UNIT 5

Prospectus Meaning And Definition - Types Of Prospectus - Misstatement In Prospectus - Book

Building - Issue Of Shares- Allotment Of Shares- Forfeiture Of Share - Calls On Shares-
Transmission Of Shares- Issue Of Sweat Capital - Employee Stock Options - Issue Of Bonus
Share And Buy Back Shares- Reduction Of Share Capital- Variation Of Shareholder Rights-
Meetings Of Shareholders And Board - Types Of Meeting - Convening And Conduct Meetings
- Requisites Of Valid Meeting- Notice - Agenda - Chairman - Quorum - Proxy - Postal Ballot
- Minutes - Meetings Through Video Conferencing - Committees Of Board Of Directors- Audit
Committee- Nomination And Remuneration Committee - Resolution - Meaning - Types- Types
Of Resolution- Case Study - Winding Up- Meaning And Definitions- Concept Of Winding Up-
Modes Of Winding Up- Liquidator- National Company Law Tribunal (NCLT) - Appellate
Tribunal (NCLAT) - Special Courts - Definition Of Depositories - Significance Of
Depositories- Pros Of Depositories - Cons Of Depositories - Rights Of Depositories -
Obligations Of Depositories- Rights Of Depositories- Obligations Of Depositors

Prospectus

MEANING

A prospectus is a legal document that provides information about a company's securities that are being
offered to the public. The prospectus is a formal document that is filed with the Securities and Exchange
Commission (SEC) and is usually an abridged version of the company's registration statement.

A prospectus provides detailed information about the company’s financials, business operations,
management, risks, and other relevant information that investors need to know before investing in the
company’s securities.

In the context of company law, a prospectus is regulated by the Companies Act, which sets out the
requirements and guidelines for preparing and issuing prospectuses. The Companies Act lays down the
mandatory disclosures that must be made in a prospectus to ensure transparency and investor protection.
A prospectus must be registered with the regulatory authority before it can be used for offering securities
to the public.

DEFINITION

According to section 2(36) of company act 'any document described or issued as a prospectus including
any notice, circular, advertisement or other document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of any shares or debentures of a body corporate'.
 Types of Prospectus

1. Red Herring Prospectus

• Filed by companies that intend to raise capital through an initial public offering (IPO).This is
a preliminary prospectus that provides most details about the business but leaves out the price
of the securities and the number of shares being offered. It helps to generate interest from
potential investors.

• Example: Used during the book-building process of an IPO.

2. Abridged Prospectus

A condensed version of the full prospectus. It contains all the essential information of the main
prospectus but is much shorter. This is distributed to potential investors along with an
application form when a company offers shares.

Example: Useful for providing quick but comprehensive information to investors.

3. Shelf Prospectus

Used by companies planning to issue multiple tranches of securities over a period without
preparing a new prospectus for each issue. Once filed, the company can issue securities in
phases. It helps to reduce costs and time for frequent issuers.

Example: A company may use it if it wants to issue debt securities over a two-year period.

4. Deemed Prospectus

Applies to securities offered for sale through intermediaries. If a company offers its securities
to intermediaries who then sell them to the public, the document used is considered a "deemed
prospectus," which carries the same legal obligations as a prospectus.

Example: Used in certain types of underwriting arrangements.

5. Final Prospectus

Provides the finalized details of the securities offering. Contains the final price of the securities,
the exact number of shares, and other confirmed details of the offering. This is given to potential
investors to help them make an informed decision.

Example: Issued once the registration statement is approved by regulatory authorities, such as
the SEC (Securities and Exchange Commission).

Misstatement in prospectus
 A misstatement in a prospectus refers to any false, misleading, or inaccurate statement, or the
omission of any relevant information, in a prospectus issued by a company. A prospectus is a
legal document that a company issues to the public when it offers securities (like shares,
debentures) for sale. It provides potential investors with essential details about the company’s
financial health, operations, and future prospects. Any misrepresentation in this document can
lead to legal and financial consequences.

Civil Liability:

• Liability to Investors: If any investor suffers a loss as a result of relying on the misstatements,
they have the right to sue the company, its directors, promoters, and anyone who signed the
prospectus for compensation.

• Rescission of Contract: An investor who has purchased shares based on a misstatement can
cancel (rescind) their contract to buy those shares and claim damages.

• Section 35 (Civil Liability for Misstatements): This section allows affected investors to
claim compensation from anyone who authorized the issue of the prospectus, including
directors, promoters, and underwriters.

Criminal Liability:

• Imprisonment and Fines: The Companies Act provides for criminal penalties, including fines
and imprisonment, for issuing a prospectus containing false or misleading statements.

