company law test i

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art A.pdf

art B&C.pdf

art D.pdf

art E.docx


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Definition of a company

Sec 3(1)(i) of CA merely states that a company means a company formed and registered under

this Act or an existing company as defined in Sec 3(1)

(ii) Existing company means a company formed and registered under any of the previous company

law.

Chief Justice Marshall a corporation is an artificial being, invisible, intangible existing only in

contemplation of law. Being a mere creation of law, it possesses only the properties which the

Charter of its creation confers upon it, expressly or incidentally to its very existence.

A company is an association or collection of individuals people or"warm-bodies"or else contrived"legal persons" (or a mixture of both). Company members share a common purpose and unite in

order to focus their various talents and organize their collectively available skills or resources toachieve specific, declared goals. Companies take various forms such as:

Voluntary associations which may be registered as a Nonprofit organization A group of soldiers Business entity with an aim of gaining a profit Financial entities and Banks

CHARACTERISTICS OF A COMPANY

The main characteristics of a company are:

1. Incorporated association. A company is created when it is registered under the Companies Act.It comes into being from the date mentioned in the certificate of incorporation. It may be noted in

this connection that Section 11 provides that an association of more than ten persons carrying onbusiness in banking or an association or more than twenty persons carrying on any other type of

business must be registered under the Companies Act and is deemed to be an illegal association,if it is not so registered.

For forming a public company at least seven persons and for a private company at least two persons

are persons are required. These persons will subscribe their names to the Memorandum ofassociation and also comply with other legal requirements of the Act in respect of registration to

form and incorporate a company, with or without limited liability [Sec 12 (1)]

2. Artificial legal person. A company is an artificial person. Negatively speaking, it is not a natural

person. It exists in the eyes of the law and cannot act on its own. It has to act through a board ofdirectors elected by shareholders. It was rightly pointed out in Bates V Standard Land Co. that :The board of directors are the brains and the only brains of the company, which is the body and

the company can and does act only through them.

But for many purposes, a company is a legal person like a natural person. It has the right to acquire

and dispose of the property, to enter into contract with third parties in its own name, and can sueand be sued in its own name.


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However, it is not a citizen as it cannot enjoy the rights under the Constitution of India orCitizenship Act. In State Trading Corporation of India v C.T.O (1963 SCJ705), it was held that

neither the provisions of the Constitution nor the Citizenship Act apply to it. It should be notedthat though a company does not possess fundamental rights, yet it is person in the eyes of law. It

can enter into contracts with its Directors, its members, and outsiders.

Justice Hidayatullah once remarked that if all the members are citizens of India, the company doesnot become a citizen of India.

3. Separate Legal Entity: A company has a legal distinct entity and is independent of its members.

The creditors of the company can recover their money only from the company and the property ofthe company. They cannot sue individual members. Similarly, the company is not in any way liable

for the individual debts of its members. The property of the company is to be used for the benefitof the company and nor for the personal benefit of the shareholders. On the same grounds, a

member cannot claim any ownership rights in the assets of the company either individually orjointly during the existence of the company or in its winding up. At the same time the members of

the company can enter into contracts with the company in the same manner as any other individualcan. Separate legal entity of the company is also recognized by the Income Tax Act. Where a

company is required to pay Income-tax on its profits and when these profits are distributed toshareholders in the form of dividend, the shareholders have to pay income-tax on their dividend of

income. This proves that a company that a company and its shareholders are two separate entities.

4. Perpetual Existence. A company is a stable form of business organization. Its life does not

depend upon the death, insolvency or retirement of any or all shareholder(s) or director (s). Law

creates it and law alone can dissolve it. Members may come and go but the company can go on

forever. During the war all the member of one private company, while in general meeting, were

killed by a bomb. But the company survived; not even a hydrogen bomb could have destroyed i.

The company may be compared with a flowing river where the water keeps on changingcontinuously, still the identity of the river remains the same. Thus, a company has a perpetual

existence, irrespective of changes in its membership.

5. Common Seal. As was pointed out earlier, a company being an artificial person has no body

similar to natural person and as such it cannot sign documents for itself. It acts through natural

person who are called its directors. But having a legal personality, it can be bound by only those

documents which bear its signature. Therefore, the law has provided for the use of common seal,

with the name of the company engraved on it, as a substitute for its signature. Any document

bearing the common seal of the company will be legally binding on the company.

