● Doctrine of Indoor Management:

● The doctrine of constructive notice proved too inconvenient for business transactions
and hindered the smooth flow of business.
● It was replaced by the Doctrine of indoor management in 1856 in the Royal British Bank
V. Turquand Case.
● According to this doctrine, “any person dealing with the company having satisfied himself
that the proposed contract is not inconsistent with the MOA and AOA. He is not bound to
inquire into the regularity of any internal proceedings of the company. He is bound to
presume that the provisions of articles have been observed and complied with, by the
officers of the company.”
● It is not the duty of the outsider to see that the company carries out its own internal
regulation
- Royal British Bank V. Turquand, (1856)
● Exceptions to doctrine of indoor management:
● The doctrine of indoor management will not protect the outsider and the company will not
be liable in the following circumstances:
- Where the outsider had knowledge of irregularity
- No knowledge of memorandum and articles-
- Rama corporation V. proved Tin & General Investment Co. (1952)
- Forgery -
- Rouben V great fingal consolidated (1906)
- Negligence -
- Anand behari lal V. dinshaw & co. ltd. AIR 1942

● Section 6 gives overriding force and effect to the provisions of the act. A provision
contained in the memorandum, articles, agreement or resolution to the extent to which it
is repugnant to the provisions of the Act, will be regarded as void.

● Prospectus
● Prospectus is a disclosure document inviting the public, to subscribe for the securities of
the company, to enable the inventors to take rational investment decisions and to protect
their rights, by giving various materials facts and prospectus about the company.
● Section 2(70) defines a prospectus as “any document described or issued as a
prospectus and includes a red herring prospectus referred to in section 32 or shelf
prospectus referred to in section 31 or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities
of a body corporate.”
● A document should have following ingredients to constitute a prospectus:
- There must be an invitation to the public
- The invitation must be made “by or on behalf of the company or in relation to an
intended company”
- The invitation must be “to subscribe or purchase”
- The invitation must relate to any securities of the company
● A document is deemed to be issued to the public, if the invitation to subscribe for share
capital is such as to be open to any one who brings his money and applies in prescribed
form, whether the prospectus was addressed to him or not.
● The first remedy against the company is ​to rescind the contract.​ A person who takes
securities on the faith of a prospectus containing false statements, ay apply to the Court
for setting contract aside, and striking off his name from register of members. He may
also claim his money back.
● The second remedy against the company is to ​sue for damages for deceit.​ The allottee
may recover damages from the company for any loss he may have suffered if the
invitation to take securities from the company and the persons making it on behalf of the
company have fraudulently misrepresented material facts.
● The allottee cannot both retain the securities and get damages against the company. In
actual practice, however, suits for damages against the company are rarely filed.
Damages are generally claimed from the directors, promoters and other persons who
authorised the issue of the prospectus.
● The test is not who receives the document, but who can apply for the securities in
response to the invitation contained in it.
● However, an issue will not be “public” if-
- It is directed to a specific person or a group of persons, and
- It is not calculated to result in the securities becoming available to other persons.

● Advertisement in newspaper to invite application for purchase of remaining shares of a

company is prospectus (Pramatha Nath Sanyal V. Kali Kumar Dutt, AIR 1925 Cal 714).
● A single private communication does not satisfy the term “issue” (Nash V. Lynde 1929
AC 158).

● Contents of Prospectus
● According to sec 26 the prospectus of a public company must be signed and dated and
contain all the necessary information as stated under:
● Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
● Date of the opening and closing of the issue
● Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept and details of utilization and non-utilization of receipts of previous
issues.
● Consent of the directors, auditors, bankers to the issue, experts opinions.
● Authority for the issue and details of the resolution passed for it
● Procedure and time scheduled for the allotment and issue of securities.
● The capital structure of the in the manner which may be prescribed
● The objective of a public offer
● The objective of the business and its location
● Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
● Minimum of directors, their remuneration and extent of their interest in the company
● Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

● Golden Rule for framing of Prospectus

● The golden rule for framing of a prospectus was valid down by Justice Kindersley in ​New
Brunswick & Canada Rly. & Land Co. V. Muggeridge (​ 1860). Everything must be stated
with strict and scrupulous accuracy. In a word, the true nature of the company’s venture
should be disclosed.
● In ​Rex V. Kylsant (​ 1932), the prospectus though true in itself was rendered false in the
context in which it was stated.
● A half truth, for instance, represented as a whole truth may tantamount to false
statement ​(Lord Halsbury In Aarons Reefs V. Twisa).
● Thus, the persons issuing the prospectus must include in the prospectus all the relevant
particulars, which are required to be stated compulsorily but should also voluntarily
disclose any other information within their knowledge which might in any way affect the
decision of the prospective investor to invest in the company.

● Filing of Copy with the registrar

● According to Sec 26(4), the prospectus is not to be issued by a company or on its behalf
unless on or before the date of publication, a copy of the prospectus is delivered to the
registrar for registration.
● The copy should be signed by every person whose name has been mentioned in the
prospectus as a director or proposed director or the assigned attorney on his behalf

● Registration of prospectus
● Section 26(7) states about the registration of a prospectus by the registrar. The registrar
can register a prospectus when:
- It fulfills the requirements of section 26 and
- It contains the consent of all the persons named in the prospectus in writing

● Issue of prospectus after registration

● If a prospectus is not issued before 90 days from the date from which a copy was
delivered before the registrar, then it is considered to be invalid.

● Types of Prospectus
● There are 4 types of a prospectus, which are as under:
● Abridged Prospectus
● According to Section 2(1), abridged prospectus means a memorandum containing
salient features of a prospectus as may be specified by the SEBI on this behalf. It means
that a company cannot issue application form for purchase of securities unless such
form is accompanied by an abridged prospectus.
● Deemed Prospectus
● According to section 25(1), where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the
public. Any document by which such offer for sale to the public is made is deemed to be
a prospectus by implication of law.
● Shelf Prospectus
● According to section 31, shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or
more issues over certain persons without the issue of a further prospectus. Only the
companies (Eg. financial institutions, banking companies) which have been prescribed
by the SEBI can issue a Shelf prospectus with the Registrar.
● Red Herring Prospectus (RHP)
● According to section 32, an RHP means a prospectus which does not have complete
particulars on the price of the securities offered and quantum of securities to be issued.
● A company may issue an RHP prior to the issue of a prospectus. The company shall file
RHP with the Registrar at least 3 days prior to the opening obligations as are applicable
to a prospectus and any variation between the RHP and a prospectus shall be
highlighted as variations in the prospectus.

● Liability for Untrue/Misstatement in Prospectus

● Where an untrue statement occurs in a prospectus, there may arise (i) civil liability (ii)
criminal liability.
● Every person who is a director of the company at the time of the issue of the prospectus,
every promoter of the company and every person, including an expert, who has
authorised the issue of a prospectus, shall be liable.
● What is an ​Untrue/Mis-statement?
● Whether a statement is untrue or not is to be judged by the context in which it appears
and the totality of impression it would create.
● Further, where any inclusion or omission of any matter in a prospectus is likely to
mislead, the prospectus shall be deemed, in respect of such omission, to be a
prospectus in which an untrue statement is included.
● The expression “included” with reference to a prospectus means included in the
prospectus itself or contained in any report or memorandum appearing on the face
thereof or by reference incorporated therein or issued therewith.
● Even if every word included in the prospectus is true, the suppression of material facts
may cause the prospectus to be fraudulent.

● Criminal Liability for Misstatement in the prospectus

● Where a prospectus is issued which includes any statement which is untrue or
misleading the investor, then every person who authorised the issue of prospectus shall
be punishable with imprisonment for a term which may not be less than 6 months but
which may extend to 10 years; or a fine not less than the amount involved in fraud bt it
may extend to three times the amount of fraud; or with both
● Onus for Proof of Misstatement
 ● The burden of proof lies upon an allottee that he has been misled by the misstatement in
the prospectus. He must prove:
- The misrepresentation was of a fact
- It was in respect of a material fact. What is a material statement of fact will
depend upon the circumstances of each case.
- He acted on the misrepresentation and
- He suffered damages in consequence.