• Directors and Promoters: Directors, promoters, and anyone knowingly involved in the
preparation of a false prospectus can be held criminally liable. This could lead to imprisonment
for up to 3 years and/or a fine.

• Section 34 (Criminal Liability for Misstatements): This section makes it a punishable

offense to issue a prospectus that includes any untrue or misleading statements.
Individuals involved in the issuance of such a prospectus can face both imprisonment
and financial penalties.

Book building

Book building is a process used in initial public offerings (IPOs) to determine the price at which
shares should be offered. It involves generating, capturing, and recording investor demand for
shares before the final price is set. The book-building process allows issuers (companies) to
gauge market demand and thus arrive at a fair price for the shares to be sold to the public.
 Elements of Book Building:

1. Price Discovery: Based on the bids received, the final issue price is determined (this is called
the "cut-off" price). The price reflects the level of demand and the highest price that ensures all
the shares can be sold.

2. Efficiency: The process ensures efficient price determination and reduces underpricing or
overpricing.

3. Transparency: Provides a clear picture of the market demand for the company's shares.

Issue of shares

The issue of shares refers to the process by which a company offers its shares to raise capital.
This process allows companies to expand, fund operations, or make new investments by
attracting investors. When a company issues shares, it gives investors part ownership of the
company in exchange for money. The 3 key fundamental steps of the process of issuing the
shares are

1. Issue of Prospectus

2. Receiving Applications

3. Allotment of Shares

Allotment of shares

Allotment of shares refers to the process of allocating shares to the shareholders who have
applied for them. When a company issues new shares, it invites applications from the public or
existing shareholders. Once the company receives the applications, it processes them and
decides on the allotment of shares.

The allotment process involves assigning a specific number of shares to each shareholder based
on the number of shares they have applied for and available for allotment. Once the shares are
allotted, the shareholders become the company owners to the extent of the shares allotted to
them.

Forfeiture of shares

Forfeiture of shares occurs when a shareholder fails to pay the required amount on shares that
they have subscribed to, either during the allotment stage or in subsequent calls for payment
(such as calls on unpaid share capital). When a shareholder does not fulfill their payment
obligations, the company has the legal right to cancel (forfeit) the shares, which results in the
loss of the shareholder’s rights over those shares, including any money already paid. Forfeited
shares are usually classified as treasury stock (non-issued shares) and can be reissued or resold
by the company in the future to recover any unpaid amounts

Call on shares

Call on Shares refers to the demand made by a company to its shareholders to pay the remaining
unpaid amount on the shares they hold. When shares are issued on a partly-paid basis,
shareholders do not pay the full amount upfront. Instead, they pay a portion of the share price
at the time of issuance, and the remaining amount is paid later as per the company’s
requirements. A "call" is the formal demand from the company for these unpaid amounts. If a
shareholder defaults on the payment of call money, the company can levy interest, typically at
a rate specified in the company’s articles. The company may also forfeit shares after giving due
notice to the shareholder, although there is a procedure that needs to be followed.

Transmission of shares

Transmission of shares refers to the process by which the ownership of shares is transferred to
legal heirs or beneficiaries when the original shareholder dies, becomes bankrupt, or is declared
mentally incapacitated. Unlike a regular transfer of shares (which is a voluntary act), the
transmission is an involuntary process that happens due to legal reasons such as death or
insolvency.

Reason for Transmission:

• Death of the shareholder.

• Bankruptcy or insolvency of the shareholder.
• The shareholder is declared mentally incapacitated.

Example of Transmission of Shares:A shareholder passes away, and their legal heir submits
the required documents (such as the death certificate and will) to the company.The company
verifies the documents and transmits the shares into the name of the heir, who becomes the new
shareholder.

Sweat Equity Shares

Sweat equity shares (or sweat capital) refer to shares issued by a company to its employees or
directors at a discount or for consideration other than cash, typically as a reward for their
contributions, know-how, or intellectual property. It is a way for companies to recognize and
compensate the hard work ("sweat") put in by employees, especially in startups and early-stage
companies.
 • Sweat equity shares are issued to reward employees or directors who have
contributed significantly to the company through their expertise, technical
know-how, or valuable work over time.

• These shares are typically issued at a discount to the market price or even for
consideration other than cash (such as in exchange for intellectual property,
expertise, or technical know-how).

Employee stock option (ESO)

An employee stock option (ESO) is a form of financial equity compensation that is

offered to employees and executives by their organization. The stock options offered
come in the form of regular call options and allow the employee or executive to
purchase their organization’s stocks at a specified price and time. Before the stock
option is finalized, the terms and conditions are discussed and signed off on in an
employee stock option agreement.