6. Limited Liability: A company may be company limited by shares or a company limited byguarantee. In company limited by shares, the liability of members is limited to the unpaid value of

the shares. For example, if the face value of a share in a company is Rs. 10 and a member has

already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share during the

lifetime of the company. In a company limited by guarantee the liability of members is limited to

such amount as the member may undertake to contribute to the assets of the company in the event

of its being wound up.


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7. Transferable Shares. In a public company, the shares are freely transferable. The right to transfershares is a statutory right and it cannot be taken away by a provision in the articles. However, the

articles shall prescribe the manner in which such transfer of shares will be made and it may also

contain bona fide and reasonable restrictions on the right of members to transfer their shares. But

absolute restrictions on the rights of members to transfer their shares shall be ultra vires. However,

in the case of a private company, the articles shall restrict the right of member to transfer their

shares in companies with its statutory definition.

In order to make the right to transfer shares more effective, the shareholder can apply to the Central

Government in case of refusal by the company to register a transfer of shares.

8. Separate Property: As a company is a legal person distinct from its members, it is capable of

owning, enjoying and disposing of property in its own name. Although its capital and assets are

contributed by its shareholders, they are not the private and joint owners of its property. The

company is the real person in which all its property is vested and by which it is controlled, managed

and disposed of.

9. Delegated Management: A joint stock company is an autonomous, self-governing and self-

controlling organization. Since it has a large number of members, all of them cannot take part in

the management of the affairs of the company. Actual control and management is, therefore,

delegated by the shareholders to their elected representatives, know as directors. They look after

the day-to-day working of the company. Moreover, since shareholders, by majority of votes,

decide the general policy of the company, the management of the company is carried on democraticlines. Majority decision and centralized management compulsorily bring about unity of action.

ILLEGAL ASSOCIATION

Under the Companies Act, 1956, not more than 10 persons can come together for carrying on

any banking business and not more than 20 persons can come together for carrying on any otherof business, unless the association is registered under the Companies Act or any other Indian

law. Any association which does not comply with the above norms is an illegal association.Therefore, a partnership of more 10 or 20 members, as the case may be, is an illegal association

unless the registered under the Companies Act or any other Indian law.

However, this provision does not apply in the following cases :-

A Joint Hindu Family business comprising of family members only. But where two or more Joint

Hindu families come together for business through partnership, the total number of memberscannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor

members of such family will be excluded.


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Any association of charitable, religious, scientific trust or organisation which is not formed witha profit motive

Foreign companies.

When the number of members exceed the prescribed maximum, members must register it underCompanies Act or any other Indian law?

DIFFRENCE BETWEEN A COMPANY & A PARTNERSHIP


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1.5 TYPES OF COMPANY

Joint stock company can be of various types. The following are the important types

of company:1. Classification of Companies by Mode of Incorporation

Depending on the mode of incorporation, there are three classes of joint stock companies.

A. Chartered companies. These are incorporated under a special charter by a monarch. The East

India Company and The Bank of England are examples of chartered incorporated in England. The

powers and nature of business of a chartered company are defined by the charter which

incorporates it. A chartered company has wide powers. It can deal with its property and bind itself

to any contracts that any ordinary person can. In case the company deviates from its business as

prescribed by the charted, the Sovereign can annul the latter and close the company. Such

companies do not exist in India.

B. Statutory Companies. These companies are incorporated by a Special Act passed by the Central

or State legislature. Reserve Bank of India, State Bank of India, Industrial Finance Corporation,

Unit Trust of India, State Trading corporation and Life Insurance Corporation are some of the

examples of statutory companies. Such companies do not have any memorandum or articles of

association. They derive their powers from the Acts constituting them and enjoy certain powers

that companies incorporated under the Companies Act have. Alternations in the powers of such

companies can be brought about by legislative amendments.

