept in a separate account in a scheduled bank and can not be

withdrawn unless the entire process of allotment of shares and dispatch of

refund cheques is completed.

(d) For any Public Issue to be declared successful, it is mandatory that

minimum 90% subscription is received (inclusive of Underwriter’s purchase). In

case 90% subscription is not received, no shares can be issued and all the

money has to be returned to the applicants. SEBI regulations stipulate that

any money due for refund should be refunded to the applicants within 8 days

of becoming payable failing which, interest @ 15% pa is payable. In case of

Raymonds Synthetics Ltd, the delay was claimed to be caused by fire in

which all the refund cheques got burnt and thus had to be reprinted.

However, court refused to give any relief on interest payment on this count

and ordered payment of interest at prevailing penal rate. The money

becomes payable in case of Underwritten issue on 61st day of closure of

issue as per SEBI rules and 121st day as per CLB, and immediately in case

the issue is not underwritten.

(e) Opening of Subscription List – A issue should remain open for public to

apply as follows: -

(aa) CLB – Minimum 5 days without any upper limit.

(ab) SEBI – Minimum 3 days and max 10 days.

(ac) The combined effect of the two regulations is minimum 5 days and

max 10 days.




(f) Permission of Stock Exchange – Permission to list in Regional Stock

Exchange of the area where Company’s head office is located is mandatory.

In addition, the company can opt to list its shares in any number of stock

exchanges across the country. However, permission for listing from all the

stock exchanges applied is essential for issue to be successful. In case, even

one Stock Exchange of all the stock exchanges applied-in rejects the

application for registration, the issue will be unsuccessful and money of all

the applicants would have to be returned irrespective of subscription status.

(g) Basis of Allotment (In case of over subscription) – Of late, issues are

coming with Book Building Procedure where in allotment is normally done

on pro-rata/proportionate basis. Earlier, lottery system was used.

(h) Retention of Oversubscription – Retention of oversubscription has not

been allowed by SEBI. However, up to 10% retention is allowed to cater for

proportionate allotment. In case of book building issue, 15% is allowed as

Green Shoe Option for stabilization of share prices.

(i) Consideration – Cash. Company Law permits other modes of

consideration as well such as allotment of shares against purchase of

equipment. Allotment of shares against debt is treated as equivalent of cash.

Other than cash, shares can be traded for property, goods, etc.

(j) On allotment of shares, “Return of allotment” is to be filed on separate

forms for cash and kind with copy of agreement.

3. Issue of Shares at a Premium

SEBI has allowed companies to issue shares even at IPO stage for any premium.

(TCS IPO share with face value of Re 1 was issued at a premium of Rs 849) but the

premium is to be justified in the prospectus.

Premium on shares is not profit. This money can not be distributed among Shareholders. It

is to be kept in Securities Premium Reserve.

The money realized through premium on shares can be utilized for following purposes: -

(a) Issue of Bonus Shares

(b) Write off preliminary expenses, issue expenses, discount on issue of shares

(Amortisation) (Infosys IPO shares in 1991 were issued at discount).

(c) Paying premium on redemption of preference shares.

(d) Shares buy back.




4. Issue of Shares at a Discount

(a) First issue (IPO may not be first issue. Shares may have already been

allotted on Pvt Placement basis) has to be at premium or par.

(b) A period of one year must have elapsed from commencement of business.

(c) Should pass a resolution in General Body Meeting and approval obtained

from Central Govt.

(d) Ordinarily discount can be allowed up to 10%. However, Central Govt has

discretionary powers to increase the discount.

(e) Issue of shares should be done within 2 months of resolution passing.

5. Issue of Sweat Equity

How is sweat equity different from ESOP? Sweat Equity is issued to employees in

appreciation of their past contribution to the company. Such equity has no lock in period

and employee can leave the company very next day of receiving the equity without any

prejudice to his entitlement. ESOP is actually used as a bait to retain the employees in the

company. Employee is given an option to purchase company’s share at a pre-fixed price,

normally at a discount to the current market price, which can be redeemed after a gap of

one year or more from the offer date. However, in case the employee leaves the company

in the interim, he loses his claim on ESOP.

As per Companies’ Act for Listed Companies –

(a) Sweat equity shares should be of a class already issued.

(b) Sweat Equity can not be issued before company has completed at least one

year in the business (to be reckoned from the date of commencement).

(c) Company should pass special resolution giving details.

SEBI’s Regulations –

(a) Issue of Sweat Equity to promoters (major Shareholders) –

(i) Company should pass ordinary resolution.

(ii) Voting is to be done through postal ballot. (Postal ballot is more

participative than physical ballot in AGM where only few participate).

(iii) Beneficiary Promoters can not take part in the voting.

(b) Pricing of the Issue – Sweat Equity can be given completely free or at a

discounted price.




(i) In case the equity is being given for a price, lowest price to be

charged is higher of either - Avg of weekly High/Low for last six

months, or – Avg of weekly High/Lows for last 2 weeks. The data to

be used for this purposes is of 30 days prior to conduct of AGM.

(ii) Valuation – If given free then Merchant Banker would assess the

know how/intellectual capital contributed.

(iii) Sweat Equity has a lock-in period of 3 years.

(iv) Listing of Sweat Equity is allowed only if all the regulations of SEBI

have been followed.

(c) Sweat Equity to Full Time Directors – If they have generated any know

how which can be taken to Balance Sheet, then it is not counted towards

their remuneration. Else, cost of such equity would be counted within limit

of 11% of profits on Directors’ remuneration.

(d) In case sweat equity is issued without any tangible assets being generated

which can be taken to Balance Sheet, then the cost of equity is taken to

Profit and Loss A/c.




Date: 10 Feb 2006

ESOP & ESPS

What is the difference between ESOS and ESPS?

ESOS – Employee Stock Option Scheme – ESOS evolved as a form of incentive for

employee retention as well as to motivate them to work towards maximizing shareholders’

value. Employees are offered a specified number of shares at a fixed price which may be at

a discount to the prevailing market. He has one year (minimum statutory time for ESOS) or more

(as decided by the company) to convey his acceptance of the offer. Once accepted, he can pay

the money and purchase those shares at offer price. In case the employee leaves the

company before acceptance of the ESOS, he loses his right to purchase those shares. Thus,

it is a bait for the employees to desist them from leaving company within short period.

Being owner/potential owner of the shares, it is in employees’ interest that company’s

shares perform well in the stock market to maximize their personal gains. Once the shares

are accepted, there is no lock-in period and can be sold immediately.

Eligibility –

(a) Employees and directors of the company, holding company and subsidiary

companies. However, as per SEBI guidelines, Promoters can not be allotted

ESOS. Further, any director who holds 10% or more shares directly or

through friends and family can not be offered ESOS.

(b) Company is required to form a compensation committee of which majority

of the members should be independent directors. This committee will decide

the terms and conditions of ESOS. Committee will ensure that all terms and

conditions of SEBI are complied with.

(c) The terms and conditions framed by the committee should then be approved

by shareholders through a special resolution.

(d) Vesting Period (interval between offer and acceptance date) can not be

reduced below one year. Committee may decide to increase though.

(e) Terms of allotment of ESOS can be altered at a later date if they are not

against the interest of the employee. Like offer price may be reduced in case

of drop in share price.

ESPS – While ESOS is an incentive to stay with the company and work towards

maximizing shareholders wealth, ESPS is a reward for good work. There is no vesting

period or acceptance involved in this case. However, unlike ESOS, there is a lock-in period

of one year in this case. Shares so allotted can not be traded in stock exchanged for one




year. These shares can be awarded to employees either as part of the public issue or in a

separate issue for employees. Balance regulations are same as in case of ESOS.

Buy Back of Securities

When a company purchases its own shares and extinguishes the liability, it is called buy

back of securities. Buy Back of securities was not allowed for a long time and was

permitted only a few years back.

Source of Funds for Buy Back – Any single or combination of following funds can

be used to fund the buy back -

(a) Free Reserves

(b) Securities Premium Account

(c) Through fresh issue of securities (other than class of security being bought

back)

In case of use of Free Reserves, an amount equal to used for funding of Buy Back is

required to be transferred to Capital Redemption Reserves.

Rules –

(a) Buy back should be authorized by Articles of Association.

(b) If Buy Back is less than or equal to 10% of the outstanding securities, same

can be approved by passing a Board Resolution.

(c) In case buy back exceeds 10% but is less than or equal to 25%, a special

resolution is required to be passed by the shareholders.

(d) Buy back of more than 25% of the outstanding shares in a year is not

allowed.

(e) Post buy back, Debt Equity Ratio should be less than or equal to 2.

(f) Partly paid up shares can not be bought back.

(g) In case of special resolution, Shareholders are to be notified through a

declaration or disclosure, the intent and purpose of buy back.

(h) Buy back of shares results in reduced capital as well as reduced liquidity and

therefore can be detrimental towards fulfilling liabilities of the company.

Therefore, a declaration of solvency is to be made to the Registrar of the

companies showing how debtors’ interests are going to be safeguarded.




(i) All shares bought back should be physically destroyed (in case of physical

shares) within 7 days of Buy Back.

(j) Once a particular security has been bought back, same class of security can

not be reissued within 6 months.

(k) Advertisement regarding Buy Back should be placed at least in two news

papers, one local vernacular and other English along with Record Dates of

Buy Back. (Only Shareholders as on record date are eligible to sell shares

back to the company).

(l) Shareholders should be given 21 days’ notice.

(m) A register of details regarding buy back like person, quantity, date, rate, etc

should be maintained.

(n) Return regarding buy back should be submitted to the Registrar.