Benefits of ESO

1. It acts as a source of motivation for employees who will be benefiting when the prices
of the company shares rise in the market.

2. It helps to retain employees in the organisation

3. Employees are benefited for the hard work they perform in trying times.

4. It helps in preventing a significant amount of cash outflow from the company.

Issue Of Bonus Shares

Bonus shares are additional shares issued by a company to its existing shareholders
without any additional cost, based on the number of shares that a shareholder already
owns. It is a way for companies to distribute accumulated profits to shareholders in the
form of equity rather than cash dividends.

Advantages of Issuing Bonus Shares:

1. Improves Liquidity: The issuance of bonus shares increases the total number of shares
outstanding, which can lead to higher trading volumes and improved liquidity in the
stock market.
 2. Rewards Shareholders: It is a way to reward shareholders without distributing cash
dividends, allowing shareholders to receive additional shares and possibly sell them if
they need liquidity.

3. Signals Financial Health: Issuing bonus shares may indicate that the company has a
strong financial position and adequate reserves, boosting investor confidence.

4. Maintains Shareholders' Ownership: Since bonus shares are issued proportionally,

shareholders' ownership percentage in the company remains the same.

5. Increases Investor Confidence: The issuance of bonus shares can increase investor
confidence, as it is perceived as a sign of the company’s optimism about its future
performance.

Buy Back of Shares

Buyback of shares (also known as share repurchase) is a process where a company purchases
its own shares from the existing shareholders, typically at a price higher than the market value.
After the buyback, the shares are either canceled or held as treasury shares, effectively reducing
the number of outstanding shares in the market.

Advantages of Buyback of Shares:

1. Improves Shareholder Value: By reducing the number of outstanding shares,

buybacks can increase the earnings per share (EPS) and return on equity (ROE), which
may lead to higher share prices and improved shareholder value.

2. Tax Efficiency: Buybacks may provide a tax advantage to shareholders as the returns
may be treated as capital gains rather than dividends, which are often taxed at a higher
rate.

3. Sign of Confidence: A buyback is often interpreted as a sign that the company’s

management believes the stock is undervalued and that they are confident in the
company’s future performance.

4. Prevents Hostile Takeovers: Reducing the number of shares in circulation can help
prevent hostile takeovers by making it more difficult for an outside party to gain a
controlling stake.
 5. Enhances Control: The promoters or key shareholders can increase their percentage
of ownership without actually buying more shares themselves.

Reduction of share capital

Reduction of share capital is the process by which a company decreases its issued share
capital, often to adjust its capital structure or eliminate accumulated losses. This process is
subject to legal provisions and typically requires the approval of shareholders and regulatory
authorities. The reduction of share capital can involve canceling or reducing the nominal value
of shares, returning excess capital to shareholders, or adjusting the capital to reflect changes in
the company's financial position.

Impact of Reduction of Share Capital:

• Financial Restructuring: By reducing capital, a company can clean up its balance

sheet, especially if there are accumulated losses or an excess of capital.

• Improvement in Financial Ratios: Capital reduction can improve ratios like earnings
per share (EPS) and return on equity (ROE) by reducing the denominator (share
capital).

• Share Price and Investor Confidence: Depending on the method used, capital
reduction may increase the share price by reducing the number of shares outstanding,
which may signal financial prudence and increase investor confidence.

• Effect on Shareholder Ownership: In some cases, the percentage ownership of

individual shareholders may change depending on the reduction method (e.g., buyback
or return of capital).

Variation Of Shareholder Rights

Section 48 of the Act provides that the rights attached to the class of shares of the
company can be varied with the written consent of the shareholders of more than three-
fourths of the issued shares of that class.

It can also be varied through a special resolution passed at a separate meeting of the
shareholders of the issued shares of that class. However, the shareholders of the issued
shares of a class can consent or pass a special resolution to vary the rights attached to
that class of shares when:
• A provision regarding such variation is provided in the Memorandum of Association
(MoA) or Articles of Association (AoA) of the company.

• Such variation is not prohibited by the issue terms of the shares of that class if the
provision for variation is not provided in the MoA or AoA.

When the variation of the rights attached to one class of shareholders affects the rights
of another class of shareholders, the consent of three-fourths of the other class of
shareholders should also be obtained.

Meeting Of Shareholders

Shareholders meeting means a meeting of the stockholders of the corporation wherein

resolutions are placed before the shareholders to discuss the corporate matters and other
matters required by the bylaws of the company (such as company's performance over
the relevant statutory period is reviewed and approved, Board of Directors (BOD) of
the company are appointed, decisions regarding the increase in share capital, major
acquisitions, mergers are taken, etc.) and may be conducted at frequent intervals (like
annually or six-monthly or quarter or in exceptional circumstances).