C. Registered or incorporated companies. These are formed under the Companies Act, 1956 or

under the Companies Act passed earlier to this. Such companies come into existence only whenthey are registered under the Act and a certificate of incorporation has been issued by the Registrar

of Companies. This is the most popular mode of incorporating a company. Registered companies

may further be divided into three categories of the following.

i) Companies limited by Shares: These types of companies have a share capital and the liability of

each member or the company is limited by the Memorandum to the extent of face value of share

subscribed by him. In other words, during the existence of the company or in the event of winding

up, a member can be called upon to pay the amount remaining unpaid on the shares subscribed by

him. Such a company is called company limited by shares. A company limited by shares may be

a public company or a private company. These are the most popular types of companies.

ii) Companies Limited by Guarantee: These types of companies may or may not have a share

capital. Each member promises to pay a fixed sum of money specified in the Memorandum in the

event of liquidation of the company for payment of the debts and liabilities of the company [Sec

13(3)] This amount promised by him is called Guarantee. The Articles of Association of the

company state the number of member with which the company is to be registered [Sec 27 (2)].

Such a company is called a company limited by guarantee. Such companies depend for their

existence on entrance and subscription fees. They may or may not have a share capital. The liability


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of the member is limited to the extent of the guarantee and the face value of the shares subscribed

by them, if the company has a share capital. If it has a share capital, it may be a public company

or a private company.

iii) Unlimited Companies: Section 12 gives choice to the promoters to form a company with or

without limited liability. A company not having any limit on the liability of its members is calledan unlimited company [Sec 12(c)]. An unlimited company may or may not have a share capital.

If it has a share capital it may be a public company or a private company. If the company has a

share capital, the article shall state the amount of share capital with which the company is to be

registered [Sec 27 (1)]

The articles of an unlimited company shall state the number of member with which the company

is to be registered.

II. On the Basis of Number of Members

A. Private Company

According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company

which by its articles of association :

i) limits the number of its members to fifty, excluding employees who are members or ex-

employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Where two or more persons hold share jointly, they are treated as a single member. According to

Sec 12 of the Companies Act, the minimum number of members to form a private company is two.

A private company must use the word Pvt after its name.

Characteristics or Features of a Private Company. The main features of a private of a private

company are as follows :

i) A private company restricts the right of transfer of its shares. The shares of a private company

are not as freely transferable as those of public companies. The articles generally state that

whenever a shareholder of a Private Company wants to transfer his shares, he must first offer them

to the existing members of the existing members of the company. The price of the shares is

determined by the directors. It is done so as to preserve the family nature of the companys

shareholders.

ii) It limits the number of its members to fifty excluding members who are employees or ex-employees who were and continue to be the member.

Where two or more persons hold share jointly they are treated as a single member. The minimum

number of members to form a private company is two.

iii) A private company cannot invite the public to subscribe for its capital or shares of debentures.

It has to make its own private arrangement.


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B. Public company

According to Section 3 (1) (iv) of Indian Companies Act. 1956 A publiccompany which is not a

Private Company,

If we explain the definition of Indian Companies Act. 1956 in regard tothe public company, we

note the following :

i) The articles do not restrict the transfer of shares of the company

ii) It imposes no restriction no restriction on the maximum number of the members on the

company.

iii) It invites the general public to purchase the shares and debentures of the companies

Differences between a Public Company and a Private company

1. Minimum number: The minimum number of persons required to form a public company is 7. It

is 2 in case of a private company.

2. Maximum number: There is no restriction on maximum number of members in a public

company, whereas the maximum number cannot exceed 50 in a private company.

3. Number of directors. A public company must have at least 3 directors whereas a private

company must have at least 2 directors (Sec. 252)

4. Restriction on appointment of directors. In the case of a public company, the directors must file

with the Register a consent to act as directors or sign an undertaking for their qualification shares.

The directors or a private company need not do so (Sec 266)

5. Restriction on invitation to subscribe for shares. A public company invites the general public to

subscribe for shares. A public company invites the general public to subscribe for the shares or the

debentures of the company. A private company by its Articles prohibits invitation to public to

subscribe for its shares.

6. Name of the Company: In a private company, the words Private Limited shall be added at the

end of its name.

7. Public subscription: A private company cannot invite the public to purchase its shares or

debentures. A public company may do so.

8. Issue of prospectus: Unlike a public company a private company is not expected to issue a

prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.

9. Transferability of Shares. In a public company, the shares are freely transferable (Sec. 82). In a

private company the right to transfer shares is restricted by Articles.

10. Special Privileges. A private company enjoys some special privileges. A public company

enjoys no such privileges.