● Remedies for Misstatement in Prospectus

● A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company, or by someone with the authority of the
company, e.g. the board of directors. The company is also liable for misstatement in
prospectus even though the prospectus is issued by the promoters & the Board ratifies
and adopts the issue of prospectus.

Membership in a Company
● Shareholder and Member:
● Member is a person whose name appear in the Register of members of the company.
On the other hand a shareholder is a person who holds the shares of a company.
● In case of a company limited by shares, the terms “members” and “shareholders” are
interchangeably used since there is not other method of becoming a member other than
through share holding
● The membership is a company is obtained through subscribing to the memorandum,
through allotment/transfer/ transmission etc.

● Differences between a member and shareholder:

● When a person transfers his shares, until registration of shares if affected by the
company, he continues to be the member of the company even though not a
shareholder. Similarly, the buyer of shares, until the registration is effected, continues to
be the shareholder of the company and not a member.
● In case of a company limited by guarantee not having share capital, the members are
those persons who are liable under the guarantee clause in its memorandum, in the
event of liquidation. There are no shareholders in such a company.
● Similarly in case of unlimited company, the members are liable for the entire debts and
liabilities of the company in the event of winding up. Even in this case there are no
shareholders.
● The legal representative, official receiver or official assignee in case of transmission of
shares due to death, insolvency or insanity of a member, are not members of the
company even though they continue to be shareholders with certain rights including right
to receive dividend, right to receive notices of meeting, etc.
● A share warrant holder is a holder of shares in the company and not a member of the
company.

● Definition of ‘Member’
 ● According to section 2(55)
● The ​subscribers to the memorandum ​of a company who shall be entered as members
in its register of members
● Every person ​whose name is entered in its register of members ​shall, be a member
of the company.
● Every ​beneficial owner in the records ​of a depository shall be deemed to be a member
of the concerned company
● There are two important elements which must be present before a person can
acquire membership of a company viz.,
● Agreement to become a member, and
● Entry of the name of the person so agreeing, in the register of a member of the
company.
● The person desirous of becoming a member of a company must have the legal capacity
of entering into an agreement in accordance with the provisions of the Indian Contract
Act 1972
● Modes of Acquiring Membership
● As per Section 2(55), a person may acquire the membership of a company:
a) By ​subscribing to the MOA ​(deemed agreement); or
b) By ​agreeing in writing to become a member:
1) By application and allotment of shares; or
2) By executing an instrument of transfer; or
3) By transfer of share of a deceased member; or
4) By acquiescence or estoppel.
c) by ​beneficial owner in the records ​of a depository shall be deemed to be a member of the
concerned company

a) Subscribers to the Memorandum

● In the case of a subscriber, no application or allotment is necessary to become a
member, by virtue of his, subscribing to the memorandum, he is deemed to have agreed
to become a member and he becomes member on the incorporation of the company and
is liable for the shares he has subscribed
● When a person signs a memorandum for any number of shares he becomes absolutely
bound to take those shares and no delay will relieve him from that liability unless he
fulfills the obligation
● His liability remains right up to the time when the company goes into liquidation and he is
bound to bring the money for which he is liable to pay the creditors of the company.

b) Agreement
● (i) By an application and allotment
● A person who applies for shares becomes a member when shares are allotted to him, a
notice of allotment is issued to him and his name is entered on the register of members.
The general law of contract applies to this transaction.
● (ii) By transfer of shares
● Shares in a company are movable property according to section 44 and are transferable
in the manner as provided in the articles of the company and as per section 56
● A person can become a member by acquiring shares from an existing member and by
having the transfer of shares registered in the books of the company, i.e. by getting his
name entered in the register of members of the company.
● (iii) By transmission of shares
● A person may become a member of a company by operation of law. Membership by this
method is a legal consequence. On the death of a member, his executor or the person
who is entitled under the law to succeed to his estate, gets the right to have the shares
transmitted and registered in his name in the company’s register of members
● No instrument of transfer is necessary in this case. If the legal representative of a
deceased member desires to be registered as a member in place of the deceased
member, the company shall do so.
● The Official Assignee or Official Receiver is likewise entitled to be a member in place of
the shareholder, who has been adjudged insolvent.
● (iv) By acquiescence or estoppels
● A person is deemed to be a member of a company if he allows his name, without cause,
to be on the register of members of the company or otherwise holds himself out or allows
himself to be held out as a member
● In such a case, he is estopped from denying his membership. He can, however, escape
his liability by taking prompt action for having his name removed from the register of
members on permissible grounds.
- In Re M.F.R.D. Cruz, ​AIR 1939 Madras 803

c) Holding Shares as Beneficial Owner in the Records of Depository

● Every person holding shares of the company and whose name is entered as a beneficial
owner in the records of the depository shall be deemed to be a member of the
concerned company.

● Who can become a member?

● Subject to the MOA and AOA, any person who is competent to contract except the
company itself
- Company as a member of another company
- Partnership firm as a member
- Limited liability partnership
- Section 8 company
- Foreigners as members
- Minor as member - Ms Nandita Jain vs. Benett Coleman and Co. Ltd.
- Insolvent as member
- Pawnee - Balakrishna Gupta V. Swadeshi Polytex Ltd. 1985 AIR 520
- Receiver
- Trade Union as member - All India Bank Officers Confederation V. Dhanalakshmi
Bank Ltd. (1997)90 Com Cases 225
- Persons taking shares in fictitious names
● Rights of Members:
● When once a person becomes a member he is entitled to exercise all the rights of a
member until he ceases to be a member
● Individual Rights
● Members of a company enjoy certain rights in their individual capacity, which they can
enforce individually. These rights are contractual rights and cannot be taken away
except with the written consent of the member concerned. These rights can be
categorised as under:
● (1) right to receive copies of the following documents from the company:
- Abridged financial statement and auditor’s report in the case of a listed company
(section 136)
- Report of the Cost Auditor, if so directed by the Government.
- Notices of the general meetings of the company (sec 101-102)

● (2) right to inspect statutory registers/returns and get copies thereof. The members have
been given right to inspect the following registers-
- Debenture trust deed (sec 71)
- Register of charges and instrument of charges (sec 85 and 87)
- Copies of contract of employment with managing or whole-time directors)
- Shareholder’s minutes book(sec 119)
- Register of contracts, companies and firms in which directors are interested (sec
189)
- Register of directors and key managerial personnel and their shareholding (sec
170)

● (3) right to attend meetings of the shareholders and exercise voting rights at these
meetings either personally or through proxy (secs 96, 100, 105 and 107)
● (4) other rights.
- To transfer shares (sec 44 and 56 and AOA)
- To receive dividend when declared
- To have rights shares (sec 62)
- To appoint directors (sec 152)
- To share the surplus assets on winding up (sec 320)
- Right of dissentient shareholders to apply to tribunal (sec 48)
- Right to be exercised collectively by passing a special resolution and intimating
the same to the central government for investigation of the affairs of the company
(sec 210)
- Right to make application collectively to the tribunal for relief in cases of
oppression and mismanagement (sec 241)
- Right to file class action suits before the tribunal (sec 245)
- Right of nomination (sec 72)
- Right to file a suit or take any other action in case of any misleading statement in
the prospectus (section 37)
● Collective Membership Rights
● Members of a company have certain rights which can be exercised by member
collectively by means of democratic process i.e. by majority of members usually unless
otherwise prescribed
● Section 241 r/w section 244 confers rights, not less than 100 of a company or not less
than one-tenth of the total number of its members which is ess or any amembers, to
apply to board of relief in cases of oppression or for relief in cases of mismanagement
respectively
● Section 100 confers on members, holding not less than one-tenth of the paid-up share
capital of a company, right to make a requisition to be board of directors to call and
extraordinary general meeting of the company

● Voting Rights of Members

● The right of attending shareholders’ meetings and voting thereat is the most important
right of a member of a company, as shareholders meetings play a very important role in
the company’s life
● Section 47 provides that every member of a company limited by shares, shall have right
to vote on every resolution placed before the company and his voting right on a poll shall
be in proportion to his share in the paid up equity share capital

● Nomination by members (section 72)

● Section 72 states that every holder of securities of a company may, at any time,
nominate, in the prescribed manner, any person to whom his securities shall vest in the
event of his death

● Expulsion of a Member
● The supreme court in ​Bajaj Auto Ltd. V. N.K. Firodia (1971) 41 Com Cases 1​ has laid
down the law as to the conditions on which the directors could be expelled as a member
of the company. ​ ​The court held that assumption by the board of directors of a company
of any power to expel a member by amending its articles of association is illegal and
void.
● A controversy had arisen as to whether a public limited company had powers to insert an
article in its AOA relating to expulsion of a member by the Board of directors of the
company where the directors were of the view that the activities or conduct of such a
member was detrimental to the interests of the company.
● The Ministry of Corporate Affairs clarified that an article for expulsion of a member is
opposed to the fundamental principles of the company jurisprudence and is ​ultra vires
the company
● According to section 6, the act overrides the memorandum and articles of association
and any provision contained in these documents repugnant to the provisions of the
companies act, is void.