1. Statutory Meeting

A statutory meeting is the first meeting of shareholders, held by public companies within a
specified period after incorporation. This meeting is essential for discussing the company’s
formation, financial position and the goals of the business. It provides an opportunity for
shareholders to understand the company’s structure and future plans.

2. Annual General Meeting (AGM)

The AGM is a mandatory meeting held by both public and private companies at the end of each
financial year. It serves as a platform for presenting the company’s financial performance,
electing directors, declaring dividends and addressing shareholder concerns.

3. Extraordinary General Meeting (EGM)

An EGM is convened to address urgent or exceptional issues that cannot wait until the next
AGM. These meetings are usually called for specific purposes such as mergers, acquisitions or
changes to the company’s rules.

4. Class Meetings
Class meetings are held for shareholders who hold a particular class of shares, such as
preference shares. These meetings address issues that specifically affect that class, such as
changes in dividend rights or voting powers.

5. Board of Directors Meeting

The board of directors meets regularly to discuss and decide on the company’s strategic
direction, financial performance and key management issues. These meetings are central to the
company’s governance and operational efficiency.

6.Committee Meetings

Committee meetings involve smaller groups within the board, such as the audit committee,
compensation committee or risk management committee. These meetings focus on specific
areas of the company’s operations and provide detailed oversight.

7.Debenture Holders Meeting

Debenture holder meetings are convened to discuss issues related to debentures, such as
repayment schedules, restructuring or defaults. These meetings are important for maintaining
the trust and confidence of the company’s creditors.

8.Creditors Meeting

Creditors meetings are typically held during insolvency or liquidation proceedings to discuss
the repayment of debts, asset distribution and other financial matters. These meetings are vital
for ensuring that creditors receive fair treatment during the liquidation process.

Requisites of a valid meeting

• Notice of Meeting
• Agenda
• Chairman
• Quorum
• Proxy
• Postal Ballot
• Minutes

Notice of Meeting:

Issuance of Notice: A proper notice must be sent to all participants eligible to attend
the meeting (directors, shareholders, etc.). The notice should specify the date, time,
8.venue (or virtual platform), and agenda of the meeting.
 Notice Period: The law or company’s articles of association often require a specific
minimum notice period (e.g., 21 days for an AGM). For EGMs or board meetings,
shorter notice periods may apply, but consent from participants may be required for
shorter notices.

Mode of Communication: The notice can be sent via email, registered post, or as
outlined in the company’s articles of association. It is important that all eligible
participants receive notice.

Agenda:

The agenda outlines the topics to be discussed at the meeting and serves as a guide for
the meeting’s conduct. It should be clear and precise, covering essential items like
reports, financial statements, resolutions, and other business matters.The agenda should
be sent along with the notice of the meeting.

Example: The agenda for a board meeting may include financial reports, project
updates, and strategic planning.

Quorum:

Quorum Requirement: A quorum is the minimum number of members required to be present

for a meeting to be valid. The company’s constitution or applicable laws will specify the
quorum requirements for different meetings (e.g., 2 members or shareholders present for an
AGM).

Example: A board meeting may require at least 5 members to form a quorum. If the quorum
is not met, the meeting cannot proceed, or any decisions made may be invalid

Chairman

A chairman, also known as a chairperson, is the person who leads a meeting or conference of
an organized group like a board or committee. The meeting must be conducted by a person
authorized to preside, usually the chairperson or an appointed individual. The chairperson
ensures that the meeting follows the agenda and adheres to rules of order.

Example: The chairperson in a corporate board meeting leads the proceedings, allowing
discussions and making sure all votes are recorded properly.

Proxy

A proxy is a written statement that authorizes someone to vote on behalf of a shareholder. A

proxy can be general or specific. In a general proxy, the proxy voter can decide how to vote,
while in a specific proxy, the proxy voter is given specific instructions on how to vote
 Postal ballot

A postal ballot is a method of voting where shareholders or members of an organization cast

their votes by mail, rather than attending a meeting in person or voting electronically. It allows
for wider participation in decision-making processes, especially for those who may not be able
to attend meetings physically.

Minutes of the Meeting

A written record or minutes of the meeting must be kept to document the discussions, decisions, and
resolutions. These minutes serve as the official record and must be approved in a subsequent meeting.

Example: In a board meeting, the minutes may include resolutions passed, decisions made, and the next
steps assigned to members.