Methods

1. By inviting tender from Shareholders.

2. Purchase from Stock Market

(a) Company should announce the period of Buy Back from open market.

(b) The period can not be less than 15 days and can not be more than 30 days.

Company should disclose price and number of shares bought back on daily

basis (It is not specified as to whom declaration is to be made).

(c) Shares can not be bought back from the promoter group.

(d) Promoters should declare their holding of securities pre and post Buy Back

period.

(e) During Buy Back period, company can not issue further shares.

3. Book Building Route

Restrictions

1. Can not buy through subsidiary companies

2. Can not buy through investment companies.

3. Companies having defaulted in payment of principal or interest of public deposit

are not allowed to buy back.




4. Any company defaulting on any other provision of Companies’ Act is not allowed.

Reduction of Share Capital (Old Provision)

This is the alternate route for Buy Back of shares. Before provisions for Buy Back were

introduced few years back, this was the only route available for Buy Back of shares. As per

court judgment, Buy Back and Reduction of Share Capital are parallel routes and company

can choose either route.

In case of Reduction of Share Capital, a special resolution should be passed by

shareholders which should be approved by Company court. This was the route utilized by

Sterlite Industries.

Various methods used for reduction of share capital are –

1. Writing off of uncalled money in case of partly paid shares. In such cases, the face

value of share reduces by the uncalled amount.

2. Return of excess money (Capital)

3. Return excess capital with call option.

4. Combination of above options.

Procedure –

Special resolution has to be passed and then approved by the company court. In order to

approve the resolution, court requires:

(a) Advertisement in two News Papers regarding reduction of capital specifying

the method.

(b) Court will invite objections and decide on the objections on the merit.

(c) Court gives the company following options regarding the objections

received from creditors –

(i) Negotiate with creditors

(ii) Settle their dues

(iii) In case above two options are not possible, then company has to

satisfy the court as to how creditors’ interest are going to be

safeguarded.




Rights Issue – In case of fresh issue, the Shareholders enjoy two rights: -

(a) Right of Pre-emption – Existing shareholders have the first right over the

fresh issue of shares.

(b) Right to renounce the right to some other person.

(c) Advertisement in news paper.

Exemptions –

(a) If an issue is floated within 2 years of incorporation or within one year of

first allotment, then Rights Issue is not necessary.

(b) Special Resolution is passed by the shareholders relinquishing rights issue.

There are SEBI regulations also governing Rights Issue but they are applicable only

for listed companies.

In case Issue size is Rs 50 Cr or more, a merchant banker has to be appointed.

In case of Rights Issue, request for allotment of shares once made can not be

withdrawn.

Issue of Bonus Shares

Issue of Bonus shares can be funded out of free reserves or share premium account. Bonus

shares should be fully paid up shares.




Membership of a Company

Generally all Shareholders are members. But there are exceptions when this may not be

true.

1. There may be a company where share capital may not be there, like a company

limited by Guarantee. In such companies, Guarantors are the members.

2. If a shareholder sells all his shares and the new shareholder has not got himself

registered with the company as the new shareholder.

3. A person who died is not a member but continues to remain shareholders till his

heirs get the shares transferred to their names.

4. In case of insolvency, Receiver becomes the shareholder but not the member.

A person can become member by –

1. Subscription to Memorandum of Association. People who signed the MOA are

members of the company even though they may not be holding any shares.

2. By applying in writing. Company may accept application by way of allotting fresh

shares or transfer of shares.

(Company has to maintain register of members in case of physical shares. All persons listed

in the register are members. However, in case of DEMAT shares only depository participant’s name

is there. The list of Beneficial Owners of shares is held by the Depository Participant).

Who can be a member?

1. A minor can not be member because he can not be party to a contract as per our

law. All members are party to the contract in the form of Articles of Association

(AOA).

2. Partnership firms can not be members because they are not legal entities.

3. Foreigners can become members.

4. Societies, registered under Societies Registration Act can become members.

Rights and Liabilities of Members

We have discussed the rights, individual as well as collective, in lecture notes dated 27 Jan

06 on page 9. Liabilities are as under:

1. In case of partly paid up shares, balance amount is to be paid up when called.




2. Liability is unlimited in case it is discovered during winding up of the company that

shareholder had indulged in fraudulent acts causing losses to the company.

3. Liability is also unlimited in case all of the following three conditions are satisfied:

(a) Membership of the company falls below the statutory minimum.

(b) The member was aware of the membership having fallen below minimum.

(c) Company continues to operate with deficient membership for over six

months

Contributory Clause

Instances came to light where-in owners of partly paid shares, having got information about

impending insolvency of the company, transferred the shares in the name of their domestic

help or relatives who had no assets. Thus, they escaped paying up balance money. In order

to plug this loophole, contributory clause was incorporated in the regulations. Thus, if a

company is liquidated within 12 months of a person ceasing to be member and new

member not being able to fulfil the claim, then the previous owner of such shares is liable

to pay.

Joint Ownership

1. In case of joint ownership of shares, there can not be more than three joint holders

and the three would be counted as single member (single vote)

2. In case of transfers of shares, all joint owners should sign the document.

3. Any notice would be sent to only the first named person.

4. Joint members are liable jointly and severally. It means they can be asked to pay to

fulfil liability against shares as a group or individually without proportionate

division of liability.

Can a company expel a member?

No. Any company can not expel any member under any count. This permission has not

been given else it can be misused to eject vocal minority shareholder. But a member can

surrender his shares and cease to be member.




Date: 24 Feb 2006

Corporate Borrowings

Contrary to popular notion and belief, companies in general do not have implicit power to

borrow money. Only Trading companies have implicit power to borrow money. Other

companies in order to be able to borrow money, from any source, have to have explicit

powers vested through MOA.

If MOA gives the power to borrow money, there is no cap on borrowing unless the MOA

itself imposes restriction of maximum borrowings.

Any borrowings without explicit authority vested by the MOA or in excess of limits

imposed by the MOA are Ultra Vires borrowings and company has no liability to pay the

same to the lender. Company in this case is protected through the Principle of Constructive

Notice. Thus, before giving loan to any company, the lender is required to examine the

MOA with regard to powers vested by it in the company to borrow and amount of

borrowings. It also needs to examine the extent of earlier borrowing before sanctioning any

loan.

Though company in general is not responsible to pay back the Ultra Vires Loan given to it

by the lender, all is not lost for the lender. He has a few legal remedies available to him.

These are: -

(a) Injunctions

(b) Subrogation

(c) Tracing Order

(d) Suit against the directors

Injunction – If the money is still not used, the lender can approach a court to issue

Injunction against use of lent money to the company. Lender can request that the account in

which money has been kept may be frozen for operations.

Subrogation – Even if the money has already been used but it can be traced to any asset,

say a building, plant or machinery, which was purchased through borrowed money, court

can be requested to hand over the ownership of that asset to the lender.

Tracing Order – If money can be traced, it can be ordered to be refunded back. Suppose

Co. “A” borrows money from one bank to clear loan of other bank, other bank can be made

to refund this money to original bank.

Suit Against Directors - In case of Ultra Vires borrowings, the directors are responsible. It

is not necessary that only the directors who have signed the loan documents or have

approached and negotiated the loan from the agency are responsible. If it was a Board

meeting which authorized the loan, all personnel associated with entire exercise are




responsible. Thus, suit can be filed individually against all the directors but not against the

Board of Directors.

Powers of Directors to Borrow Money – Once authorized and unless capped,

directors have powers to borrow money to a limit of - 100% of paid up capital + free

reserves. Company can increase Directors’ powers to borrow money by passing a special

resolution.

If directors exceed the cap on borrowing but not the power of the company to borrow, then

company can ratify the borrowing provided the money was used for benefit of the

company. In case the company decides not to ratify the excess borrowing, the lender can

take recourse to Principle of Indoor Management.

Creating a Charge

Most of the borrowers would demand a security against the amount they are lending. Thus,

company would have to mortgage some asset of the company to the lender called collateral

security. This process of mortgaging or providing collateral security is called “Creating a

Charge on Assets of the Company”.

Charges are of two types: -

(a) Fixed Charge – Company can not sell that asset. Such asset is called

encumbered. It can only be sold with prior permission of the lender who

may enter into some understanding with the buyer before granting

permission to sell.

(b) Floating Charge – Company may offer its current assets such as stock,

inventory, etc, as charge. Such assets are not encumbered. It is a charge on a

Class of Assets. Company is free to use the stock and trade in inventory.

Crystallisation of Floating Charges: -

This is a point of time when floating assets will get converted to fixed

Charge. It happens when company goes for liquidation or when company ceases to

carry on business or whenever lender decides to do so or as mutually agreed by the

parties (Terms of contract).

Registration of Charges: -

Any charge whenever created on the assets of the company is to be recorded

in company’s register and also registered in the office of the Registrar of the

Companies.

By Whom and When– Ideally, it should be done by borrowing Company within 30

days of creating the charge. However, it can also be done by lender.




What is the benefit of Registration and what are the consequences

if not done?

Registration of charge makes the asset encumbered in the knowledge of the

whole world and the debtor company can not create another charge on it because

charge documents are open public documents accessible to every one. The loan

forwarded against such charge becomes a secured loan to the extent of value of the

charge. In case of non-registration of charge, such loan will be treated as an

unsecured loan and in case of liquidation of the company will have lower priority

for repayment.

In case the borrowing company fails to register the charge with Registrar of

the Companies, the loan becomes payable immediately irrespective of the terms of

contract and lender can demand repayment immediately.

Whenever, charge is modified due to say, part payment of loan, it is also to

be registered with ROC. Similarly, when the charge is completely freed/satisfied,

similar registration is done.