● REGISTER OF MEMBERS
● According to section 88 every company shall keep and maintain the following registers -
- Register of members indicating separately for each class of equity and
preference shares held by each member residing in or outside india
- Register of debenture- holders and
- Register of any other securities holders

● Every register maintained shall include an index of the names included therein
● The register and index of beneficial owners maintained by a depository under section 11
of the depositories act 1996, shall be deemed to be the corresponding register and index
for the purposes of this act
● Inspection of Registers
● According to section 94(2) the registers and their indices, except when they are closed
under the act, and the copies of all the returns shall be open for inspection by any
member, debenture-holders, other security holder or beneficial owner, during business
hours.
● Rectification of register of members (sec 59)
● The shares in a public company shall be freely transferable. The directors of a company
or depository has no discretion to refuse or withhold transfer of any security. The transfer
has to be effected by the company/depository automatically and immediately (sec 58(s))
● If the name of any person is, without sufficient cause, omitted or delayed takes place in
entering in the register, the aggrieved person may appeal to the tribunal for rectification
(sec 59(1)).
● The tribunal may, be order, direct that the transfer or transmission shall be registered by
the company within 10 days of the receipt of the order and direct the company to pay
damages. (sec 59 (2))
● During the pendency of the appeal before the tribunal, the holder of securities can
transfer such securities and such further transfer would entitle the transferee to voting
rights also, unless the voting rights been suspended by the tribunal (sec 59 (3))

● CAPITAL AND FINANCE OF COMPANIES

● There are various ways to raise capital which include equity and preferential capital, debt
capital, employee stock option, rights shares, shares with differential voting rights etc.
● In company law, the”capital” is the share capital of company, which is classified as -
- Nominal, authorised or registered capital (sec 2(8))
- Issued capital (section 2(50))
- Subscribed capital (section 2(86))
- Called up capital (section 2(15))
- Paid-up share capital (section 2(64))

● Preference and Equity Share Capital (section 43)

● ‘Equity share capital’, with reference to any company limited by shares, means all share
capital which is not preference share capital;

● SHARE AND SHARE CAPITAL

● The capital of a company if divided into certain indivisible units of a fixed amount and
these units are called shares
● Section 2(84) defines a share as ‘a share in the share capital of a company, and
includes stock except where a distinction between stock and shares is expressed or
implied.
● It is “the interest of a shareholder in the company measured, by a sum of money for the
purpose of liability in the first place and of interest in the second, but also consisting of a
series of mutual covenants entered into by all the shareholders inter se”
● It carries with it certain rights and liabilities while the company is a going concern or
while the company is being wound up. In this sense it may be defined share as a “bundle
of rights and obligations”
● A share is evidenced by a share certificate
● Each share to be distinguished by appropriate number
● Share is a moveable property
● They are transferable in a manner provided by the articles

● Types of Shares:
● Under section 43, a company can issue two types of shares -
● (s) preference shares; and
● (b) equity shares
● ‘Preference share capital’, ​with reference to any company limited by shares, means
that part of the issued share capital of the company which carries a preferential right with
respect to -
- Payment of dividend, ​either as a fixed amount or an amount calculated at a
fixed rate, and
- Repayment of capital ​in the case of a winding up, the amount of the share
capital paid- up, there is a preferential rights to the payment of any fixed premium
or premium on any fixed scale, specified in the memorandum or articles of the
company;

● A preferential share has a preference in regard to payment of fixed amount or fixed rate
of dividend and preferential right of the repayment of capital in the event of winding up of
company
● Equity shares : ​equity shares, with reference to any company limited by shares, are
those ​which are not preference shares.​ These are of two types - (a) with voting rights;
(b) with differential rights as to dividend, voting or otherwise.

● Kinds of Preference Shares:

● Participating and non-participating preference shares
● Cumulative and non-cumulative preference shares
● Convertible and non-convertible preference shares
● Redeemable and irredeemable preference shares

● Redemption of preference shares

● A company may redeem its preference shares only on the terms of which they were
issued or as varied after due approval of preference shareholders. Under section 48 the
preference shares may be redeemed -
- At a fixed time or on the happening of an event
- Any time at the company’s option
- Any time at the shareholder’s option

● Conditions for Redemption of preference shares:

- Preference shares shall be redeemed out of the profits
- Shares shall be redeemed are fully paid
- A sum equal to the shares to be redeemed, to be transferred to a reserve, called
the capital redemption reserve account
- Premium payable on redemption of any preference shares shall be provided for
out of the profits or out of the securities premium account

● Consequences of non-fulfilment of conditions:

● When a company is not in a position to redeem any preference shares or to pay
dividend, in accordance with the terms of issue, with the consent of the holders of
three-fourths in value of such preference shares and with the approval of the Tribunal,
issue further redeemable preference shares equal to the amount due, including the
dividend, in respect of the unredeemed preference shares, and on the issue of such
further redeemable preference shares, the unredeemed preference shares shall be
deemed to have been redeemed.
● No subsisting default in the payment of a declared dividend or repayment of its matured
deposits or redemption of its preference shares or debentures
● No default in repayment of any term loan from a public financial institution or bank that
has become repayable with respect to statutory payments relating to its employees to
any authority
● Not to be penalized by court or tribunal during the last 3 years of any offence under
specified legislations
● Details of the issue to be disclosed in the board’s report
● Register of members to contain the details of shares with differential voting rights.
● Differences between equity shares and preference shares
1) Dividend
2) Repayment of capital
3) Voting rights
4) Redemption
5) Convertible
6) Cumulative
● Issue of shares at premium
● Issue of shares at discount
● Issue of sweat equity shares
● Bonus shares
● Further issue of shares/right issue
● Employee stock option scheme

● Issue of securities at premium

● A company may issue securities at a premium when it is able to sell them at a price
above nominal value
● The companies act 2013, does not stipulate any conditions or restrictions regulating the
issue of securities by a company at a premium. However, the company act does impose
conditions regulating the utilization of the amount of premium collected on securities.
● Share premium to be transferred to ‘securities premium account’
● Section 52(1) states that when a company issues shares at a premium, a sum equal to
the aggregate amount of the premium received on those shares shall be transferred to
aa= “securities premium account”.
● Utilisation of Securities premium (section 52(2))
- Issuing fully paid bonus shares to members
- Writing off the preliminary expenses of the company
- Writing off commission paid or discount allowed, or the expenses incurred on
issue of shares of debentures of the company
- For providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company or
- For the purchase of its own shares or other securities under section 68

● Firstly, the premium cannot be treated as profit and as such the amount of premium is
not available for distribution as dividend. Secondly, the amount of premium whether
received in cash or in kind must be kept in a separate account, known as the “securities
premium account”. Thirdly, the amount of premium is to be maintained with the same
sanctity as the share capital.