Meeting through Video conferencing

"Video conferencing or other audio-visual means audio-visual electronic communication facility

employed which enables all the persons participating in a meeting to communicate concurrently with
each other without an intermediary and to participate effectively in the meeting.” As per Section 173(2)
of Companies Act, 2013 (the Act) read with Rule 3 of the Companies (Meetings of Board and its
Powers) Rules, 2014 (the Rules), every Company can hold a Board Meeting through video conferencing
or other audio-visual means, which are capable of recording and recognizing the participation of the
directors and of recording and storing the proceedings of such meetings along with date and time.

Committees of Board of Directors

Audit Committee

Oversees the company’s financial reporting process, internal controls, risk management, and audit
functions. This committee ensures transparency, accuracy, and integrity in financial matters. Members
of the committee includes independent directors with financial expertise.

2. Nomination and Remuneration Committee (NRC)

Responsible for identifying suitable candidates for the board and determining compensation for
executives and directors. Helps in recruiting and retaining top talent while ensuring fair and transparent
compensation practices. Members of the committee Usually composed of independent directors to
avoid conflicts of interest.

3. Corporate Governance Committee

Focuses on ensuring that the company follows good governance practices. This committee strengthens
the organization’s commitment to ethical and transparent operations. Members of the committee
Includes a mix of independent and non-executive directors.

4. Risk Management Committee

Identifies and monitors risks that could affect the company’s operations, reputation, or financial
stability. Helps in proactively addressing potential risks that can harm the company. Members of the
committee Directors with expertise in risk management, finance, or industry-specific risks.

5. Corporate Social Responsibility (CSR) Committee

Ensures that the company meets its obligations related to social responsibility and sustainability.
Enhances the company’s contribution to society and aligns with long-term sustainability goals.
Members of the committee includes directors with an understanding of corporate social initiatives.

6. Strategy Committee

Focuses on developing and reviewing the company’s long-term strategic goals. Ensures that the
company is forward-looking and adapting to market changes. Members of the committee includes
experienced directors with expertise in business strategy.

7. Compensation Committee

Focuses specifically on compensation-related issues, including executive pay and incentive structures.
Balances the need for competitive compensation with the interests of shareholders. Members of the
committee consists of independent directors.

8. Investment Committee

Evaluates and oversees the company’s investments and capital allocation decisions. Helps the company
grow and diversify its portfolio while managing risks. Members of the committee Includes directors
with expertise in finance and investment management.

Resolution

A resolution is a written document that is created by the board of directors of a company. A board of
directors is a group of persons who act as the governing body of a company on behalf of the shareholders
of the company. The Board of Directors created a proposal for resolution and presented this proposal in
front of shareholders in a meeting and shareholders gave approval for this proposal, and that resolution
was passed by the company. A resolution is a legally binding decision for a company.

Under the Companies Act 2013, a resolution is a decision or agreement made by the directors,
shareholders, and members of a company. When a resolution is proposed, it is referred to as a motion.
Once a company completes the proper formalities regarding a motion, it becomes a resolution. After a
resolution is passed, the company must act in accordance with it. When a company needs to make a
major decision, it convenes a meeting of all its members. During this meeting, company members pass
resolutions using various methods such as voting, expressing their will, or formally expressing their
concerns.

Types of Resolution

1. Ordinary Resolution

An ordinary resolution is passed by a simple majority of the shareholders or board members who are
present and voting at the meeting. Required majority is More than 50% of the votes cast must be in
favour of the resolution. Ordinary resolutions are typically used for routine business matters. The
process requires standard notice to be given to all shareholders or directors as per the company’s
governing documents.

2. Special Resolution

A special resolution requires a higher majority of votes compared to an ordinary resolution and is used
for more significant decisions that may impact the company's future. Required Majority is at least 75%
of the votes cast must be in favour. Special resolutions are used for important matters affecting the
company’s structure or governance. A longer notice period (typically 21 days) is often required for a
special resolution, and it must be explicitly stated in the notice that a special resolution is to be
considered.

3. Board Resolution / Directors Resolution

A board resolution is a decision passed by the company’s board of directors during a board meeting.
The voting requirement varies depending on the company’s articles, but usually, a simple majority of
the board members is needed. Used for decisions related to the company’s day-to-day management and
operations. In the Process it Requires a board meeting where a quorum is present, and the resolution is
passed by the required majority of board members.