Debentures

Debenture is document that either creates or acknowledges debt.

There are two kinds of debenture holders:

(a) Senior Debenture Holders – The people who had invested first in the

debenture (Earlier issues only. Subscribers to the same issue are at par) have priority

for payment. In case of liquidation of the company, these holders will get

priority for payment of their dues over other debenture holders.

(b) Subordinate Debenture Holders – These debenture holders have

comparatively lower priority for payment.

Pari-Passu – When a company declares a debenture issue to be Pari-Passu, it means that

company has extinguished the distinction between the Senior Debenture Holders and

current issue subscribers. The subscribers of this issue will be treated at par with Senior

Debenture Holders for payment of their debenture owings. Once an issue is declared as

Pari-Passu, the charge created on assets earlier in favour of Senior Debenture Holders is

then registered in favour of all including the new subscribers.

Convertible Debentures at discount – Not allowed. Company is free to issue a debenture

at par, discount or premium. Company law places no restrictions in this regard. However,

courts have raised objections to issue of “Convertible Debentures” at discount since this




can be used as escape route to issue shares at a discount greater than otherwise allowed by

law.

Debenture Trustee - On issue of a Debenture series, a trust is created and some one is

appointed as Debenture Trustee. A debenture trustee looks after the interest of debenture

holders. Debenture Trustee is to be declared in the offer documents.

Qualifications for a Debenture Trustee

1. He should not be a beneficial share holder which means that not only he should

not be holding any shares directly but also not through family and friends.

2. He should have no relationship with company

3. He should not have guaranteed any loan taken by the company.

The company is legally bound to insure and maintain the “charge” in good condition.

Trustee is to ensure that the charge is well maintained and insured. A legal mortgage is

created in favour of debenture holders. Trustee is supposed to ensure that company meets

all the terms of debenture issue. In case of any default, action is taken against the

Debenture Trustee.

Rights of Debenture Holders

1. Unsecured Debenture Holders – They have no special rights except the normal

claim on residual worth of company after all secured lenders have been satisfied.

2. Secured Debenture Holders –

(a) They can sell assets on charge.

(b) They can opt for foreclosure. In such a case, either the company pays the

money or the asset on “Charge” becomes the property of the debenture

holders which they can sell and recover their dues.

Above rules are applicable to every debenture issue, whether through public offer or

private placement basis. However, there are additional rules in the form of SEBI

guidelines in case of public offer of debentures:

1. Purpose – Company enjoys full freedom for use of Debenture money. However,

debenture money can not be used to buy shares in any company.

2. Eligibility of Company –

(a) Every Public Issue of Debentures is to be rated at least by two Credit ratings

agencies. Company is free to obtain as many credit ratings as it wishes.




However, once a rating is obtained, company is obliged to make the rating

public. It can not choose as to which ratings it wants to make public.

(b) Company should not have been blacklisted by RBI.

(c) Company should not have defaulted in meeting any debenture obligation

(payment of interest or principal) in the last 6 months.

(d) Number of allottees should be greater than 50.

3. Disclosure norms and documents – Rules are similar to equity issue.

4. Debenture Trusty should

(a) Monitor progress of the project for which the money was raised as per the

prospectus/offer document.

(b) Monitor utilization of money that it is not being used for said purpose.

5. Debenture Redemption Reserves – Every company raising money through

debentures is required to create Debenture Redemption Reserve where part of the

profits are deposited every year to enable company to have adequate fund to meet

the payment obligation at the end of period.

6. Payment of Dividends – Dividends can be declared only after the minimum

amount has been credited into DRR. In any case, any dividend greater than 20%

should be approved by the debenture holders.

7. Conversion of Debentures into Shares – Conversion is always optional. It can not

be made compulsory.

8. Roll Over of Debentures –

Non Convertible Portion –

(a) Postponing of payment date is called Roll Over.

(b) Postponing is possible only after a resolution to the effect is passed by

minimum 75% of debenture holders through a special resolution held by

postal ballot. In case the resolution is approved, the dissenting debenture

holders should be paid over and others’ debentures can be rolled over.

(c) In case of roll over, the process is almost like issuing fresh debenture series.

Convertible Portion - Convertible portion of the debenture can be rolled over only

on receiving a positive confirmation from Debenture Holders. Non-response can not

be taken as acceptance. Clauses like “If no response is received within “X” days, it

would be construed that you have no objection to “YYYY”, are invalid in this case.




Corporate Investments

When a company buys shares or debentures of other companies, it is called corporate

investments. Excess cash in company is often deployed in securities.

Regulations –

1. All such investments should be held in the company’s name with certain

exceptions.

Exceptions –

(a) In case of large investments, company may be eligible to nominate a

director. Other company may have clause regarding qualification shares for

directors. In such cases, nominated directors can hold minimum

qualification shares in his name to meet the legal obligations.

(b) In case of 100% subsidiary companies, parent company is the only share

holder. However, no company can be formed with only one person holding

all the shares. Minimum 2 persons for a Pvt Ltd Company and 7 persons for

a public limited company are essential. Thus to meet this legal requirement,

companies can hold shares in name of other persons.

(c) A separate register should be maintained by company of shares not held in

its own name.

Finance, Investment and banking companies are exempted from this clause of

holding all shares in company’s name due to nature of their business.

How much money can be invested as corporate investments or provided

as loans or worth of guarantees?

Corporate Investment is capped at 60% of paid-up capital plus free reserves or 100% of

free reserves which ever is higher. This cap is for cumulative investment in all three modes,

past and present. This ceiling is FIXED and can not be increased by any means like passing

a special resolution.

In case of guarantees, this limit can be exceeded by passing a Board Resolution which

would clearly state the emergency under which such action was taken. Further, such action

should be subsequently ratified by the General Body meeting.




Date: 28 Feb 2006

Company Management

Directors

Term “Director” has not been clearly defined in the Companies Act. It merely states that

people occupying the position of a director by what ever name called.

So, duly appointed members of Board which has been given powers to control the company

and authorized by AOA to enter into contracts in the company’s name, are called directors,

even though they may be called by different names, like governors, members of governing

council, etc, and not necessary as directors. On the other hand there could be some people

appointed as directors, like marketing director, but not acting as director, are not directors.

Thus, Director is defined more by the responsibilities entrusted by the company in a person

and not by designation conferred on him.

Deemed or Shadow Director – Deemed or Shadow director is defined as a person who is

not in the Board of directors but whose directions or instructions the Board of Directors is

accustomed to follow. This provision is not a beneficial but penal provision. A deemed

director is not entitled to any perks and benefits but would be held by law for any wrong

doings.

While it is necessary for a director to be an individual, there is no such limitation in case of

Deemed or Shadow directors. A shadow director can be a body corporate also.

There is no concept of Chairman of Company. There is Chairman of Board of Directors

who is often called Chairman of Company which is legally not correct. As Chairman, he

has no powers. Chairman cum Managing Director concept has come in for criticism from

Corporate Governance since the two posts should be held by separate persons.

Who may be appointed as Directors?

Only individuals can be appointed as Directors. So a body corporate, association or firm

can not be appointed as Director.

Exception – Deemed or Shadow Director can be a body corporate.

What are the qualifications for appointment as Director?

No academic or professional qualifications have been laid down in Companies Act for a

person to qualify for Directorship. He need not be even member or shareholder of the

company. Articles of Association some times may provide for holding of qualification

shares. However, AOA can not stipulate holding of more than Rs 5000 worth of nominal




value of shares or one share where Face Value of shares is higher than Rs 5000/-. In such a

case he has to obtain the shares within 2 months of his appointment.

Disqualifications – Following persons shall not be capable of appointment as directors

of any company: -

1. A person is declared to be of unsound mind by a court.

2. A person who is an un-discharged insolvent (Any insolvency is for a limited period only and

in this period he is called un-discharged insolvent).or

3. A person who has applied for insolvency.

4. A person convicted of moral turpitude and jailed for 6 months or more, is debarred

for 5 years from the date of expiry of sentence.

5. If a person has failed to pay the call money (on partly paid shares) and six months

have elapsed from the last due date of payment.

6. If a person has been debarred by any court for any economic offence.

7. Directors of a company

(a) which has failed to file Annual Returns to Registrar of Companies

continuously for three years. All the directors of such company are

disqualified to hold any directorship in any company.

(b) which has defaulted in payment of interest and principal of public deposits,

or defaulted in redemption of its shares on due date and such default

continues for one year or more. Such directors would not be eligible to be

appointed as director of any company for 5 years.

Above debarring provisions don’t apply to Directors nominated by the Govt. and Financial

Institutions.

Appointment of Directors

1. First Directors – First Directors are named in the AOA. In case, the directors are

not named in the AOA, all the individual subscribers (not the body corporates) of

AOA are deemed to be directors. In the hypothetical case of all the members being

body corporates and no directors named in the AOA, the company will have no

directors to begin with.

2. In a Public Ltd Co. two thirds of total directors are elected by the AGM and will

retire by rotation at the rate of one third of number of elected directors every year.

(Thus, tenure of each elected director is three years). Retiring directors can be re-elected if

needed.

3. Balance 1/3rd

are permanent directors and named in the AOA. Nominee Directors of

other major stake holders in the company are part of this group of permanent

directors.




4. Minimum and Maximum No. of Directors – As per Companies Act, a Pvt Ltd

company has to have minimum 2 directors and a Public Ltd Company 3 directors.

However, there is no ceiling on maximum number of directors. It is left to

individual company to decide.

5. Govt Appointed Directors are over and above the decided size of the Board and

do not retire.