● Prohibition to issue the share at discount

● Section 53 states that a company shall not issue shares at a discount except as
provided in section 54 (i.e. issue of sweat equity shares)
● Any share issued by a company at a discounted price shall be void
● When a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than Rs.1 lakh but which may extend to Rs.5
lakhs and ever officer who is in default shall be punishable with imprisonment for a term
which may extend to 6 months or with fine which shall not be less than Rs.1 lakh but
which may extend to Rs.5 lakhs, or with both.

● ISSUE OF SWEAT EQUITY SHARES (SEC 54)

● According to section 2(88), sweat equity shares mean ’equity shares issued by a
company to its directors or employees at a discount or for consideration, other than cash
for providing know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever nature called’.
● Section 54 permits issue of sweat equity shares to employees or directors in recognition
of their contribution for providing know-how etc.
● As the contribution made by employees/directors results in increased profits to the
company for a number of years, sweat equity shares, provide a new form of adequate
return
● Conditions for issue of sweat equity shares
● The issue has been authorized by a special resolution
● The following are clearly specified in the resolution
- Number of shares; current market price
- Consideration, if any, and
- class/es of directors or employees to whom such equity shares are to be issued

● As on the date of issue, at least one year should have elapsed from the date on which
the company had commenced business.
● A company whose shares are listed on a recognised stock exchange issuing sweat
equity shares should comply with the regulations of SEBO
● A company whose shares are not so listed should issue sweat equity shares in
compliance with the rules made in this behalf by the Central Government (I.e.
Companies (share capital and debentures) Rules, 2014)
● Limits on issue of sweat equity shares
● A company shall not issue sweat equity shares for more than 15% of the existing paid up
equity share capital in a year or shares of the issue value of Rs.5 crores, whichever is
higher
● The issuance of sweat equity shares in the company shall not exceed 25% of the paid
up equity capital of the company at any time.
● Sweat Equity Shares to be locked for three years
● The sweat equity shares issued to directors or employees shall be locked
in/non-transferable for a period of 3 years from the date of allotment and the fact that the
share certificates are under lock-in and the period of expiry of lock in shall be stamped in
bold or mentioned in any other prominent manner on the share certificates
● Holder of Sweat Equity Shares to be ranked ​pari passu​ with other Equity
shareholders
● Section 54(2) provides that the rights, limitations, restrictions for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued under
this section and the holders of such shares shall rank ​pari passu​ with other equity
shareholders

● BONUS SHARES (SEC 63)

● A company may, if its articles provide, capitalize its profits by issuing fully-paid bonus
shares. When a company is prosperous and accumulates large distributable profits, it
converts these accumulated profits into capital and divides the capital among the
existing members in proportion to their entitlements. Members do not have to pay any
amount for such shares.
● Conditions for issue of Bonus Shares
● According to section 63(2), no company shall capitalise its profits or reserves for the
purpose of issuing fully paid-up bonus shares, unless-
● It is authorized by its articles
● It has been authorized, on the recommendation of the board, in the general meeting of
the company
● It has not defaulted in patent of interest or principle in respect of fixed deposits or debt
securities issued by it
● It has not defaulted in respect of the payment of statutory dues of the employees, such
as, contribution to provident fund, gratuity and bonus;
● The partly paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up
● Sources for issue of Bonus shares
● According to section 63(1), a company may issue fully paid-up bonus shares to its
members, in any manner whatsoever, out of -
- Its free reserves
- The securities premium account
- The capital redemption reserve account

● No Bonus Shares in lieu of dividend

● The bonus shares shall not be issued in lieu of divided (sec 63(3))
● SEBI has issued regulations for Bonus issues which are contained in SEBI (issue of
capital and disclosure requirements) Regulations, 209 with regard to bonus issues by
listed companies.

● EMPLOYEE STOCK OPTION SCHEME

● According to Section 2(37) “employees’ stock option” means the option given to the
directors, officers or employees of a company or of its holding company or subsidiary
company or companies, if any which gives such directors, officers or employees, the
benefit or right to purchase, or to subscribe for, the shares of the company at a future
date at a predetermined price.
● Section 62(1)(b) provides that a company may issue further shares to its employees
under a scheme of employees’ stock option
● Pass special resolution
● Free pricing in conformity with accounting policies
● Separate resolution to be obtained for granting options and vesting of option company is
free o set lock-in period
● Option granted shall not be transferable. Pledged, hypothecated, mortgaged in any
manner
● Listed companies to comply with SEBI guidelines
● Disclosure to be made in board report
● Buyback of Shares ​(sec 68 to 70)
● Buyback of shares means purchase by the company of its own shares. Buyback of
equity shares is an imperative mode of capital restructuring
● It is a corporate financial strategy which involves capital restructuring and is prevalent
globally with the underlying objectives of increasing earnings per share, averting hostile
takeovers, improving returns to the stakeholders and realigning the capital structure
● Sources of buyback:​ a company may purchase its shares out of -
- Free reserves
- Securities premium account or
- Proceeds of the issue of any shares or other specified securities

● However, no buyback of any kind of shares can be made out of the proceeds of an
earlier issue of the same kind of shares

● Provisions for buyback of shares

● Authorization for buyback: ​articles of association of the company should authorise the
buyback
● Quantum of buyback: ​the buyback can be made with the approval of the board of
directors at a board meetings and by a special resolution passed by shareholders in
general meeting depending on the quantum of buyback:
- Approval of board of directors - ​upto 10% of the total paid-up equity capital
and free reserves of the company
- Approval of shareholders - ​upto 25% of the aggregate of paid-up capital and
free reserves of the company

● Notice of general meeting: ​ the notice of the meeting at which the special resolution is
proposed to be passed shall be accompanied by an explanatory statement in which the
particulars required to be mentioned as per section 68(3) and Rule 17(1) of Companies
(share capital and debentures) Rules, 2014 should be disclosed
● Methods of buyback : ​ the buyback of shares or private and unlisted public companies
may be:
- From the existing shareholders on a proportionate basis
- By purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity

● Letter of offer: ​(Form SH-8): before the buyback of shares, the company shall file with
the Registrar of Companies a Letter of Offer in e-form SH-8 and the Letter of Offer shall
be dispatched to the shareholders immediately after filing the same with the Registrar of
Companies but not later than 20 days from its filings with the Registrar of Companies
ensuring the matters as prescribed in The Companies (Share Capital and Debentures)
Rules, 2014
● Post buyback debt-equity ratio not to exceed 2:1 (sec 68(2)(d))
● The ratio of the aggregate of secured and unsecured debts owed by the company after
buyback is not more than twice the paid-up capital and its free reserves
● Shares / securities being bought back are to be fully paid up (sec 68(2))
● Time limit for completion of buyback (sec 68(4))
● Every buyback shall be completed within a period of 1 year from the date of passing of
the special resolution, or as the case may be, the resolution passed by the Board
● Methods of buyback (section 68(5))
● The buyback may be-
 - From the existing shareholders on a proportionate basis;
- From the open market
- By purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity
- Register of buyback (section 68(9))
- Return of buyback (section 68(10))

● Punishment (Section 68(11))

● If a company makes any default in complying with the provisions of this section, in case
of listed companies, the company shall be punishable with fine which shall not be less
than Rs. 1 lakh but which may extend to Rs.3 lakhs and eerie officer of the company
who is in default shall be punishable with imprisonment for a term which may extend to 3
years or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs.3
lakh, or with both.
● Transfer to and application of Capital Redemption Reserve Account (section 69)
● The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.