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11. Quorum. If the Articles of a company do not provide for a larger quorum. 5 members personally

present in the case of a public company are quorum for a meeting of the company. It is 2 in the

case of a private company (Sec. 174)

12. Managerial remuneration. Total managerial remuneration in a public company cannot exceed

11 per cent of the net profits (Sec. 198). No such restriction applies to a private company.13. Commencement of business. A private company may commence its business immediately after

obtaining a certificate of incorporation. A public company cannot commence its business until it

is granted a Certificate of Commencement of business.

Special privileges of a Private Company

Unlike a private a public company is subject to a number of regulations and restrictions as per the

requirements of Companies Act, 1956. It is done to safeguard the interests of

investors/shareholders of the public company. These privileges can be studied as follows :

a) Special privileges of all companies. The following privileges are available to every private

company, including a private company which is subsidiary of a public company or deemed to be

a public company :

1. A private company may be formed with only two persons as member. [Sec.12(1)]

2. It may commence allotment of shares even before the minimum subscription is subscribed for

or paid (Sec. 69).

3. It is not required to either issue a prospectus to the public of file statement in lieu of a prospectus.

(Sec 70 (3)]

4. Restrictions imposed on public companies regarding further issue of capital do not apply on

private companies. [Sec 81 (3)]

5. Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)

6. It need not keep an index of members. (Sec. 115)

7. It can commence its business after obtaining a certificate of incorporation. A certificate of

commencement of business is not required. [Sec. 149 (7)]

8. It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]

9. Unless the articles provide for a larger number, only two persons personally present shall form

the quorum in case of a private company, while at least five member personally present form thequorum in case of a public company (Sec. 174).

10. A director is not required to file consent to act as such with the Registrar. Similarly, the

provisions of the Act regarding undertaking to take up qualification shares and pay for them are

not applicable to directors of a private companies [Sec. 266 (5) (b)]


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11. Provisions in Section 284 regarding removal of directors by the company in general meeting

shall not apply to a life director appointed by a private company on or before 1st April 1952 [Sec.

284 (1)]

12. In case of a private company, poll can be demanded by one member if not more than seven

members are present, and by two member if not more than seven member are present. In case of apublic company, poll can be demanded by persons having not less than one-tenth of the total voting

power in respect of the resolution or holding shares on which an aggregate sum of not less than

fifty thousand rupees has been paid-up (Sec. 179).

13. It need not have more than two directors, while a public company must have at least three

directors (Sec. 252)

b) Privileges available to an independent private company (i.e. one which is not a subsidiary of a

public company)

Advantages of Incorporation

The shareholders (owners) of the Corporation are protected from liability when thebusiness is sued

Perpetual Duration of the Company unless specified otherwise in the Certificate ofIncorporation

The owners have their liability limited to the amount they have paid into their share ofstock

The operations of a Corporation are not affected by the transfer of shares, or death of ashareholder

Corporations may own property, sue, and be sued due to their status as a separate legalentity


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STAGES OF FORMATION OF A COMPANY

I. Promotion :Refers to the entire process by which a company is brought into existence. It starts with the

conceptualisation of the birth a a company and determination of the purpose for which it is tobe formed. The persons who conceive the company and invest the initial funds are known asthe promoters of the company. The promoters enter into preliminary contracts with vendors

and make arrangements for the preparation, advertisement and the circulation of prospectusand placement of capital. However, a person who merely acts in his professional capacity on

behalf of the promoter (eg lawyer, CA, etc) for drawing up the agreement or other documentsor prepares the figures on behalf of the promoter and who is paid by the promoter is not a

promoter.

The promoters have certain basic duties towards the company formed :-

1.

He must not make any secret profit out of the promotion of the company. Secret profit ismade by entering into a transaction on his own behalf and then sell to concerned propertyto the company at a profit without making disclosure of the profit to the company or its

members. The promoter can make profits in his dealings with the company provided hediscloses these profits to the company and its members. What is not permitted is making

secret profits i.e. making profits without disclosing them to the company and its members.2. He must make full disclosure to the company of all relevant facts including to any profit

made by him in transaction with the company.

In case of default on the part of the promoter in fulfilling the above duties, the company may :-

1.