6. Election of Directors by Passing Resolution - A separate resolution is to be

passed for election of each director. Two or more directors can not be elected

through a single resolution.

7. Reappointment of Directors – A retiring director is deemed to be reappointed if

the position is not filled during the AGM and no resolution is passed specifically

stating that the position is to be kept vacant or a particular person is not to be re-

elected.

Directors are elected during AGM and retire during AGM. But what would happen

in case the retiring directors in cahoots with other directors and delay the AGM

itself to prolong their tenure?

Court has directed that in case the AGM is delayed, the directors due to retire

during the particular AGM will retire on the last day of the month in which AGM

was falling due.

All the above provisions are applicable to Public Ltd Cos. Pvt Ltd Cos are free to

frame their own rules through AOA. However, in case AOA has not framed any

rules regarding directors, these rules will apply to them also.

8. Appointment of Directors by Board of Directors – Board of Directors can

appoint directors under following situations: -

(a) Additional Directors – Additional directors, like specialists in the field, can

be appointed by Board of Directors. Their term will end on the day of next

AGM.

(b) Alternate Director – If a director is out of state in which Registered Office

of the Company is located for 3 months or more, Board of Directors can

appoint alternate director. The term of such appointment will terminate on

the day original director steps back in the state. This rule is often applied in

case of foreign directors who visit the company only once or twice a year.

(c) Casual Vacancies – Since a director can be elected only by AGM,

vacancies between AGMs arising due to death, insolvency or any other

disqualification, can be filled by the Board of Directors. Such appointments

will terminate on the day of AGM unless elected by AGM.




(d) Appointment by Central Govt – Central Govt can appoint any number of

directors on the Board of any company in specific situations like

mismanagement of company, oppression of minority shareholders, etc.

However, such appointments are not commonplace and rarely done.

9. Nominee Directors – As per the companies Act, a director is a director and nothing

else. It does not differentiate between an elected or nominated or permanent

director. A nominee director is an internal understanding between the company and

the nominating entity. He is part of the 1/3rd

group of permanent directors. Thus,

functionally there is no distinction between nominee and other directors.

10. Small Shareholders’ Directors – Appointment of small shareholders’ director is

done in companies in case

(a) It is a Public Ltd Company, or

(b) Paid up capital of company is > 5 Cr, or

(c) There are more than 1000 small Shareholders (small shareholder is defined as

some one owning shares of Face Value not exceeding Rs 20,000).

Small Shareholders’ Director is elected by small shareholders themselves. In case

of listed company, election is done by postal ballot so that maximum number of

shareholders can participate.

11. Legal Position of a Director.

(a) As Agent of the Company – Since directors act on behalf of company on

all matters except those specifically reserved for company (read

shareholders) to act, they are agents of company. However, company, in any

manner, including through AGM, can not direct the directors to take any

particular decision. If the company is not happy with directors’ decisions, it

can change the directors during AGM or by calling EGM.

(b) Trustee of Company’s Shareholders – Directors are trustees for assets and

properties of the company. They have fiduciary relationship with company

which means that they should exhibit same amount of diligence in

company’s matters as they would do for their personal matters.

(c) Managing Partner – They are not exactly managing partner but to some

extent , Yes.

(d) Employees – Directors are normally not employees of the company but not

necessarily. There are executive directors who are employees of the

company.




12. Powers of Directors – Directors don’t enjoy any significant power individually.

All the powers of directors have been vested with Board of which Directors are

members. Thus, power is available on collective basis and not individually.

Directors have right to inspect the books of account. Or, in case they are

incapacitated for any reason, they can also appoint someone else to inspect the books on

their behalf.

Directors also enjoy residual powers. There are certain powers explicitly given to

shareholders and Board of Directors. Residual powers, which are not conferred on any one,

rest with directors.

Can shareholders interfere with powers of directors?

Answer is NO. Else, there will always be some investors who will feel aggrieved by

Board’s decision. Their interference will severely inhibit functional capacity of the Board

of Directors. However, shareholders can interfere with Board’s power under following

situations –

(a) In case of malafide action by the Board members.

(b) If directors are wrong doers.

(c) In case of incompetence. This incompetence is not functional incompetence.

This is about legal incompetence, like in case of award of any contract, all

the directors have stake in the contract. Thus, they are not considered to be

competent enough to take a decision in the matter.

(d) Deadlock in Board. Suppose the Board of directors is divided into two

groups of exactly equal strength and thus the majority is not available for

taking any decision. There is a deadlock as each group objects to other

group’s proposal and their strength being equal, no proposal gets majority

support.

How does the Board exercise its powers?

Board exercises its powers by two methods: -

(a) By holding the Board’s meeting. Such meeting are supposed to be

conducted at least once in every quarter.

(b) Passing a resolution by Circulation. Draft proposal is circulated to all

members on a file and they give their comments/support or otherwise.




Date: 06 Mar 2006

Occupation of Office or Place of Profit

A director, executive or independent, can not occupy any other office of profit in the same

company or any of its subsidiary companies.

Exemptions

(a) He can occupy any other office of profit if it is approved through a special

resolution by the shareholders.

(b) His relatives; partnership firm of which he is a partner; or a private firm of

which he is a member, can not get any office of profit in the same company

where he is a director. However, if the remuneration is less than Rs 10000

per month, it can be authorised by the special resolution.

(c) If remuneration is >10000 but <50000 per month, then, in addition to special

resolution, approval of Central Govt is also required.

(d) Provisions at (b) and (c) above are not applicable if the person under

consideration was already in employment with the company when the

director was appointed.

Who all are included in the relatives?

There is no ambiguity as who are to be treated as relatives. The list of people who are

considered to be relative for this Act is listed in a separate Schedule in Companies Act.

Duties of a Director

1. Fiduciary Duties (matters of confidence, trust, faith) – These are the duties which

are not explicitly defined. These are the kind of ones which a person of normal

conscience is expected to do.

(a) Good Faith

(i) Corporate Opportunities – A director is expected and enjoined to

exploit the opportunities of profit making for the company and not

his own. Courts have been very strict in this case. They have held

that even if a company decides not to exploit an opportunity of profit

making, a director still can not take up that opportunity for own

profit. This is done to ensure that directors don’t forego the

opportunities deliberately to profit themselves from them.

(ii) Not to Make Secret Profits – While Directors are allowed to make

profits by declaring the relevant facts of any transactions before the




Board of Directors and with their consent, secret profits are not

allowed. Any secret profit, when discovered, can be recovered from

the director.

(b) Duty of Care – Directors are expected to exercise as much care and

diligence in matters of company as they would exercise in personal matters.

(c) Duty Not to Delegate – A director is chosen on the basis of his credentials

and the faith the company reposes in them. If he delegates his job to some

one else, entire exercise of selection of director by the company becomes

null and void. However, Companies Act permits some amount of delegation

by directors which should not be exceeded.

2. Statutory Duties – The list of such duties is long. Some of the most important one

are given here.

(a) Duty to Attend Meetings of Board of Directors

(b) Appoint the First Auditors – Auditors are generally appointed by the

General Body. However, appointment of auditors for the period preceding

the first General Body Meeting is done by the Directors. Cost auditors are

always appointed by the Directors and not the General Body.

(c) Report of Board of Director – The report on functioning of the company

presented at the Annual General Meeting is to be prepared by the Board of

Directors.

(d) Duty to Declare Interest – Every Director is required to declare his interest

(financial involvement) in any matter, like finalising award of a contract,

under consideration of the Board of Directors and not to participate or vote

on such issues.

Liabilities of Directors

1. Liability to the Company

(a) Breach of fiduciary duties

(b) Ultra Vires Acts

(c) Negligence

(d) Malafide Acts

2. Liability to Outsiders

(a) Prospectus

(b) Allotment

(c) Unlimited Liability




3. Breach of Statutory Duties

4. Criminal Liabilities

5. Liability for acts of co-directors.

Liability to Company – In case of most of liabilities like breach of fiduciary duties or

Ultra Vires Acts or Malafide acts, company can recover the costs from the directors. But

who can file a case against the directors on behalf of company, when they themselves are

the sole authority to approach courts on behalf of company; and shareholders are expressly

prohibited from filing law suits on behalf of company?

Such situations are exceptions when shareholders can approach court with prayer to be

allowed to file law suit against director. However, in cases of successful appeal, the

damages awarded by the court will go to the company and plaintiffs will get nothing for

fighting the case.

Liability to Outsiders – Directors are personally responsible in case of any mis-

information contained in the prospectus of company or delay in allotment of shares or

refund of balance application money. In case of delay beyond statutory period attracting

interest, directors can be asked to pay interest to applicants. Offence like mis-statement in

prospectus invite a penalty of up to 2 years imprisonment and false Directors’ report can

lead to 6 months imprisonment. Even bouncing of cheques can lead to jail.

But such harsh punishments are applicable only when the error is of commission

(deliberate) and not of omission (innocent mistake). If a cheque was issued when the

director was fully aware about inadequacy of funds in the account, it will invite jail term.

It is to be noted here that while criminal cases are decided on the basis of incontrovertible

(undeniable) evidence, civil cases are decided on the balance of probabilities. Most of the

director’s responsibilities and duties fall under civil offence.

Directors’ liability can be increased to unlimited amount but only with the consent of that

director.

Relief to Directors by Courts

(a) Courts have discretionary powers in matters of punishment.

(b) Courts can grant relief it is proved that Directors acted honestly and fairly

under the prevailing circumstances.




Managing Director

Managing Director is defined as a person (necessarily one of the directors) who has been

conferred with substantial powers of management which are not otherwise exercisable by

him as director.