● Prohibitions on buyback of shares

● No company shall directly or indirectly purchase its own shares:-
- Through any subsidiary company including its own subsidiary companies
- Through any investment company or group of investment companies
- If a default, is a made by the company, in the repayment of deposits accepted, or
interest payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment of any term loan or
interest payable thereon to any financial institution or banking, however, the
buyback is not prohibited, if the default is remedied and a period of three years
as lapsed after such default ceased to subsist
- If the company has not complied with the provisions of sec 92 (Annual Return),
Sec 123 (Declaration of Dividend), Sec 127 (punishment for failure to distribute
dividend) and sec 129 (financial statement)

● Further issue of shares/rights issue

● Section 62 states that whenever at any time, a company having a share capital proposes
to increase its subscribed capital by the issue of further shares, such shares shall be
offered to the ​existing holders​ of equity shares in proportion to the paid-up share
capital on their shares the time of further issue by sending a letter of offer
● Section 62 applicable to all types of companies
● For listed companies, the information as regards the quantum of such issue and the
proportion in which rights shall be offered shall be supplied to the concerned Stock
Exchanges in advance
● The company must give notice the shares offered to him by the company
● The shareholder must be informed of the number of shares he has opted to buy giving
him at least 15 days but not more than 30 days to decide
● The said notice shall be dispatched through registered or speed post or through
electronic mode to all the existing shareholders at least 3 days before the opening of the
issue
● If the shareholder does not convey to the company his acceptance of the company’s
offer of further shares he shall be deemed to have declined the offer
● Unless the articles of the company otherwise provide, the directors must state in the
notice of offer of rights shares the fact that the shareholder has also the right to
renounce the offer in whole or in part, in favour of some other persons
● If a shareholder has neither renounced in favour of another person nor accepted the
shares, the board of directors may dispose of the shares so decliden in such manner
which is not dis-advantageous to the shareholders and the company
● Section 62(1)(b) provides that a company may issue further shares to its employees
under a scheme of employees; stock option, subject to special resolution passed by the
company and subject to such conditions as may be prescribed
● Section 62(1)(c) deals with issue of shares to persons other than existing shareholders
and provides that a company can issue further shares to persons other than existing
shareholders either for cash or for a consideration other than cash, if -
- The company in General Meeting passes a special resolution to this effect; and
- The price of such shares is determined by the valuation report of a registered
valuer subject to such conditions as may be prescribed

● The restrictions contained in section 62 of the Act regarding issue of further shares do
not apply to conversion of debentures or loans into shares of the company 9section
62(3))

● ALTERATION OF CAPITAL (section 61)

● A limited company having a share capital may make the following types of alterations in
its memorandum by an ordinary resolution, if so authorised by its articles, at its general
meetings to -
- Increase its authorised share capital by such amount as its thinks expedient
- Consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares
- Convert all or any of its fully paid-up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination
- Sub-divide its shares, into shares of smaller amount than is fixed by the
memorandum
- Cancel shares which, have not been taken or agreed to be taken by any person,
and diminish the amount of its share capital by the amount of the shares so
cancelled

● Reduction of capital (section 66(1))

● Subject to confirmation by the Tribunal on an application by the company, a company
limited by shares or limited by guarantee and having a share capital may, by a special
resolution, reduce the share capital in any manner and in particular, may -
- Extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up; or
- Either with or without extinguishing or reducing liability on any of its shares:-
- cancel any paid-up share capital which is lost or is unrepresented by available
assets; or
- pay off any paid-up share capital which is in excess of the wants of the
company

● Alter its memorandum by reducing the amount of its share capital and of its shares
accordingly:
● It may be noted that reduction of capital shall not be made if the company is in arrears in
the repayment of any deposits accepted by it, either before or after the commencement
of Act, or the interest payable thereon.
● Notice by Tribunal (sec 66 (2))
● The tribunal shall give notice to
- The central government
- Registrar
- The SEBI, in the case of listed companies, and
- The creditors of the company

● It shall take into consideration the representations, if any, made to it by the government,
Registrar, the SEBI and the creditors within a period of 3 months from the date of receipt
of the notice.
● If no representation has been received from the central government, Registrar, the SEBI
or the creditors within the said period, it shall be presumed that they have no objection to
the reduction
● Stock and its nature
● Section 61 allows the company to convert its fully paid up shares into stock
● Section 2(84) defining a share, states that “share means a share in the share capital of a
company and includes stock”. Thus by converting shares into stock, a shareholder is
known as a stockholder. A stockholder has the same rights as to dividends as a
shareholder
● It is only the conversion of fully paid shares into stock that is allowed by Sec 61 (1 ( c ))
nd not a direct issue of stock
● It should be noted that (i) only fully paid up shares can be converted into stock, and (ii)
no direct issue of stock by a company is lawful.
● Eg: after shares are converted into stock, the stockholder may own Rs. 1000 worth of
stock where formerly he held 100 shares of Rs. 10 each. Thus, though his investment in
the company remains the same, the interest of the stockholder in the company is
described differently
● Difference between share and stock
 Share Stock

Shares in physical form bear distinct Shares are the consolidated value of
numbers share capital

Shares may or may not be fully paid up Stock is always fully paid up

Shares have nominal value Stock does not have any nominal value

It is not possible to transfer shares into Stock is divisible into any amount
fraction required. Thus, it is possible to transfer
even into fractions

All shares are of equal denomination Denomination of stocks varies

Shares comes into existence before the Stock comes into existence after
stock and it is issued initially conversion of shares into stock and on
conversion of shares into stock, the
provisions of the Act governing the shares
shall cease to apply to the share capital
as it is converted into stock
● Calls on shares (sec 49)
● Calls are normally made on shares at intervals depending upon the requirements of
funds for implementation of the project
● Under Sec 179 the power to make calls is exercised by the board only at the meeting of
the board by passing a resolution and not by circulation. Also, the board can not
delegate this power to any committee of the board or managing director, etc.
● A call is a demand made by the company in accordance with the articles. Calls once
made is a debt due to the company.
● In the event of liquidation of the company the power to make call is exercised by the
liquidator
● A proper notice must be given and the notice must specify the amount called up, date of
payment, place of payment, and also to whom it should be paid
● In the East and West Insurance Co. Ltd v. Kamala Mehta, the BOD of a company
resolved to make a call without specifying the date and amount of payment. The court
held the called notice (in which the blanks had been subsequently filed by the Secretary)
was invalid.
● The power to make a call is in the nature of trust and must be exercised only for the
bona fide interest of the company and not for the private ends of the directors. Thus, if a
call is made for the personal benefit of directors, the call will be invalid.
● According to Section 49, calls on same class of shares must be made on uniform basis
● In Galloway v. Halle Concerts Society, G paid the first 2 calles of 7 and 3 after a great
delay. He neglected to pay the third calls of 10 also. The directors were annoyed by the
conduct of G and made a call upon him to the entire balance amount. Held that the call
was invalid.
● Table F (articles 13-18) of Schedule- 1 contain provision for call which provides that-
● The board may make calls upon the members in respect of any moneys unpaid on their
shares
● The gap between two calls must be at least one month
● At least 14 days prior notice must be given to the member
● A call may be revoked or postponed at the discretion of the Board
● Joint holders of a share shall be jointly and severally liable to pay all calls in respect
thereof
● For delayed periods, interest is payable at rate 10% p. A., or at such lower rate on the
Board may specify
● The Board shall be at liberty to waives payment of any such interest wholly or in part
● Where any amount is payable by the terms of issue share on allotment or at any fixed
date, no call is required. It shall be deemed to be a call duly made and payable on the
date on which by the terms of issue such sum becomes payable
● Calls in advance (sec 50)
● Sec 50 permits acceptance of calls pain in advance if the articles so authorizes. No
voting right is allowed in respect of such calls paid in advance, Article 18 of Table F of
Schedule ! provides for payment of interest at such rate not exceeding 12%
● The directors of the company may accept calls in advance from the members, on their
shares before the call was actually made and also pay interest, provided the articles of
association for such authority.
● The amount paid as calls in advance is not refundable except in winding up of the
company. In the event of winding up, the shareholders rank after creditors in respect of
such calls in advance.
● Calls in advance will not be entitled to any voting right and shall not participate in the
dividends.
● The rate of interest permitted by the articles is not exceeding 12%
● The power to make a call is in the nature of trust and must be exercised only for the
bona fide interest of the company and not for the private ends of the directors. Thus, if a
call is made for the personal benefit of directors, the call will be invalid.
● Forfeiture of share (Sch 1, Table F, Articles 28-34)
● The articles of association normally authorize the board of directors with power to forfeit
shares for non payment of calls
● The shares can be forfeited only for non payment of calls and not for any other debt due
from the member
● Where the power is given in the articles, the board must exercise it strictly in accordance
with regulations contained in the articles regarding notice, procedure and manner stated
therein, otherwise forfeiture will be void
● As per the articles, proper notices precedent to forfeiture must be given to the defaulting
shareholder. Such notice must state clearly that the shares in question will be forfeited if
the call with interest is not paid within the specified period
● The SC held in Public Passengers Service ltd v. Khader, that any defect in notice, even
though slight, invalidated the forfeiture
● The power of forfeiture is normally to be exercised only by the board of directors and at
the discretion of board, forfeiture may be annulled for sufficient reasons
● After forfeiture the articles provide that an intimation regarding forfeiture is sent to the
shareholder concerned
● The power of forfeiture must be exercised bona fide and in the best interest of the
company. It should not be for collusive or fraudulent purposes.
● Forfeited shares can be re-issued at any price provided that the total money already paid
by original owner together with the reissue price is not less than par value.
● The original shareholder continues to remain liable for the unpaid calls even after
forfeiture and his name will be put in the B list of contributes, in event of liquidation
● If the shares are reissued the new shareholder will only be liable for the payment of calls
primarily, the new shareholder will only be liable for the payment of calls primarily and
thus his name will be put in the A list of contributors, in the event of liquidation
● However, a company cannot recover from the original holder more that the difference
between the amount payable by him and the amount already received on the forfeited
shares including the amount of re issue.
● Re issue of forfeited shares
● Articles of association of company provide for selling of forfeited shares to others
● Hold a board meeting and decide the terms and manner of selling the forfeited shares to
others
● Show full consideration, either by receipt or by adjustment, for the sale of forfeited
shares and executes the transfer of those shares in favour of the person to whom shares
are sold or disposed off
● Register the name of the transferee as the holder of those shares in the register of
members
● Deliver the share certificates comprising those shares to the transferee who has now
become a member with the registration of his name, in the register of members of the
company.
● Lien on shares (sch 1, table F, Art. 9-13)
● The articles of a company provide that the company shall have a first and paramount lien
on shares, which are not fully paid up. This enables the company to sell the shares of
the defaulting member and recover the money due from the member
● However the power to exercise lien should be provided by the articles and 14 days
notice should be given before the lien is exercised
● Lien can be exercised not only on unpaid calls but also on any debt due to the
company
● The other feature in lien is that the company should refund the surplus after adjusting the
amount due to the company, to the defaulting shareholder.
● Stock exchanges prohibit the exercise of right of lien on any other debt due to the
company
● Difference between forfeiture and lien
Forfeiture Lien