4. Written Resolution

A written resolution allows shareholders or board members to pass a resolution without

holding a formal meeting by signing a document agreeing to the proposed decision. The
majority required depends on the type of resolution (ordinary or special). Written resolutions
are used when convening a physical meeting is not practical or necessary. The resolution is
circulated, and once the required number of signatories is obtained, it is deemed passed.
Winding up

Winding up is the process of liquidating a company. While winding up, a company ceases to
do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any
remaining assets to partners or shareholders. The term is synonymous with liquidation, which
is the process of converting assets to cash.

The primary aim of winding up is to settle the company's debts and liabilities and distribute
any surplus among its shareholders or members. Once the winding-up process is completed,
the company is formally dissolved and struck off the register of companies, meaning it no
longer legally exists.

Mode Of Winding Up

Compulsory /Court Winding up :

Winding Up Initiated by a court order, often due to the company being unable to pay its debts
or for other legal reasons, such as failure to comply with regulations. The conditions under
which a court can order the winding up of a company include:

• Inability to Pay Debts: If a company is unable to pay its debts and a creditor has
demanded payment and not received it within three weeks, the creditor can petition for
winding up.
• Special Resolution: If the company has resolved by a special resolution that it should
be wound up by the court.
• Default in Holding Statutory Meeting: If the company has not held its statutory
meeting or filed its statutory report.
• Acts Against Sovereignty and Integrity: If the company is found to be acting against
the sovereignty and integrity of India or public order.
• Fraudulent Conduct: If the business of the company is being conducted fraudulently
or for an unlawful purpose.

Voluntary/ Company winding up

Voluntary winding up occurs when the members or shareholders of the company decide, by
passing a special resolution, to wind up the company voluntarily. The conditions under which
a court can order the winding up of a company include:

• Members’ Voluntary Winding Up: This occurs when the company is solvent and able
to pay its debts in full within a specified period. The directors must make a declaration
of solvency, followed by a resolution passed by the members in a general meeting. An
official liquidator is then appointed to wind up the company’s affairs.
• Creditors’ Voluntary Winding Up: This occurs when the company is insolvent and
unable to pay its debts. The process begins with a resolution by the members, followed
by a meeting of the creditors. The creditors have a significant role in appointing the
liquidator and overseeing the winding-up process.

Liquidator

A liquidator will recover and sell the assets of the wound up company and distribute the net proceeds
to the company's creditors. A liquidator may be one of the following parties:

• The Official Receiver, who is a public officer appointed by the court to act as the liquidator of
companies undergoing compulsory winding up.

• A licensed insolvency practitioner.

The roles of a liquidator include:

• Investigating into the affairs and assets of the company, the conduct of its officers and the claims
of creditors and third parties.

• Recovering and realising the company’s assets in the most advantageous manner to the
company.

• Adjudicating the claims of the creditors to ensure an equitable distribution of the company’s
assets in accordance with the IRDA.

National Company Law Tribunal (NCLT)

The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates matters
related to corporate laws, including disputes related to companies, insolvency, and bankruptcy. The
NCLT was established under the Companies Act, 2013, and became operational in 2016. It serves as a
key forum for resolving corporate disputes and facilitating the insolvency process in India.
Jurisdiction of NCLT

Insolvency Proceedings: Under the Insolvency and Bankruptcy Code (IBC), 2016, the NCLT
handles insolvency and liquidation cases for companies and Limited Liability Partnerships (LLPs).
Creditors or debtors can approach the NCLT to initiate corporate insolvency resolution processes.

Company Disputes: NCLT handles disputes between shareholders, directors, and companies, such as
issues related to mismanagement, oppression of minority shareholders, or breaches of the Companies
Act.

Mergers and Acquisitions: The NCLT approves schemes of mergers, demergers, and corporate
restructuring.

Alteration of Financial Statements: The tribunal has the power to approve the revision or alteration
of financial statements of companies.

Winding Up of Companies:

The NCLT has the power to order the winding up (dissolution) of companies based on various grounds
such as insolvency or the inability to continue operations.

National Company Law Appellate Tribunal (NCLAT)

The National Company Law Appellate Tribunal (NCLAT) is a higher quasi-judicial body in India
that hears appeals against the orders and decisions of the National Company Law Tribunal (NCLT).
Established under the Companies Act, 2013, the NCLAT became operational in 2016 and serves as the
appellate authority for decisions made by the NCLT, the Insolvency and Bankruptcy Board of India
(IBBI), and certain orders passed by the Competition Commission of India (CCI).

Jurisdiction of NCLAT

Appeals from NCLT:

The NCLAT primarily hears appeals against orders passed by various benches of the NCLT. These
include matters related to:

• Corporate insolvency resolution processes (CIRP) under the Insolvency and

Bankruptcy Code (IBC), 2016.
• Winding up of companies.
• Oppression and mismanagement cases.
• Mergers, acquisitions, and other corporate restructuring decisions.
Appeals from the Insolvency and Bankruptcy Board of India (IBBI): The NCLAT also hears
appeals against decisions or orders passed by the IBBI, which regulates insolvency professionals and
agencies under the IBC.