He is the only director who has individual powers of management. Rest of the directors

have only collective powers of management. They can take any decision as Board of

Directors but nothing in individual capacity of director. Board of Directors decides the

exact powers conferred on the Managing Director.

While private limited companies have no compulsion to appoint a Managing Director,

Public Ltd Cos with paid up capital of Rs 5 Cr or more have to have a Managing Director.

Mode of Appointment

A Managing Director can be appointed either by Company’s resolution or Board of

Directors resolution, or MOA or AOA provided it is approved by Central Govt.

With more than 5000 companies listed on stock exchanges, and many more elsewhere, it

would be a Herculean task to accord approval for appointment of each Managing Director.

Therefore, Schedule XIII of the Companies Act was incorporated. If an appointment

complies with terms of this schedule, no approval of Central Govt is required.

Disqualification

1. Absolute – No waiver even by Govt can be accorded against disqualification under

these clauses. That is why they are called “Absolute” clauses.

(a) Insolvent – If a person was declared insolvent ever in the past, he is not

qualified to become Managing Director. (Please note that disqualification in case

of insolvency for Director is only for 5 years but here it is life-long).

(b) Settlement with Creditors – It is something like insolvency only. If a

person pleads his inability to pay back loans and negotiates concessions in

interest or principal amount repayment with his lender, such person is

disqualified from becoming Managing Director for his life time.

(c) Conviction for offence involving moral turpitude.

2. Can be Condoned by Central Govt

(a) Convicted for offences under corporate or tax laws.

(b) Detention under COFEPOSA (Conservation of Foreign Exchange and

Prevention of Smuggling Act, 1974). It was a draconian act under which a




person could be detained for long periods without even being presented to a

judge or trial. Please note that only detention is condonable and not

conviction.

3. Condonation by Passing a Special Resolution – A Managing Director’s age

should be between 25 and 70. Company can condone this age limit (but not below 18,

else he would be a minor) by passing a special resolution.

Term of Managing Director – A Managing Director can be appointed for a max period

of 5 years. However, he is eligible for reappointment/election. But reappointment

resolution can be passed by the company only in the last two years of the running term and

not earlier than that.




Manager

A manager is a person who under the superintendence, control and directions of Board of

Director has the whole or substantially whole of management of the company.

A company will have either the Manager or the Managing Director.

CEO is something like Manager. Primary difference between a Manager and a Managing

Director is that a Manager is not a director. The disqualification clauses are same for

Manager as that of Managing Director.

Managerial Remunerations – These rules apply to only Directors, MD and Managers and

no one else. These appointments are entitled to

(a) Periodic Payments

(b) Commission

(c) Perks

Sitting fees of directors is not included in Managerial Remuneration. But there is a cap of

Rs 20000/- per sitting. Directors per say do not have any right to get any remuneration.

Therefore, there should be a separate contract for remuneration.

Since the directors run the company and therefore can manipulate to get undue advantage

of the control they exercise on the company, there is a need to put limits on their

remunerations.

(a) Overall Limit - The maximum amount that can be paid to all the directors

can not exceed 11% of the profits of company in that year.

(b) For Executive Directors

(i) In case there is only one executive Director – max 5% of Net Profits

(ii) In case there is a group of Executive Directors – Max 10% of Net

Profits

(c) For Non Executive Directors

(i) Periodic Salary – Normally no salary is paid to non Executive

directors but same can be paid with prior approval of Central

Government.

(ii) Commission – Commission be authorised to them through a special

resolution.




(iii) Payments to Non Executive Directors is restricted to 1% of NP in

case the company has an MD. In case of absence of MD, maximum

3% of NP can be paid to them.

Above conditions are applicable when a company generates enough profits. What happens

when the company is running into loss or just about in the black. (profits inadequate to pay

decent remuneration to directors). Again Schedule XIII comes to the rescue. Max payments

to each director are laid down based on effective capital of the company.

EFFECTIVE CAPITAL MAX MONTHLY REMUNERATION PER DIRECTOR

Less than 1 Cr Rs 75000

1 – 5 Cr Rs 100000

5-25 Cr Rs 125000

25-50 Cr Rs 150000

50 – 100 Cr Rs 175000

More than 100 Cr Rs 200000

Effective Capital does not include Revaluation reserves. Effective date for applicability of

capital is the last audited balance sheet. In case of a new set up company, where there is no

balance sheet available, Effective capital as on date of appointment of a new Director is

taken

Exceptions

Above limits can be doubled by passing a special resolution provided the company has not

defaulted in payment of interest or capital of public deposits.

Above limits are not applicable to units located in SEZ. Max salary of Rs 20 lacs can be

paid if public issue is not involved and company is not making any profits.

Companies can also pay extra for following to expatriates

(a) Allowance for Children education

(b) Holiday to home country with family.

(c) Leave travel concession.




Date: 10 Mar 06

Board of Directors’ Report

Board of Directors’ Report is submitted in every Annual General Body Meeting.

Companies Act prescribes a format for same. Accordingly, a Board of Directors’ Report

should contain following details:

I

1. General

(a) State of Affairs – General details of the happening in the company are

included in this head.

(b) Transfer to Reserves – Amount proposed to be transferred to Reserves and

Surplus and normally justification for the same is also included under this

head.

(c) Dividend Recommended.

(d) Material Changes – Book Closure date is 31 Mar while it normally takes

up to 6 months to conduct Annual General Meeting. Some important

changes may have taken place in company in the intervening long duration.

Such changes are to be placed in the Board of Directors’ Report.

(e) Others

(i) Conservation of Foreign Exchange – Efforts taken by company to

conserve the foreign exchange are to be included in the report. This

Act was written in 1975 and therefore some of the archaic

regulations are still in place.

(ii) Technology Absorption – Report about how much of technology

absorption of the imported technology has been achieved. Again an

archaic regulation.

2. Significant Changes – The report has to include various significant changes taken

place at various levels: -

(a) Company

(b) Subsidiaries

(c) Industry

3. Employees – Report has to include details of employees who are drawing high

salaries for shareholders to know that largesses are not being showered on unworthy




people as a favour. Thus, these details are to be included under following three

heads

(a) Annual Salary more than 24 lakhs

(b) Monthly Salary more than Rs 2 lakhs in case of employees who may not

have worked for full year.

(c) Other employees who are drawing salary more than Managing Director and

also hold 1% or more of the voting rights. In this case, there is no qualifying

amount of Rs 2 lakhs per month /Rs 24 lakhs per annum.

4. Director’s Responsibility Statement

5. Report on failure to buyback as to why did the buy back of securities attempt not

succeed.

6. Response to Auditors’ Objections – Most of the time, auditors pass the balance

sheet with some observation. Thus, clarifications to auditors’ observations are to be

included in the BoDs’ Report.

7. Composition of audit committee is to be declared in the documents.

II

SEBI Requirement – SEBI’s guide lines in this regard are not elaborate. As per SEBI,

BoDs’ Report should contain complete details about ESOPs and ESPS (Employees Stock

Option Plan and Employees Stock Purchase Scheme. Refer Page 21), like policy, basis for

allotment, number of stocks allotted, how many employees exercised the option, etc.

III

Listing Agreement – As per listing agreement, Clause 49, the BoDs’ report should include

(a) Management discussion and analysis

(b) Compliance Report on Corporate Governance – All the actions are to be

quantified as to how many meetings held, how many independent directors

are there on the board, etc.




Board Meetings

Following are the important aspects of Board Meeting

1. Authority to Convene – Any meeting should be convened by a person who has the

authority, else meeting would be null and void. Any director is empowered to call

the meeting.

2. Notice – Nothing is specified in the Companies Act about notice period. It is also

silent about forwarding of agenda. Even though secretarial standards (Company

Secretary) state that agenda for the meeting should be issued, law does not make it

compulsory. Notice should be sent to all directors in India as per their available

address. In case of other directors notice can sent by any communication medium,

including email and post. There is no format, no duration, and no mode specified.

However, individually companies are allowed to include such details in the Articles

of Association.

3. Frequency – Board meetings should be held minimum once in every quarter (3

months) and minimum 4 times in a year. Initially there were no constraints about

interval between two meeting. Thus, if a meeting was held on 01 Jan of first quarter

and the second meeting was held on 30 Jun of second quarter, it was perfectly valid

because a meeting was held in every quarter. But the gap between meetings was

effectively 6 month. As per the latest amendment by SEBI, a stipulation regarding

gap between two meetings not exceeding 4 months has been introduced.

4. Quorum – Quorum for a Board meeting is 1/3rd

of Board strength or 2 directors,

whichever is more. But it does not include any INTERESTED directors. Another

important point to note is that in case of Board Meetings, quorum is required to be

present through out meeting unlike AGM where it was required only to commence

the meeting and thereafter its depletion had no bearing on validity of the decisions

taken during the meeting.

5. Attendance – If a director is absent from three consecutive meetings or three

months at a stretch without leave of absence from the Board, then he is

automatically unseated from the Board membership. Attendance is taken at every

Board meeting to comply with this provision.

6. Chairman – Chairman is usually named in the Articles of Association. Else, Board

members can elect their own chairman. Chairman is responsible for orderly conduct

of the meeting and is authorised to sign the minutes of meeting.

7. Minutes of the Meeting – Summary of meeting is to be accurately recorded in the

minutes of meetings. Chairman has discretion to remove any matter which he does

not deem fit. Minutes should be written in the Minutes Book within 30 days of the

meeting.




Divisible Profits

Part of the net profits allowed to be distributed to shareholders is called divisible profits.