Rescind or cancel the contract made and if he has made profit on any related transaction,that profit also may be recovered2. Retain the property paying no more for it then what the promoter has paid for it depriving

him of the secret profit.3. If these are not appropriate (eg cases where the property has altered in such a manner that

it is not possible to cancel the contract or where the promoter has already received his secretprofit), the company can sue him to for breach of trust. Damages upto the difference

between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming thecompany in several ways. The more common ones are :-

1. The company may to pay some remuneration for the services rendered.2. The promoter may make profits on transactions entered by him with the company after

making full disclosure to the company and its members.

3. The promoter may sell his property for fully paid shares in the company after making fulldisclosures.

4. The promoter may be given an option to buy further shares in the company.5. The promoter may be given commission on shares sold.


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6. The articles of the Company may provide for fixed sum to be paid by the company to him.However, such provision has no legal effect and the promoter cannot sue to enforce it but

if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes

a false statement in the prospectus whereby the person relying on that statement makes a loss, hewill be liable to make good the loss suffered by that other person. The promoter is liable for untruestatements made in the prospectus. A person who subscribes for any shares or debenture in the

company on the faith of the untrue statement contained in the prospectus can sue the promoter forthe loss or damages sustained by him as the result of such untrue statement.

II.Incorporation by Registration :

The promoters must make a decision regarding the type of company i.e a pulic company or aprivate company or an unlimited company, etc and accordingly prepare the documents for

incorporation of the company. In this connection the Memorandum and Articles of Association

(MA & AA) are crucial documents to be prepared.

Memorandum of Association of a company :

Is the constitution or charter of the company and contains the powers of the company. No company

can be registered under the Companies Act, 1956 without the memorandum of association. UnderSection 2(28) of the Companies Act, 1956 the memorandum means the memorandum of

association of the company as originally framed or as altered from time to time in pursuance withany of the previous companies law or the Companies Act, 1956.

The memorandum of association should be in any of the one form specified in the tables B,C,D

and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case ofcompanies limited by the shares , form in Table C is applicable to the companies limited byguarantee and not having share capital, form in Table D is applicable to company limited by

guarantee and having a share capital whereas form in table E is applicable to unlimited companies.

Contents of Memorandum :

The memorandum of association of every company must contain the following clauses :-

Name clause

The name of the company is mentioned in the name clause. A public limited company must endwith the word 'Limited' and a private limited company must end with the words 'Private Limited'.The company cannot have a name which in the opinion of the Central Government is undesirable.

A name which is identical with or the nearly resembles the name of another company in existencewill not be allowed. A company cannot use a name which is prohibited under the Names and

Emblems (Prevntion of Misuse Act, 1950 or use a name suggestive of connection to governmentor State patronage.


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Domicile clause

The state in which the registered office of company is to be situated is mentioned in this clause. Ifit is not possible to state the exact location of the registered office, the company must state it

provide the exact address either on the day on which commences to carry on its business or within

30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18must be given to the Registrar of Comapnies within 30 days of the date of incorporation of thecompany. Similarly, any change in the registered office must also be intimated in form no 18 to

the Registrar of Companies within 30 days. The registered office of the company is the officialaddress of the company where the statutory books and records must be normally be kept. Every

company must affix or paint its name and address of its registered office on the outside of the everyoffice or place at which its activities are carried on in. The name must be written in one of the local

languages and in English.

Objects clause

This clause is the most important clause of the company. It specifies the activities which a companycan carry on and which activities it cannot carry on. The company cannot carry on any activitywhich is not authorised by its MA. This clause must specify :-

i. Main objects of the company to be pursued by the company on its incorporationii. Objects incidental or ancillary to the attainment of the main objects

iii. Other objects of the company not included in (i) and (ii) above.In case of the companies other than trading corporations whose objects are not confined to one

state, the states to whose territories the objects of the company extend must be specified.

Doctrine of the ultra-vires

Any transaction which is outside the scope of the powers specified in the objects clause of the MA

and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires thecompany and therefore void. No rights and liabilities on the part of the company arise out of such

transactions and it is a nullity even if every member agrees to it.

Consequences of an ultravires transaction :-

1. The company cannot sue any person for enforcement of any of its rights.2. No person can sue the company for enforcement of its rights.3.

The directors of the company may be held personally liable to outsiders for an ultra vires

However, the doctrine of ultra-vires does not apply in the following cases :-

1. If an act is ultra-vires of powers the directors but intra-vires of company, the company isliable.

2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum,the articles can be altered to rectify the error.