It can be exercised only on unpaid calls It can be exercised not only on unpaid
calls but on any debt due to the company
 It is like a penalty clause to enforce the It is a kind of security for the debt due
payment of money due on shares

It is an act depriving the right to members It is enforced by sale of shares to adjust

the outstanding dues

The entire money already paid by the On sale of shares, the surplus, if any,
member will be forfeited by the company after adjusting the outstanding dues will
be refunded to the members

Forfeiture leads to extinction of shares The shares are no way affected only the
and comes into existence only on reissue right to sell is exercised by the company
● Global depository receipts
● Section 41 states that a company may issue global depository receipts to transact
business with in a depository mode in any foreign country
● A company may, after passing a special resolution in its general meeting, issue
depository receipts in any foreign country
● The Companies ​(Issue of Global Depository Receipts) ​Rules, 2014, lays the
conditions and the manner in which a company may issue depository receipts in a
foreign country.
● The depository receipts can be issued by way of of public offering or private placement
or in an overseas listing or trading platform
● The depository receipts may be issued against issue of new shares or may be
sponsored against shares held by shareholders of the company in accordance with such
conditions as the Central Government or Reserve Bank of India may prescribe or specify
from time to time.

● DEBT CAPITAL (BORROWINGS)

● In order to run a business effectively and successfully, an adequate amount of ca[ital is
necessary.
● In some cases capital arranged through internal resources i.e. by way of issuing equity
share capital or using accumulated profit is not adequate and the organization is
resorted to external resources of arranging capital i.e. Debentures, Bank Loan, Public
Deposits, External Commercial borrowing (ECB), etc.
● Power of Companyto borrow
● The power of the company to borrow is exercised by its directors, who cannot borrow
more than the sum authorised
● The powers to borrow money and to issue debentures whether in or outside India can
only be exercised by the Directors at a duly convened meeting. Pursuant to Section
179(3)(c) & (d) directors have to pass resolution at a duly convened Board Meeting to
borrow moneys.
● The power to issue debentures cannot be delegated by the Board of directors.
● Unauthorized or Ultra Vires Borrowing
● Where a company borrows without the authority conferred on it by the articles or beyond
the amount set out, is an ultra vires borrowing.
● Any act which is ultra vires the company is void. In such a case the contract is void and
the lender cannot sue the company for the return of the loan.
● The securities given for such ultra-vires borrowing are also void and inoperative. Ultra
vires borrowings cannot even be ratified by a resolution passed by the company in
general meeting.
● If the lender has parted with his money to the company under an ultra vires borrowing,
unable to sue for its return, or enforce any security granted to him, he nevertheless has
the following remedies:
● Injunction and Recovery
● Subrogation
● Suit against Directors
● A debenture stock is called perpetual if the principal amount of debt is not payable at any
fixed time but only in the case of winding up or in case of default in paying interest.
● Debentures are secured over the assets of the company. Debentures are issued as a
series, single debentures can also be issued.
● Debentures carry no voting rights at any meeting of the company (sec 71 (2))
● Section 71 provides the manner in which a company may issue debentures.
● Section 23 also provides the ways in which a public company or private company may
issue securities.
● (a) Issue of securities by public company
(i) to public through prospectus (public offer) or
(ii) through private placement; or
(iii) through rights issue
(b) Issue of securities by Private Company
(i) by way of rights issue or
(ii) through private placement

● Kinds of Debentures:
● Bearer Debentures : ​these are also known as unregistered debentures. They are
payable to the bearer. These are regarded as negotiable instruments and are
transferable by delivery.
● Registered debentures : ​these are debentures which are payable to the registered
holders. A registered holder is one whose name appears both on the debenture
certificate and in the company’s register of debenture holders required to be maintained
under SEc 152. The registered holder of debentures can transfer them like shares 9sec
108). Registered debentures. The charge may be a fixed discharge or a floating charge.
● Unsecured or naked debentures : ​ debentures which do not create any charge on the
assets of the company are known as unsecured or naked debentures. The holder of
these debentures like ordinary unsecured creditors may sue the company for recovery of
the debt
● Debentures with pari-passu clause
● The expression ‘pari-passu’ implies with equal step, equally treated, at the same rate, or
at par with.
● When it is said that existing debentures shall be issued pari-passu, it implies they would
be on an equal footing as to security, and should the security be enforced, the amount
realised shall be divided pro-rate, i.e. they are to be discharged ratably. In the event of
deficiency of assets, they will abate proportionately.
● If the words pari-passu are not used, the debentures will be payable according to the
date of issue, and if they are all issued on the same day, they will be payable according
to their numerical order. However, a company cannot issue a new series of debentures
so as to rank pari-passu with prior series, unless the power to do so is expressly
reserved and contained in the debentures of the previous series.
● Debenture Trust (sec 71 (5)(6 & (7))
● Where a series of debentures are issued to numerous debenture holders, a debenture
trust normally created through a debenture trust deed.
● The debenture trustees appointed by the debenture holders administer the trust and all
the debenture holders are beneficiaries of the trust.
● The main purpose of creating a debenture trust is to enable the company to create a
charge or security in favour of the trust.
● The trustees area bound to exercise due care and diligence to protect the interest of the
debenture holder’s u/s 72(6) of the Act.
● The debenture trustees shall be liable for breach of trust and negligence and any term in
the debenture trust deed which exempts the trustee from liability in case of breach of
trust is void and will not have any legal effect.
● The debenture trust has the following advantages:
● The case of default by the company either in the payment of interest or Repayment of
principal, the trustee can directly take steps to enforce the Securities instead of leaving
the initiative in the hands of few debenture holders.
● The trustees are normally given the power to sell and realise the security without the aid
of the court.
● Since the legal estate is vested in the trustee when the charge is registered no
subsequent legal mortgage having priority can be registered
● The title deeds of the mortgage having property are kept insured and maintained in
proper condition
● The trustees ensure that the mortgaged property is kept insured and maintained in
proper condition.
● Debenture Trust Deed : (sec 71(5) & R. 18(5))
● Every company issuing prospectus or make an offer or invitation to public or to its
members ​exceeding 500 persons ​for the subscription of its debentures required to
execute the debenture trust deed and it shall be made within ​60 days ​of allotment of
debenture. The deed shall be made in favour of the debentures trustees.
● Inspection and copy of trust deed : ​any member of debenture holder of the company
has the right to inspect the trust deed and obtain copies of the same of payment of
prescribed amount (R.18 (8a) & (8b))
● Appointment of Debenture Trustee : (Sec. 71(5) and R.18(2) of Companies (Share
Capital & Debenture) Rules, 2014)
● The company shall appoint a debenture trustee before the issue of prospectus or letter
of offer for subscription of its debentures.
● Appoint one or more debenture trustees.
● State in Letter offer, the names of Debentures Trustees
● Obtain written consent, before such appointment, from Debenture trustees.
● A person shall be appointed as a Debenture trustees, if he -
- Beneficially holds shares in the company
- Is a promoter, director or key managerial personal or any other officer or an
employee of the company or its holding company, subsidiary company or
associate company
- Is beneficially entitled to moneys which are to paid by the company, otherwise
than as remuneration payable to the debenture trustee
- Is indebted to the company or its subsidiary or its holding or associate company
or a subsidiary of such holding company.