Appeals from the Competition Commission of India (CCI): The NCLAT functions as the appellate
authority for decisions made by the CCI concerning anti-competitive practices, abuse of dominant
position, and cartelization under the Competition Act, 2002.

Depositories

Depositories are financial institutions that hold securities such as stocks, bonds, mutual fund
units, and other financial assets in electronic form. They provide services related to the
safekeeping, transferring, and managing of securities, making the process more secure and
efficient. Depositories play a crucial role in modern financial markets by reducing the risks and
inefficiencies associated with physical certificates.

Significance Of Depositories:

1. Dematerialization of Securities: They convert physical securities (such as paper certificates)

into electronic form, a process known as "dematerialization" or "demat." This helps eliminate
issues like theft, loss, and forgery of paper certificates.

2. Safekeeping of Securities: Depositories securely hold financial assets in an electronic format

for investors. The assets are stored in the investor's demat account, which functions like a bank
account but for securities.

3. Transfer of Securities: When an investor buys or sells securities, the depository facilitates the
transfer from one account to another in a seamless and paperless manner.

4. Settlement of Trades: After a trade is executed on a stock exchange, the depository helps settle
the transaction by transferring securities from the seller to the buyer, and funds from the buyer
to the seller.

5. Corporate Actions: Depositories handle various corporate actions such as dividends, interest
payments, bonus issues, and stock splits on behalf of the company and its shareholders.

6. Pledging of Securities: Investors can pledge securities held in their demat account as collateral
to avail loans.

7. Increased Efficiency: The electronic management of securities ensures faster transactions and
settlements.
8. Reduced Risk: Holding securities in electronic form reduces the risk of fraud, forgery, and
loss.

9. Convenience: Investors can easily manage their holdings, buy/sell securities, and participate
in corporate actions through their demat account.

Pros of Depositories

1. Safety and Security: Holding securities in electronic form eliminates the risk of loss, theft, or
damage to physical certificates. Electronic records reduce the risk of forgery and fraud,
providing more secure ownership of assets.

2. Faster and Efficient Transactions: The dematerialization of securities enables quicker

transfers, settlements, and trade executions. Settlement of trades is often completed within 1-2
days, reducing the time investors wait for transactions to be finalized (T+2 or T+1 settlement
system).

3. Cost-Effective: It eliminates the need for printing, handling, and storing physical certificates,
reducing costs for both investors and companies. Reduced paperwork and administrative efforts
lower transaction costs.

4. Convenience: Investors can buy, sell, and transfer securities without handling physical
documents. Corporate actions like dividends, interest payments, and stock splits are
automatically credited to the investor's demat account, reducing manual processes.

5. Improved Liquidity: With faster and more reliable transfers, securities markets can operate
more efficiently, increasing liquidity. The ability to pledge securities as collateral for loans
offers additional liquidity for investors.

6. Transparency: Depositories provide real-time information about investors' holdings, which

increases transparency. The tracking and record-keeping functions help maintain an accurate
ledger of securities ownership.

7. Reduction in Bad Deliveries: Problems like mismatched signatures or wrong certificate

deliveries are avoided, ensuring smooth transactions.

Cons of Depositories

1. Technological Risks: Dependence on electronic systems means there is a risk of hacking,

cyberattacks, or system failures that could compromise investor data or security holdings. Any
malfunction in the depository system can disrupt financial transactions or settlements.
 2. Costs for Small Investors: Depositories charge fees for services like account maintenance,
transaction charges, and others. These costs may be burdensome for small or infrequent
investors. Some services, like pledging securities or transferring shares, might involve
additional charges.

3. Centralization of Risk: By centralizing securities in electronic form, depositories may become

a target for large-scale fraud or cyberattacks. If the depository’s systems are compromised, it
could affect millions of investors simultaneously.

4. Dependency on Intermediaries: Depository Participants (DPs), like banks or brokerage firms,

act as intermediaries. Investors are reliant on these intermediaries to access their accounts and
perform transactions, which may introduce inefficiencies or delays.

5. Limited Control Over Errors: Errors in the electronic system (such as incorrect transfers or
allocations) can be difficult for individual investors to detect or resolve quickly. Resolving
disputes with depositories or DPs may take time and could involve complex legal procedures.