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3. If an act is within the powers of the company but is irregualarly done, consent of theshareholders will validate it.

4. Where there is ultra-vires borrowing by the company or it obtains deliver of the propertyunder an ultra-vires contract, then the third party has no claim against the company on the

basis of the loan but he has right to follow his money or property if it exist as it is and

obtain an injunction from the Court restraining the company from parting with it providedthat he intervenes before is money spent on or the identity of the property is lost.5. The lender of the money to a company under the ultra-vires contract has a right to make

director personally liable.

Liability clause

A declaration that the liability of the members is limited in case of the company limited by theshares or guarantee must be given. The MA of a company limited by guarantee must also state that

each member undertakes to contribute to the assets of the company such amount not exceedingspecified amounts as may be required in the event of the liquidation of the company. A declaration

that the liability of the members is unlimited in case of the unlimted companies must be given. Theeffect of this clause is that in a company limited by shares, no member can be called upon to pay

more than the uncalled amount on his shares. If his shares are already fully paid up, he has noliabilty towards the company.

The following are exceptions to the rule of limited liability of members :-

1. If a member agrees in writing to be bound by the alteration of MA / AA requiring him totake more shares or increasing his liability, he shall be liable upto the amount agreed to by

him.2. If every member agrees in writing to re-register the company as an unlimited company and

the company is re-registered as such, such members will have unlimited liability.3. If to the knowledge of a member, the number of shareholders has fallen below the legalminimum, (seven in the case of a public limited company and two in case of a privatelimited company ) and the company has carried on business for more than 6 months, while

the number is so reduced, the members for the time being constituting the company wouldbe personally liable for the debts of the company contracted during that time.

Capital clause The amount of share capital with which the company is to be registered divided

into shares must be specified giving details of the number of shares and types of shares. A companycannot issue share capital greater than the maximum amount of share capital mentioned in this

clause without altering the memorandum.

Association clause A declaration by the persons for subscribing to the Memorandum that they

desire to form into a company and agree to take the shares place against their respective name mustbe given by the promoters.


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Alteration of Memorandum of Association

Alteration of memorandum of association involves compliance with prescribed procedure.Alterations only to the extent necessary for simple and fair working of the company would be

permitted. Alterations should not be prejudicial to the members or creditors of the company and

should not have the effect of increasing the liability of the members and the creditors.

Contents of the memorandum of association can be altered as under:

(i) provisions the inclusion of which is made compulsory by the Act (e.g., the name, objects, placeof registered office etc.)

(ii) other provisions which the organisers of the -company have thought it desirable to include.

Provisions coming under the second category can be altered in the same way as provisions of the

Articles of Association, (i.e., by special resolution) unless otherwise provided in the Act.

Provisions coming under the first category are called "Conditions contained in the Memorandum".The "conditions" can be altered in the manner stated below :

1. Change of name

A company may change its name by special resolution provided the Company Law Board approves

of the change.-Sec. 21. No such approval is necessary in cases of addition or deletion of the word"Private", when a Public Company is converted into a private Company and vice-versa.

If by inadvertence a company is registered with a name which is identical with or closely resembles

the name of an existing company the name may be changed by an ordinary resolution, with the

previous approval of the Company Law Board. If the company takes no steps in the matter, theBoard may direct it to change its name within a prescribed period.-Sec. 22.

When the name is validly changed, the Registrar shall enter the new name in the Register of

companies and shall issue a fresh Certificate of Incorporation. The Registrar shall also make thenecessary alteration in the memorandum of association of the company.-Sec. 23(1) and (2).

Change of name does not affect the rights and obligations of the company and pending suits by or

against the company.Sec. 23(3).

2. Change of Object

(Sections 17-19). The object clause of the memo can be changed for the purpose of enabling the

company :

(a) to carry on its business more economically or more efficiently ;


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(b) to attain its main purpose by new or improved means ;

(c) to enlarge or change the local area of its operation ;

(d) to carry on some business which under existing circumstances may conveniently or

advantageously be combined with the objects specified in the memorandum ;

(e) to restrict or abandon any of the objects specified in the memorandum ;

(f ) to sell or dispose of the whole, or any part of the undertaking, of the company ; or

(g) to amalgamate with any other company or body of persons.

The following procedure must be adopted for changing the object clause :

(i) A special resolution must be passed.