● Remedies where company fails to redeem Debentures:

● When the debentures are unsecured:
● May sue the company and obtain the order of the court for attachment of company’s
property
● May file a winding up petition in a NCLT against the company for compulsory winding up
● When the Debentures are secured:
● In addition to the remedies of unsecured debenture holders, the secured debenture
holders -
● May enforce the security without even applying to the court
● Apply to the court for appointment of receiver
● Foreclose the interest of the company in the assets charged
● If the company goes into liquidation, the debenture holder can value his securities and if
it is insufficient he can prove for the balance of the debt or totally give up the security
and prove for the whole debt.

● Charge
● A charge is security, which has the effect of passing legal title to assets or property of
the company
● A charge is a process of creation security given for debenture or loans of the company
● The company can deal with the property subject to charge to that the charge holder may
be paid first whatever is due to him
● A charge is an instrument in writing creating a security and includes an equitable charge
or deposit of title deeds.
● According to section 2(16) “charge” has been defined as an interest or lien created on
the property or assets of a company of any of its undertakings or both as security and
includes a mortgage
● The law with respect to the registration of charges are dealt in Section 77 to 87 of the
Companies Act, 2013. The sections provided the law with respect to the registering of
the charges.
● The essential difference between charge and mortgage is that in the former case, there
is only passing of title, while interest in the property remains with the company; in the
latter case there is transfer of interest in property.
● Kinds of charges -
● Fixed charge and
● Floating
● Fixed charge or Specific charge : ​a fixed charge is a specific charge made to cover
assets which are ​ascertained and definite​ ​or capable of being ascertained and defined.
● Thus a fixed charge can be created both on the present and the future property of the
company
● Fixed charge is normally created on the fixed assets of the company viz., land, buildings,
plant and machinery, vehicles, etc. However nothing in the Act prohibits creation of fixed
charge on the current assets of the company
● Fixed charge created on the fixed assets is a kind of charge where the fixed assets do
not take part directly in the production process. They only aid production. Also fixed
assets constantly remain as fixed assets without change of its character.
● The fixed assets, which are subjected to fixed charge, remain in the possession of the
company but cannot be sold without the consent of the charge holder.
● A fixed charge is easily enforceable. It does not require any other legal approval and can
be enforced without aid of the court in accordance with the conditions creating the
charge.
● Floating Charge
● A floating charge is a peculiar kind of security available to companies as borrowers.
● A floating charge is a charge on the assets for the time being of a going concern. It
remains dormant and floats over the assets of the company until the company ceases to
be a going concern
● A floating charge is not attached to any definite property but covers property of a
fluctuating type. However, it covers both the present and future property.
● Floating charge is normally created on the current assets of the company like raw
materials, work-in-progress, finished goods, sundry debtors, bill receivable, prepaid
expenses and all other current assets.
● These current assets are of fluctuating type of direct take part in the production process.
● The characteristics of the assets, which are subject to floating charges, are that they
charge their character due to the production process. Raw material gets converted into
work-in-progress, work-in-progress into finished stock, finished stock, finished stock into
cash/sundry debtors/ bills receivable and then they can convert once again into raw
material.
● The advantage of floating charge is that the company may sell the property subject to
charge in the ordinary course of business without consent of the charge holder.
● A floating charge cannot be directly enforced. It has to be first converted into a fixed
charge before its enforcement. The process of conversion of the floating charge into
fixed charge for the purpose of enforcement is called crystallization of floating charge.

● Crystallisation of Floating Charge

● The process of conversion of a floating into fixed charge for the purpose of its
enforcement is called crystallization of floating charge.
● A floating charge crystallizers and the security becomes the security becomes fixed the
following cases:
- When the company goes into liquidation
- When the company caesars to carry on business
- When the creditors take steps to enforce the security
- On the happening of an event specified in the instrument creating the charge.

● Postponement of Floating Charge

● The creation of floating charge on a property leaves the company a right to create
another fixed charge, on the same property until the floating charge crystallizes
● In such a situation a fixed charge created after the floating charge will get priority and the
floating charge gets postponed.
● The floating charge is also postponed in favour of the following persons, if they act
before crystallization of security:
- A landlord who distraints for rent
- A creditor who obtains a garnishee order
- A judgement creditor who attaches the goods of the company and gets them
sold.
- The employees of the company and other preferential creditors in the event of
the winding up
- The supplier of the goods to the company under hire purchase agreement

● Registration of charges:
● Duty of the company to register charges: ​according to section 77, it shall be duty of
the company creating a charge on its property or assets of any of its undertakings
whether tangible or otherwise, to register the particulars of the charge with the
instruments, creating such charge in such form, on payment of such fees and in such
manner as may be prescribed, with the registrar ​within 30 days ​ of creation.
● Registration by the Registrar: ​the registrar may, on the application by the company,
allow such registration to be made within a period of 300 days of such creation on
payment of such additional fees as may be prescribed.
● If registration is not made within a period of 300 days of such creation, the company
shall seek extension of time in accordance with section 87.
● Any subsequent registration of a charge shall not prejudice any right acquired in respect
of any property before the charge is actually registered.
● Issue of certificate of registration by registrar: ​ where a charge is registered with the
registrar, a certificate of registration of such charge shall be issued in prescribed form to
the company of charge holder.
● ​Verification of instruments: ​every instrument evidencing any creation or modification
of charge and required to be filed with the Registrar in pursuance of section 77, 78 or 79
shall be verified as follows-
● (a) where the instrument or deed relates solely to the ​property situated outside india,
the copy shall be verified by a certificate issued either under the seal of the company, or
under the hand of any director or company secretary of the company, or authorised
officer of the charge holder or under the hand of some person other than the company
who is interested in the mortgage or charge;
● (b) where the instrument or deeds relates, whether wholly or partly, to the ​property
situated in India, ​the copy shall be verified by a certificate issued under the hand of any
director or company secretary of the company or an authorised officer of the charge
holder.