6. Possible Lack of Personalization: The electronic and centralized nature of depositories may
result in a lack of personal attention or services for investors compared to traditional methods
of managing securities.

7. Regulatory and Privacy Concerns: With all transactions recorded electronically, concerns
may arise regarding data privacy and regulatory oversight, as sensitive investor information is
accessible to the depository and related authorities.

Rights Of Depositories

1.. Right to Hold Securities in Dematerialized Form

Depositories have the right to hold securities in electronic (dematerialized) form on behalf of investors.
This allows investors to hold and trade securities without physical certificates.

2. Right to Facilitate Transfers of Securities

Depositories are responsible for facilitating the transfer of securities between buyers and sellers during
trading on stock exchanges. They ensure that ownership of securities is transferred smoothly and
efficiently.

3. Right to Nominate Depository Participants

Depositories have the right to nominate intermediaries known as Depository Participants (DPs),
which act as agents between the depository and investors. DPs include banks, financial institutions, and
brokers.
4. Right to Charge Fees

Depositories have the right to charge fees for their services, including account maintenance,
dematerialization, and transactions such as transfers, pledging, and corporate actions.

5. Right to Safeguard Investor Interests

Depositories must protect the interests of investors by maintaining accurate records, ensuring the
integrity of the system, and complying with regulatory requirements. This includes maintaining
confidentiality of investor information.

6. Right to Initiate Corporate Actions

Depositories have the right to initiate and execute corporate actions such as bonus issues, stock splits,
dividends, and rights issues on behalf of companies whose securities they hold.

7. Right to Enforce Regulations

Depositories must comply with regulations laid down by the Securities and Exchange Board of India
(SEBI) and have the right to enforce compliance with these regulations by investors and intermediaries.

8. Right to Freeze or Close Accounts

In case of non-compliance or fraudulent activity, depositories have the right to freeze or close demat
accounts of investors. They can also take actions based on legal or regulatory directives.

Obligation Of Depositors

Depositors, or investors who hold securities through a depository in a dematerialized form, have certain
obligations to ensure smooth operations within the securities market. These obligations are essential for
maintaining compliance with regulatory standards and for safeguarding the overall integrity of their
investments.

1. Maintain a Valid Demat Account

Depositors are required to open and maintain a Demat (Dematerialized) account with a Depository
Participant (DP) to hold their securities in electronic form. They must ensure that the account is active
and all necessary documentation is up to date.

2. Provide Accurate and Complete Information

Investors are obligated to provide accurate and complete information during the account opening
process, including KYC (Know Your Customer) documents such as identity proof, address proof, and
financial details. Any changes to the information (such as address or contact details) must be updated
promptly.

3. Comply with Regulatory Requirements

Depositors must adhere to all applicable laws, regulations, and guidelines set forth by regulatory
authorities such as SEBI (Securities and Exchange Board of India), the depository itself, and other
related institutions. This includes reporting any suspicious or fraudulent activities.

4. Payment of Charges

Investors are obligated to pay the fees associated with holding a Demat account, such as account
maintenance charges, transaction charges, and any other applicable fees levied by the depository or the
Depository Participant.

5. Exercise Caution in Transactions

Depositors are responsible for ensuring that the instructions they provide for buying, selling, or
transferring securities are correct and accurate. They must verify transaction details, such as the number
of shares and price, to avoid errors or fraudulent activities.

6. Ensure Timely Transfer of Securities

Investors are obligated to ensure that any securities they buy or sell are transferred into or out of their
Demat account in a timely manner. Any delays or failures in this process could lead to penalties or loss
of ownership.

7. Monitor Account Activity

Depositors must regularly monitor their Demat account activity, reviewing account statements,
transaction records, and any updates or alerts sent by the depository or the DP. This is crucial to ensure
that no unauthorized transactions occur and that the holdings are accurate.

8. Respond to Corporate Actions

Investors have an obligation to respond to corporate actions (such as bonus issues, dividends, stock
splits, or rights issues) within the timelines specified by the companies or depositories. Failure to act on
time could result in the loss of benefits from such corporate actions.

9. Maintain Adequate Records

Depositors must keep a record of their account details, transaction history, and all communications with
their Depository Participant. These records are essential for resolving disputes or discrepancies in their
holdings or transactions.
10. Report Discrepancies or Errors

If investors notice any discrepancies in their Demat account, they are obligated to report them
immediately to their DP or depository. This includes unauthorized transactions, incorrect balances, or
corporate actions that were not reflected in the account.

11. Protect Confidential Information

Depositors are responsible for safeguarding their account information, login credentials, and other
sensitive data related to their Demat account. They should avoid sharing such information with
unauthorized persons or entities.