Entire net profits are often not allowed to be distributed among shareholders. Before profits

are distributed, company may have obligation to apportion part of profits to certain

reserves. Also, generally, only revenue profits are allowed to be distributed and capital

profits are not allowed. Thus, divisible profits are those which the company can finally

distribute to shareholders.

Divisible profits can come from any of the following sources: -

(a) Current Profits

(b) Reserves

(c) Money provided by the Govt.

Part of the profits are required to be compulsorily transferred to reserves as follows

Dividend Proposed

(of Face Value of Share)

Min Transfer to Free Reserves

(% of profits)

Less than 10% Nil

10 – 12.5% 2.5%

12.5 – 15% 5%

15 – 20% 7.5%

More than 20% 10%

In case a company wants to transfer more than 10% of profits to reserves, it has to maintain

dividend payout of previous years. The base for payout ratio is dependent upon whether

company had issued bonus shares in the previous year:

(a) If Bonus Shares Were Issued – Then the company has to maintain the

absolute amount (in Rupees terms) of payout (average of last 5 years

payout) as dividend. (If average payout over the last 5 years was Rs 2 per share, then

company has to pay minimum Rs 2 as dividend to shareholders before it can transfer more

than 10% into the reserves).

Exception – This condition may not be maintained in case the company’s

profits have fallen by 20% or more in this year.

(b) If No Bonus Shares Were Issued – Company has to maintain payout of

average of last 5 years in percentage terms. (If average payout was 8 % during past

5 years, and suppose company came up with a public issue in the past year instead of bonus

issue, it will have to first payout minimum 8% as dividend on enhanced capital before it can

transfer more than 10% into the reserves).




Payment from Reserves – Even though dividend is mostly paid from current profits,

company can draw into the reserves to pay dividend in certain cases. However, certain

conditions have to be fulfilled:

(a) Max Payment – Max dividend payout will be lower of

(i) Average rate of dividend payment over last 5 years,

(ii) 10% dividend.

(b) Amount drawn can not exceed 10% of reserves.

(c) Balance of reserves should not fall below 15% of Paid-up Capital.

2. Dividend on Preference Shares – Preference shares are cumulative unless

expressly declared to be non-cumulative. But dividend on preference shares is payable only

when declared (along with arrears if cumulative). Shareholders can not claim it as right. In

a bizarre situation, where a company goes for liquidation/wound-up and has balance

amount left after meeting the obligatory payments, balance will go to ordinary equity

shareholders and not to the outstanding dividends on preference shares.

Dividend on Participating Preference Share – Participating preference shares are

entitled to get extra dividend in case dividend on ordinary equity share exceeds a pre-

specified percentage.

3. Difference Between Final Dividend and Interim Dividend – Final dividend is

proposed by the Board and approved by the General Body at Annual General Meeting.

Once it is approved, it becomes obligatory on Company to pay the amount. (The decision can

not be rescinded later). It becomes kind of loan on company. Any shareholder can sue the

company, if payment is not received within specified period.

Interim dividend is decided by the Board of Directors in case they feel that

company is making enough profits and has liquidity to payout. Till some time back, interim

dividend could be cancelled after declaration in case there is sudden change in fortunes of

company like cancellation of some major order. However, now it can not be revoked. It is

now at par with Final dividend for all practical purposes.

4. Payment of Dividend –

(a) To Whom – Earlier, eligibility was based on book closure date but now it

has been amended to discretionary Record Date to be decided by the Board.

All shareholders on the record date are eligible to receive dividend on pro-

rata basis.

(b) Mode of Payment – Dividend can not be paid in kind. A textile company

can not offer cloth as dividend. It has to be paid in cash/cheque/demand

draft. Bonus shares are not considered as dividend.




(c) Default - Company can not pay dividend if it has defaulted on redemption

of preferential share on due date.

(d) Time – Dividend should be paid within 30 days of declaration, else 12%

interest is payable on amount.

(e) Separate Account – Once dividend is declared, dividend amount should be

deposited into a separate account within 5 days. This amount thereafter can

not be used by company for any other purpose.

5. Stock Exchange Requirement as per Listing Agreement.

(a) Notice of Board Meeting regarding decision on dividend payment is to be

given.

(b) Notice of Record Date is to be given at least 42 days in advance of date.

(c) Record date can be in any preceding month but has to be 1st or 16

th of the

relevant month.

(d) There has to be a gap of at least 90 days between two record dates.

(e) Proposed dividend is to be declared at least 5 days before the record date.

(f) 21 days notice is to be served for AGM.

(g) Stock Exchange is to be informed of the dividend decision within 15

minutes of AGM.

Dividend is proposed by Board of Directors but approved by Shareholders in the

AGM through an ordinary resolution. But shareholders do not have right to increase

the rate of dividend. Companies Act is silent on shareholders right to reduce the rate

of dividend.

6. Payment of Dividend Out of Capital Profits – Although Companies Act permits

payment of dividend only from revenue profits, courts judgements have permitted payment

of dividend out of capital profits also provided

(a) Profits are realised in cash through sale of assets and are not by revaluation

of assets.

(b) There is net profit after all assets and liabilities are revalued. (Selective

revaluation is not allowed).




Public Deposits

1. What are public deposits?

2. What are not public deposits?

Public Deposits – All unsecured loans are treated as public deposits.

How do you differentiate Public deposits from loans?

Deposits are payable only after a period of time and depositor may not be permitted

to redeem the deposit prematurely. Premature redemption of deposits generally

attracts penal discount on payable interest. Loans have no such limitation or penal

discount clause. Loans can be asked to be repaid any time or even immediately.

Not Public Deposits – Following loans are not treated as public deposits

(a) Any loan given by govt.

(b) Loans given by banks and financial institutions.

(c) Inter-corporate loans.

(d) Security deposits by any one.

(e) Advances paid by buyers, selling agent, purchasing agent, etc.

(f) Security deposit paid by employees.

(g) Any amount received as subscription for shares, debentures, stocks, bonds

etc.

(h) Money provided/loaned by directors.

3. What is the difference between Debentures and public deposits?

Debentures are essentially deposits but not treated as deposits because they can be

secured or unsecured whereas public deposits are necessarily unsecured.

4. Which companies are eligible to invite public deposits?

(a) Pvt Ltd Companies are not eligible to take public deposits.

(b) Any company which has defaulted in repayment of public deposits principal

or interest on earlier occasion is not allowed.

(c) Net Owned Funds (NOF) should be greater than Rs 1 Cr. (NOF is defined as

{Paid up equity capital + Free Reserves – (accumulated losses + Deferred




revenue expenditure + intangible assets + Investment made by company in

shares and debentures of company under the same management)}.

5. Advertisement – Obligations regarding placement of advertisement are same as in

case of prospectus.

(a) Authority – Board of Directors (They thus are responsible for accuracy of

contents of advertisement).

(b) Content – Same as prospectus

(c) It should be signed by majority of directors as against normal stipulation of

two directors in case of most transactions.

(d) Filing – Advertisement should be filed with Registrar of Companies.

(e) Validity – Till next AGM.

There is no role of SEBI in case of Public Deposits.

6. Maturity Period – Public deposits can be invited for period between 3 months to 3

years. It can not exceed maturity period of 3 years. Deposits invited for period of

less than 6 months are called small deposits and can not exceed 10% of Paid-up

capital plus Free Reserves.

7. Ceiling on Deposits – Deposits generally can not be invited for more than 25% of

Paid Up capital plus Free Reserves. In case the deposits are provided by Directors,

it can not exceed 10% of Paid Up capital plus Free Reserves.

8. Premature Withdrawal of Deposits – Company is not obliged to honour the

request for premature withdrawal. However, in case it accepts such a request,

withdrawal is to be allowed under following guidelines:

(a) For deposits less than 6 months old – No interest is payable.

(b) For deposits of more than 6 months – Rate applicable for the period deposit

was actually held with company; less 2% penal charges. (Suppose company had

offered 10% interest on deposits for 3 years and 9% on 2 years deposits. A three year

deposit is sought to be redeemed after two years. In such a case, depositor would be

entitled to get rate applicable for 2 year deposit minus 2%, ie 9% - 2% = 7%).

(c) No withdrawal is allowed within first 3 months.

Above regulations are applicable for Non Banking Non Financial Companies (NBNFCs).

Banking and NBFCs are governed by RBI guidelines.

9. Other requirements -

(a) Joint Holders – There can be up to 3 joint holders for a deposit.




(b) Nomination – Nomination facility is available in case of public deposits.

(c) Declaration by Holders – Depositors are to give a declaration that the

amount being deposited has not been raised through loan.

(d) Interest Ceiling – As decided by RBI from time to time. Currently limit has

been set at 11%.

10. Small Depositors – Small depositor is defined as a person who has invested in a

financial year a sum not exceeding Rs 20000 in a company. Regulations governing

such deposits are far more stringent to provide them added security.

(a) If a company makes a default in payment of principal or deposits of small

depositors, it is obligatory on company to give intimation to CLB on

monthly basis starting within 60 days of such default. Details of affected

small depositors are to be forwarded to Company Law Board.

(b) In case there has been any default in payment of interest or principal of

small depositors, company is prohibited from accepting any further deposits

from small depositors. However, this clause is superfluous since Section

58A(2)(c), disallows any company to accept any further deposits from any

one in case of default, where as this section gives impression that deposits

can be accepted from other than small depositors.

(c) In case of default, every advertisement and form for accepting deposit in

future should carry information about past default.

(d) In case of raising working capital loans, same is to be first utilised for

clearing dues of small depositors.

(e) Penal interest is applicable @ 18% for the default period.