(ii) A petition must be filed to the Company Law Board for confirmation of the change.

(iii) Notice must be given to all persons whose interests will be affected by the change (unless theBoard otherwise directs).

(iv) The consent of the creditors of the Company must be obtained or other claims paid off or

secured.

(v) Notice must be given to Registrar of Companies, so that he can appear before the Board andstate his objections and suggestions, if any.

(vi) After the Board has confirmed the alterations, a certified copy of the Board's Order, togetherwith a printed copy of the Memo as altered shall be filed with the Registrar within 3 months of the

date of the order.

3. Change in the location of the registered office from one State to another

The procedure to be adopted is the same as in the case of alteration of object.

The alteration must be registered with the Registrar of Companies of the 'State in which the

registered office of the Company was originally situated and also the Registrar of the 'State to

which the office is being transferred. The records of the Company will be transferred to the tatterplace.

4. Alteration of the Capital Clause

Alteration of the capital clause can be done in the following methods

(i) Alteration, including Increase of Capital


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(ii) Reduction of Capital

(iii) Variation of Shareholders' Rights and

(iv) Creation of Reserve Capital. These topics are discussed below.

ALTERATION OF SHARE CAPITAL

Section 94 of the Act provides that a company may, if so authorised by the articles, alter its share

capital in any one of the following ways :

(a) increase its share capital by such amount as it thinks expedient by issuing new shares ;

(b) consolidate and divide. all or any of its share capital into shares of larger amount than its

existing shares ;

(c) convert all or any of its fully paid up shares, into stock, and reconvert stock into fully paid upshares of any denomination ;

(d) sub-divide its shares or any of them, into shares of smaller amount than is fixed by the

memorandum, so however, that in the sub-division the proportion between the amount paid andthe amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share

from which the reduced share is derived ;

(e) cancel shares which, at the date of the passing resolution in that behalf, have not been taken or

agree to be

taken by any person, and diminish the amount of its share capital by the amount of -the shares socancelled.

Alterations coming within aforesaid categories, can be made by a company by resolution passed

in a general meeting. Confirmation by the court is not necessary. Cancellation of shares under thissection [item (e) above] is not deemed to be a reduction of share capital. Notice of any alteration

made under this Section must be given to the Registrar within 30 days of the alteration. Increaseof Capital

Increase of Capital can be done by the issues of new shares, within the limits of the AuthorisedCapital as registered and as stated in the memo and articles. Such shares are called Rights Shares.

For the issue of such shares a special procedure must be adopted.

The Company can increase its Registered Share Capital. The procedure of increase is by passingan ordinary resolution. The consent of the Central Government is necessary in certain special

cases. Notice of the alteration must be given to the Registrar within 30 days of the date ofresolution.


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Grounds for Alteration of Memorandum of Association

To carry on its business more economically more effectively; To attain its main purpose by new or improved means To enlarge or change the local area of its operations To carry on some business which under existing circumstances may conveniently oradvantageously be combined with the business of the company To restrict or abandon any of the objects specified in the memorandum To sell or dispose of the whole or any part of the undertaking To amalgamate with any other company or body of persons

Articles of Association The Articles of Association (AA) contain the rules and regulations of the

internal management of the company. The AA is nothing but a contract between the company andits members and also between the members themselves that they shall abide by the rules andregulations of internal management of the company specified in the AA. It specifies the rights and

duties of the members and directors.

The provisions of the AA must not be in conflict with the provisions of the MA. In case such aconflict arises, the MA will prevail.

Normally, every company has its own AA. However, if a company does not have its own AA, the

model AA specified in Schedule I - Table A will apply. A company may adopt any of the modelforms of AA, with or without modifications. The articles of association should be in any of the one

form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in TableB is applicable in case of companies limited by the shares , form in Table C is applicable to the

companies limited by guarantee and not having share capital, form in Table D is applicable tocompany limited by guarantee and having a share capital whereas form in table E is applicable to

unlimited companies. However, a private company must have its own AA.

The important items covered by the AA include :-

1. Powers, duties, rights and liabilities of Directors2. Powers, duties, rights and liabilities of members3. Rules for Meetings of the Company4. Dividends5. Borrowing powers of the company6. Calls on shares7. Transfer & transmission of shares8. Forfeiture of shares9. Voting powers of members, etc


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Alteration of articles of association : A company can alter any of the provisions of its AA, subjectto provisions of the Companies Act and subject to the conditions contained in the Memorandum

of association of the company. A company, by special resolution at a general meeting of members,alter its articles provided that such alteration does not have the effect of converting a public limited

company into a private company unless it has been approved by the Central Government.