● Satisfaction of charges
● According to section 82, the company shall give intimation to the Registrar of the
payment or satisfaction in full of any charge within a period of 30 days from the date of
such payment along with the fee
● Where the satisfaction of the charge is not filed within 30 days from the date on which
such payment of satisfaction, the Registrar shall not register the same unless the delay
is condoned by the Central government
● On receipt of such intimation, the Registrar shall issue a notice to the holder of the
charge calling a show cause within such time not exceeding 14 days, as to payment or
satisfaction of in full should not be recorded as intimated to the Registrar
● If no cause is shown, by such holder of the charge, the registrar shall order that a
memorandum of satisfaction shall be entered in the registrar of charges maintained by
the registrar under section 81 and shall inform the company.
● Company’s Register of Charges
● Section 85 provides that every company shall keep at its registered office a registrar of
charges which shall include therein all charges and floating charges affecting any
property or assets of the company or any of its undertakings and such particulars as may
be prescribed
● The entries in the registrar shall be authenticated by a director or the secretary of the
company or any other person authorized by the Board for the purpose
● The register of charges shall be preserved permanently for a period of 8 years from the
date of satisfaction of charge by the company. A copy of the instrument creating the
charge shall also be kept at the registered office of the company along with register of
charges
● Inspection of charges: ​the register of charges and instrument of charges shall be kept
open for inspection during business hours by members, creditors or any other person
subject to reasonable restriction by its articles.

● Deposits
● Acceptance of deposits by Banking Companies are regulated by Reserve Bank of India,
whereas the acceptance of deposits by non-banking non-financial companies are
regulated by the provisions of the companies act 2013 and Companies (Acceptance of
 Deposits) Rules, 2014. It regulates aspects as to the ceiling of total deposits,
advertisement, exemptions etc.
● Section 73 to 76 regulate the invitation and acceptance of deposits. It prohibits
acceptance of deposits except from the members through ordinary resolution or
acceptance deposits by ‘eligible company’ being a public company, subject to conditions
specified in the rules.
● Section 2(31) ‘deposit’ includes any receipt of money by way of deposit or load or in any
other form by a company, by does not include such categories of amount as may be
prescribed in consultation with the Reserve Bank of India.
● What is not a deposit?
● ‘Deposit’ includes any receipt of money by way of deposit or loans in any other form, by
a company, ​but does not include-
- Any amount received from the Central Government or a State Government, or
any local government, or any a statutory body
- Any amount received from forgeign governments, foreign/international banks,
multilateral financial institutions, foreign export credit agencies, foreign
collaborations, foreign bodies corporate and foreign citizens, foreign authorities,
subject to the provisions of FEM Act 1999
- Any amount received as a loan or facility from any baking company or from the
State Bank of India or any of its subsidiary banks or from a banking institution
notified by the Central Government under the Banking Regulations act 1949.
- Any amount received as a loan or financial assistance from Public Financial
Institutions notified by the Central government in consultation with the RBI,
insurance companies, scheduled banks as defined in the RBI Act 1934.
- Any amount received against the issue of commercial paper or any other
instrument issued in accordance with the guidelines of the RBI
- Any amount received by a company form any other company
- Any amount received from a person, who at the time of the receipt of the amount,
was a director of the company
- Any amount received from an employee not exceeding his annual salary, under a
contract of employment with the company in the nature of non-interest bearing
security deposit
- Any non-interest bearing amount received or held in trust
- Any amount brought in by the promoters of the company by way of unsecured
load in pursuance of the stipulation of any lending financial institutions or a bank
- Any amount accepted by a Nidhi Company in accordance with Section 406 of the
Act.

● Depositor [rule 2(1)(d)]

● ‘Depositor’ means
● Any member of the company who has made a deposit with the company in accordance
with section 73 of the Act, or
● Any person who has made a deposit with a public com in accordance with section 76 of
the Act
● Eligible company [Rule 2(1)(e)]
● ‘Eligible company’ means a public company as referred to in section 76, having a net
worth of not less than Rs.100 crore or a turnover or not less than Rs.500 crore and
which has obtained the prior consent of the company in general meeting by means of a
special resolution and filed the said resolution with the Registrar of Companies and
where applicable, with the RBI before making any invitation to the Public for acceptance
of deposits.
● Prohibition on acceptance of deposits from public
● Section 73(1) states that, no company shall invite, accept renew deposits under this Act
from the public except in a manner provided under chapter V
● Exceptions
● Section 73(1) prohibition, does not apply to
● A banking company and
● Non-banking financial company as defined in the RBI Act 1934 and
● To such other company as the Central government may, after consultation with the RBI,
specify in this behalf
● Conditions for acceptance of deposits from members
● Section 73(2) states that a company may, subject to
● The passing of a resolution in general meeting nad
● Subject to such rules as may be prescribed in consultation with the RBI
● Issuance of a circular to its members including a statement showing the financial position
of the company, the credit rating obtained, the total number of depositors.
● Filing a copy of the circular along with such statement with the registrar within 30 days
before the date of issue of the circular
● Depositing such sum which shall not be less than 15% of the amount of its deposits
maturing during a financial year and the financial year next following, and kept in a
scheduled bank in a separate bank account to be called as ​deposit repayment reserve
account
● Providing deposit insurance in such manner and to such extent as may be prescribed
● Certifying that the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of interest on
such deposits
● Section 73(4) states that when a company fails to repay the deposit or part thereof or
any interest thereon, the depositor concerned may apply to the Tribunal for an order
directing the company to pay the sum due or for any loss or damage incurred by him as
a result of such non-payment and for such other orders as the Tribunal may deem fit.
● Creation of Security [Rule 6]
● Every eligible company inviting secured deposits shall provide for security by way of a
charge on its assets of the company for the due repayment of the amount.
● The company shall ensure that the total value of the security either by way of deposit
insurance or by way of charge or by both on company’s assets shall not be less than the
amount of deposits accepted and the interest payable thereon
● The security for deposits shall be created in favour of a trustee for the depositors on:
● (a) specific movable property of the company, or
● (b) specific immovable property of the company wherever situated, or any interest
therein
● Appointment of deposit trustee (Rule 7)
● Consent of deposit trustees with respect to their appointment
● Execution of deposit trust deed before issuing advertisement
● Certain persons not to be appointed as deposit trustees
● Removal of deposit trustees
● Meeting of depositors through deposit trustee
● Nomination for deposits
● Furnishing of deposit receipts to depositors
● Maintenance of liquid assets and creation of deposit repayment reserve account
● Registers of deposits
● Premature repayment of deposits
● Return of deposits to be filed with the registrar
● Penal rate of interest
● Power on central government to decide certain questions
● Damages of fraud

● Theories of corporate personality

● Fiction theory
● Bracket theory
● Realistic theory
● Concession theory
● Purpose theory

● According to ​fiction theory, ​a legal person is an imaginary entity that is formed by law or
in other words enforceable by law. It has rights and duties. It just likes a human being
who has a soul but it's not a real human being. It has no will, no mind nothing. It cannot
decide on its own. It can work according to the law only. Its personality is different from
the members of the company
● Bracket theory ​was also known as the symbolist theory. This theory is first propounded
by Rudolph. According to this theory, it is said that the only human beings have rights
and interests, the corporation is only a legal device to solve complex jural relations and
nothing else
● The ​realistic theory ​was founded by german jurist Johannes. According to this
corporation is a living human being just like a normal human being and it is not created
by the state also. The corporation is associated with members of the company.
Corporations have the power to make their own decision and it has its own will. All the
members of the group are ready to fulfill the desire of the corporation
● Concession theory ​is propounded by Svigny and Dicey. According to this, it is the State
and Government who recognize the legal person then only any corporation will come
into existence. A state can form and destroy any company or any group of associations.
It can also withdraw the status of any company . it is based on the principle that the state
is sovereign.
● Purpose theory ​is propounded by german jurist Brinz and Baker. According to this,
human beings have rights and duties. The corporation is a subject less property than
anything else. Corporations can only form due to the purpose and needs of the human
being.

● IMPORTANT
● Features of company
● Types of company
● MOA & AOA - alteration -limitations
● Promoter - position - liability - preliminary contracts
● Doctrines - ultra vires, indoor management, constructive notice
● Prospectus - types, transfer and transmission, reduction and alteration
● Debentures - types - trust - DRR
● Charges - types - registration