11. Maintenance of Liquid Assets - 15% of the amount of Public Deposit maturing

next year are to be kept in marketable securities like unencumbered (against which

no loan has been raised) govt securities, HDFC bonds, current account of bank, etc.

12. Brokerage – Cases were there in past where huge amount of money was siphoned

from company to family and friends as brokerage. Brokerage payment has now

been capped as follows: -

Deposit Period Brokerage

Up to 1 year Up to 1% of amount collected through the broker

1 Year to 2 years Up to 1 ½ % of the amount collected through the broker

More than 2 years Max up to 2 % of the amount collected through the broker




13. Register of Deposits – Every company accepting a public deposit is to maintain a

register of deposits at its head office containing complete details of investor and

deposit including amount, interest rate, etc.




Date: 13 Mar 2006

Company Meetings

A company being an artificial person, all decisions on its behalf are taken by its members

through meetings. The members have various meetings. Three pre-requisites of a proper

meeting are:

(a) It should be properly convened.

(b) It should be properly constituted

(c) It should be properly conducted.

If any of the above three vital elements is missing while holding any meeting, the meeting

is null and void and the decisions taken in that meeting do not have legal sanction for

implementation.

There are three kinds of meetings in a company:

(a) Annual General Meeting (AGM).

(b) Statutory Meeting

(c) Extra-ordinary General Meeting

Annual General Meeting (AGM)

1. Convening of Meeting -

(a) Authority - Any meeting should be called by a person who has proper

authority for calling the meeting. Generally, people authorised to call

meeting are listed in AOA. In case it is not listed in AOA, Board of

Directors (BoD) becomes automatically eligible to call meeting by virtue of

Residual Rights principle. Company Secretary does not have rights to call a

meeting. But Company Law Board can call a meeting in situations where

some investor complains or there is a deadlock in the board.

(b) Notice –

(i) Whom - Notice about date, time, place and agenda is required to be

sent to all members as well as Auditors and any other persons who

are entitled to attend meeting for any reason.

(ii) Length of Notice - Notice should be sent at least 21 clear days in

advance. (Clear days means – Day of dispatch of notice and day of meeting are

not counted. Also, two days for postal delivery are excluded).




(iii) Contents of Notice – The notice should contain list of ordinary

business and special business. Following four are ordinary

businesses:

(aa) Election of new Directors

(ab) Adopt statement of accounts

(ac) Appointment of Auditors.

(ad) Declaration of Dividend

All other businesses other than above are considered to be special

business and should contain explanatory statement explaining the

entire background of particular business and include all relevant

facts to enable an informed member to take a decision on the issue.

(iv) Notice About Appointment of Proxy. Notice should contain

information about eligibility of members to appoint their Proxies for

attending the AGM on their behalf and vote. A single person can act

as proxy of two or more persons.

2. Properly Constituted Meeting –

(a) Chairman – Every meeting should be headed by a Chairman. AOA names

the Chairman of Board of Directors. If the named Chairman is not present or

Chairman is not named in AOA, then any of the directors can be elected as

President. In case no director is present or they can not decide on

appointment of President within 15 minutes of commencement of meeting,

members can elect one among themselves as Chairman and conduct

meeting.

Role of Chairman –

- Maintain order in the meeting.

- Rule on any point of order that may be raised in meeting.

- Decide on priority of speakers and amount of time.

- Casting Vote

- Ascertain sense of meeting (Judge the feeling of members in favour

or against the topic under discussion. Derive the conclusion of

discussion).

- Declare results

Contrary to popular belief, Chairman does not have much power in the

company except for the conduct of meeting.




As per Companies Act, there is no casting vote for the Chairman. However,

most AOAs, bestow the Chairman with casting vote (an extra vote over and

above this own vote) to be exercised in case of “Tie” in the poll to be able to

break the deadlock.

Corporate Governance frowns upon the concept of Chairman cum Managing

Director. As per one school of thought, Managing Director works under the

Board of Directors. His performance is appraised by the Board of Directors.

In case he heads the Board of Directors as well, who will appraise his

performance?

(b) Quorum – Companies Act lays down minimum quorum for any meeting.

There should be minimum 5 members present in person (proxies excluded)

for a Public Ltd Company and 2 members for a private Ltd Company. This

minimum requirement can be increased through inclusion of relevant clause

in AOA. However, it can not be revised downwards.

The requirement of quorum is only for commencing the proceedings

of the meeting. Once the meeting has commenced, fall in attendance below

quorum has no consequences, unlike in case of meeting of Board of

Directors where minimum quorum should be present all the time.

Joint holders of stock are to be counted as one member only. Thus,

three stock holders holding a set of shares will be counted as one vote only.

Conversely, a single member will be counted as two or more in case he is

representative or proxy for two or more people. Take the case of Mr ABC

who is representative of a company holding shares in the Company “X”. He

is also a shareholder of the company in his personal capacity. Or, he may be

representative of 5 different govt companies holding shares of Company

“X”. In this case, he will be counted as 5 members. Remember, he is not a

proxy. Companies being artificial persons, are allowed to be represented by

nominated representatives as full members. Proxies are people who

represent Natural Persons.

In case quorum is not present at the appointed time, meeting will be

adjourned for 30 minutes. In case quorum is not present even after 30

minutes, meeting will be adjourned to same day, same time and same place

next week. (in case that day happens to be a holiday then on the next

working day after holiday). In case, quorum is not present even at that time,

then number of members present will constitute the quorum.

Law says that quorum is assumed to be present unless it is objected

by some one.

3. Proper Conduct of Meeting –

(a) Ascertaining the Sense of Meeting – Sense of meeting can be ascertained

by any of the following methods:




(i) Voice Vote

(ii) Show of Hands

(iii) Division of Members – Members in favour and against the motion

are seated separately and then counted.

(iv) Poll – Ballot is used.

As per companies Act, most prevalent method is by show of hands for non

controversial issues. However, first three methods suffer from the weakness

that they follow “one person one vote” concept. But in case of companies, a

member’s voting power is proportionate to the number of shares held by

him.

Thus, the best method to ascertain the sense of meeting is poll. But

this method is to be adopted either at discretion of the Chairman or if a

member of group of members holding at least 10% of the voting power in

the meeting demand for it. (Here, 10% of voting power is translated as 10% of the

votes held by the members present (including proxies) in the meeting, and not total shares

of company).

(b) Resolution – As per Companies Act, there are two kinds of resolution

which can be passed by the meeting –

(i) Ordinary Resolution – Ordinary resolution is passed by simple

majority and used for ordinary business as well as special business of

the meeting.

(ii) Special Resolution – Special resolution requires support of

minimum 75% of members present and voting. Thus, no cognisance

is given to members who abstain from vote.

Any Special Business can be taken up for voting only if there was

explanatory statement included in the notice.

Statutory Meeting.

Statutory Meeting is applicable only in case of Public Ltd Company. (Pvt Ltd

Companies are exempt). Statutory meeting is held only once in lifetime of the company.

(a) When – Statutory Meeting is supposed to be held not earlier than one month

and not later then 6 month from commencement of formation of company.

(b) Purpose – Statutory meeting is not meant for much serious business

transaction. It is essentially meant to be a welcoming meeting and an

opportunity for members to meet the promoter who would be holding the

posts of Directors in the company and share the vision and business model

of the company.




(c) Notice – Like any other meeting, in this case also, minimum 21 days’ clear

notice is required to persons eligible to attend meeting.

(d) Scope – Scope includes all issues connected with formation of company,

like floatation, membership, etc.

(e) List of Members – is required to be prepared and made available to every

one.

(f) Statutory Report – Statutory Report is supposed to accompany the notice

for meeting. Statutory Report contains following information:

(i) Allotment of Shares

(ii) Cash received from allotment of shares

(iii) Abstract of receipts and payments

(iv) Money due from directors on account of call.

(v) List and details of Contracts that Board wants to be approved by the

members.

(vi) The report is to be certified by minimum 2 directors, one of which

should be Managing Director, if appointed. It should also be certified

by the auditors.

Annual General Meeting

As the name suggests, Annual General Meeting is held annually. But every meeting held at

the interval of one year or more is not AGM. A meeting will be called AGM only when it

is so designated by the Board of Directors.

(a) First AGM should be conducted within 18 months from the date of

incorporation or within 9 months from the date of closure of Financial Year

which ever is earlier.

(b) Subsequent AGMs –

(i) Should be conducted at least once in every calendar year

(ii) Gap between two AGMs should not exceed 15 months

(iii) Within 6 months of close of Financial Year.

All the three conditions will give different dates. Thus, in order to

comply with all the conditions, the earliest of the three dates is to

be used.

(c) Registrar of Companies can grant extension up to three months.




(d) Earlier, Directors’ tenure was from AGM to AGM. However, courts have

ruled that a director’s tenure will terminate and director will be deemed to

have vacated his office on the last day of the month AGM was due, even if

AGM is not held. (This directive is meant to discourage those who try to prolong their

directorial tenure by delaying AGM). However, there is no such curb placed on

Auditors’ term and their term continues to be from AGM to AGM

irrespective of delay in AGM. (The logic for this differential treatment is that

auditors have no say in scheduling of AGM and therefore can not manipulate it).

Extra-Ordinary General Meeting

Any meeting of the shareholders other than AGM is called EGM. EGM is held to seek

shareholders’ approval for some urgent matter before AGM.

Who can call EGM?

EGM can be called by either of the following:

(a) Board of Directors on its own.

(b) Board of Directors on requisition by members who hold minimum 10%

voting rights in the company.

(c) Members having 10% or more voting rights can call the meeting themselves

in case their requisition to the company is not met within stipulated period

of 45 days.

(d) Company Law Board.

An EGM can transact only matters which were listed in the notice for EGM and no other

business. When a requisition is deposited at the registered office of the company, the

directors should, within 21 days, move to call the meeting and hold the meeting not later

than 45 days from the date of the requisition. In the event that directors fail to call the

meeting, the requisitionists may themselves proceed to call the meeting and claim the

necessary expenses from the company. The directors cannot refuse to call the meeting on

the grounds that the matter proposed to be considered would be illegal/contrary to Act, etc.

That is a matter which can be considered by the court subsequently.

Class Meetings

Class meetings are the ones where only a particular class of investors meet. Like a meeting

of equity shareholders or preferential shareholders or debenture holders only. If a company

wants to vary the rights of a particular investor class, it can do so only with the consent of

the existing investors. Such changes can be incorporated only by special resolution passed

by 75% majority. Once a resolution is passed, it is applicable to all investors of the class.

Dissenting investors can make an application to the company Law Board/Tribunal and it

can give some relief to them.




Is one man meeting possible?

By the definition of the word meeting, it is discussion between two or more people.

However, Companies Act permits one man meeting under special circumstances. In case of

single representative representing many companies (but not the proxy since proxies are not

counted towards quorum), single member meetings are permitted. Similarly, in case a

single investor holds all the instruments of a particular class, single member meetings are

permitted.




Date: 20 Mar 2006

Accounts and Audits

Accounts

Section 209 of the Companies Act requires every company to maintain certain books of

accounts. The Act does not list the books of accounts but only lists the information to be

maintained.

1. Books to be maintained - Following information is required to be maintained:

(a) Details of Receipts and Payments and reasons thereof.

(b) All sales and purchases of goods by the company.

(c) The assets and liabilities of the company

(d) In case of certain class of companies, separately notified by Central

Government, cost records are also to be maintained.

The books are to be compulsorily maintained on accrual basis and according to

Double Entry system of accounting.

2. Persons Responsible for Keeping Proper Books of Accounts: Following persons

shall be held responsible to keep proper books of accounts:

(a) First and foremost responsibility for maintenance of books of accounts rests

on MD or Manager, as the case may be, if company has one.

(b) Every Director of the company if the company does not have a MD or

Manager.

(c) In addition to the above, all officers and employees of the company.

If any of the persons above prove that a competent and reliable person was

delegated the duties of maintenance of accounts, they will be discharged of their

responsibility.

3. Inspection of Books – Following persons are authorised/entitled to inspect any

books of account at any time during business hours even without any prior notice:

(a) The Board of Directors and any director in individual capacity.

(b) The Registrar of Companies.

(c) Officers appointed by Central Government.




(d) Officer appointed by SEBI.

4. Form of Final Accounts – Section 211 together with schedule VI of the Act deals

with form of final accounts. It clearly lays down the form of the Balance Sheet.

5. Provisions regarding Final Accounts –

(a) Approval of Final Accounts – Final accounts are approved by Board of

Directors in the meeting.

(b) Authentication – Once the accounts are approved by the meeting of the

Board, accounts are authenticated by signature of the directors. Minimum

two directors, one of which should be MD, should sign the account.

Thereafter, the account should be signed either by Company Secretary or the

Manager.

(c) Circulation – Authenticated Balance Sheet should then be circulated among

all the members minimum 21 days before the AGM.

6. Display of Accounts – This clause is applicable in case of listed companies with

large investor base. A company like Reliance would end up spending tens of crores

sending the Balance Sheet to its 40 lakh Shareholders. Such companies are allowed

to send only an abridged version of Balance Sheet and place the full Balance Sheet

in the Office of the Registrar as well as the Head Office for any one to scrutinise.

7. Adoption of Accounts - Final account is adopted by the shareholders in the AGM.

8. Filing - Once the account is adopted by the shareholders, same is required to be

filed with Registrar of Companies within 30 days of AGM.

Audits

Even though Shareholders are not allowed to inspect the books of accounts, they

collectively appoint the auditor who is authorised to inspect the books of accounts.

1. Qualification – Only a practicing Chartered Accountant can be appointed as

auditor.

2. Disqualification – Following entities or persons have been disqualified from being

appointed as an auditor of a company:

(a) A body Corporate - A Pvt Ltd or Public Ltd Company can not be appointed

as auditor. Only individuals and partnership firms of Chartered Accountants

can be appointed.

(b) Officer or Employee of the Company




(c) Employee/Partner of an officer/employee of the company.

(d) Person indebted to company for Rs 1000 or more.

(e) A person holding any security carrying voting rights.

(f) A person disqualified due to any of the above reasons is automatically

disqualified to be auditor of any holding/subsidiary company too.

3. Appointment –

(a) First Auditor – First auditors on formation of a company are appointed by

Board of Directors within first month of registration.

(b) Subsequent Auditors – All subsequent appointment of auditors are made

by passing either a general or special resolution by the members in AGM. In

case 25% or more of the shares in a company are held by State Govt,

Central Govt, Financial Institutions, Banking Company or a combination of

theirs, then special resolution is required, else simple general resolution is

sufficient.

4. Term of Auditors –

(a) First – Up to the first AGM.

(b) Subsequent – From AGM to AGM. (It is to be noted that, if an AGM is not held for

5 years, he will continue for 5 years as auditor without being reappointed. He does not

vacate the office automatically in case of delay in conduct of AGM as is the case with

Directors).

5. Reappointment – Normally the retiring auditor is reappointed. But, reappointment

is not automatic. Reappointment is done by passing an ordinary resolution in AGM.

However, in case reappointment is not proposed, either due to disqualification of

the auditor, or his own unwillingness, or company/Board’s desire to appoint some

other auditor, then a special notice is to be included in the notice to shareholders

specifying the reasons for denying reappointment and name of new auditors.

Retiring auditor has the right of representation to the AGM. If such a

representation is received in advance, it should be included in the special notice to

members. Else, he should be allowed to make the representation at the time of

AGM. But if a company feels that this right to representation could be misused to

make scandalous remarks or defame company, it can approach the Central Govt for

denying the same.

6. Appointment by Central Govt - If no auditor has been appointed by the company,

Central Govt can appoint an auditor. When no auditor is appointed by the company

through the AGM for any reason, it has to inform the fact and circumstances of




failure to Central Govt within 7 days of the AGM, and then the govt will appoint

the auditor.

7. Casual Vacancy – In case of a casual vacancy due to death, insanity,

disqualification or insolvency, the Board of Directors is empowered to fill the same.

However, in case of resignation by an auditor, the vacancy can not be filled by the

Board. It can then be filled only by calling a General Meeting.

8. Remuneration – There is no ceiling placed on remuneration to the auditors. It is to

be fixed by the authority which is appointing, BoD in case of first appointment and

casual vacancy and members in case of other appointments.

9. Ceiling on Number of Audit an Auditor Can Do – In order to avoid

concentration of audits in a few hands, as well as overwork for some, Companies

Act prescribes that no person can take up more than 20 audits in a year, out of

which 10 companies should not have paid up capital of Rs 25 lakhs or more.

In case of a partnership firm of auditors, above ceilings are to be multiplied

by the number of Chartered Accounts in the firm.

10. Removal of an Auditor – In order to make the removal of an honest and

conscientious auditor difficult, certain safeguards have been provided. It requires

that approval of the central govt be obtained by specifying the grounds for his

unsuitability to continue as auditor. Thereafter, an ordinary resolution be passed by

the members. Any auditor being so removed has the usual right of representation

and the company has right to seek denial, as detailed above.

Compromises and Arrangements

As an artificial person, a company is a nexus of contracts. It has contracts with every one

around it. It has contract with its members, its Board of directors, with employees, with

financers and outsiders. Any of these contracts may require modifications at a later date as

a result of any dispute or simply due to mutual convenience. Compromises and

arrangements is a mechanism provided to effect those modifications.

Formally it can be defined as – Revision of contracts and relaxing of rights and

obligations is called compromises and arrangements.

In case both the parties agree to the modifications without any dissent from any

member of any party, these arrangements have no utility. However, in case, while majority

may agree, there could be some dissenting members on either side. In such a case these

mechanism are required to be followed.




Meaning of Compromise – Compromise means an amicable settlement of differences by

mutual concessions by the parties of dispute. Here the key word is dispute. Compromise is

only in case of a dispute. In short – Variation or alteration of disputed rights.

Meaning of Arrangement – When a contract is reworked without there being any dispute,

it is called arrangement. It is an agreement about modifying the rights which have no

dispute. Examples are:

(a) Reorganisation of share capital of company by consolidation.

(b) Creditors agreeing to receive cash in part payment of their owing and balance

in shares or debentures.

(c) Preference shareholders agreeing to give up their claim on past dividends.

Procedure – Procedure in both cases is exactly same.

(a) Application to the court by

(i) Company, or

(ii) Members, or any class of members

(iii) Creditors, or any class of creditors.

Definition of members is not very strict here. (in effect it means any party to the

contract can apply to the court).

(b) Disclosures – The members of Board of Directors are required to make a

disclosure to Registrar of Companies, all the members and all the affected

parties regarding their interest in compromise and/or arrangement.

(c) Meeting with People with whom Compromise or Arrangement is

contemplated – Adequate notice is required to be given to all members of

such class of people whose rights are getting affected.

(d) Resolution – The resolution should be passed with 75% majority.

(e) Sanction by the Court – After the resolution is passed by the affected class

of people, sanction of the court is to be obtained before it can be enforced.

Court is not bound by the resolution and can refuse to approve it.

(f) Effect – Once the resolution is passed and approved by the court, it is

binding on all the members.

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