The articles must be printed, divided into paragraphs and numbered consequently and must besigned by each subscriber to the Memorandum of Association who shall add his address,

description and occupation in presence of at least one witness who must attest the signature andlikewise add his address, description and occupation. The articles of association of the company

when registered bind the company and the members thereof to the same extent as if it was signedby the company and by each member.

ALTERATION OF THE ARTICLES OF ASSOCIATION

Section 31 of the Act gives to all Companies a statutory right to alter articles and this right cannot

be taken away by any provision in the existing articles-or the memorandum. A provision.prohibiting change of articles is not binding on the members.

Although alteration of articles is permitted, there are certain restrictions on the nature and extentof the alterations that can he made.

l. Articles can be altered by special resolution only. If the articles of the company prescribed a

different procedure, e.g., an ordinary resolution, it will notbe followed. Confirmation by the Courtis not necessary.

2. No change is permitted which will violate the provisions of the Companies Act.

3. No change is permitted which is contrary to the conditions contained in the Memorandum ofAssociation of the Company.

4. The alterations must not contain anything illegal.

5. The liability of the members or any class of members, cannot be increased without their consent.

Example : a member cannot, by altering articles, be made to take more shares or to pay more forthe shares already taken, unless he agrees to doso in writing either before or after the alteration.

But where. the company is a club or association, the articles may be validity altered to provide for

subscription or charges at a higher rate.sec 38.

6. Alteration of certain provisions of the articles required the previous consent of the Central

Government (viz., alteration articles regarding the number of directors and their remuneration ;etc).

7. An alteration of articles which has the effect of converting v public company into a privatecompany shall not have effect unless the alteration is approved by the Central Government.


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8. The alteration must not constitute a fraud on the minority. the majority (or the ruling group)must not by altering the articles affect the interests of the minority. The Courts have been given

extensive powers to prevent such misuse of power

9. But any alteration made bona fide, in the interests of the company as a whole, is valid and

binding even though the private interests of some members may be affected.

example :In a private limited company, the majority of shares were held by the directors. The

articles were altered and the directors were given powers to compel members carrying on businessin competition with the company to sell their shares (as fullvalue) to a nominee of the directors.

Held, the alteration was valid. Sidebottom v. Kershaw Leese & Co. Ltd.

10. The Court cannot order rectification of articles, even on , the ground of mistake. But the court

can declare particular clauses to be ultra vires Scott. v. FrankF. Scott Ltd.

11. Articles may be altered with retrospective effect. The company was allowed to insert a lien

clause conferring upon the company a lien on the shares of members for debts incurredbefore andafter the insertion of this clause. Held, that the company had power to insert this clause which wasvalid and effective. Allen v. GoldReefs of WestAfrica Ltd.

12. The alteration must not lead a breach of contract with the outsiders.

III. Registration of the Company

Once the documents have been prepared, vetted, stamped and signed, they must be filed with theRegistrar of Companies for incorporating the Company. The following documents must be filed

in this connection :-

1. The MA & AA2. An agreement, if any, which the company proposes to enter into with any individual for

appointment as its managing director or whole-time director or manager.3. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear

before the High Courty or a company secretary or Chartered Accountant in whole - timepractice in India who is engaged in the formation of the company or by a person who is

named as a director or manager or secretary of the company that the requirements of theCompanies Act have been complied with in respect of the registration of the company and

matters precedent and incidental thereto.4. In addition to the above, in case of a public company, the following documents must also

be filed :-

i. Written consent of directors in Form 29 to agree to act as directorsii. The complete address of the registered office of the company in Form 18

iii. Details of the directors, managing director and manager of the company in Form32.

Certificate of Incorporation


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Once all the above documents have been filed and they are found to be in order, the Registrar ofCompanies will issue Certificate of Incorporation of the Company. This document is the birth

certificate of the company and is proof of the existence of the company. Once, this certificate isissued, the company cannot cease its existence unless it is dissolved by order of the Court.

IV. Commencement of Business

A private company or a company having no share capital can commence its business immediately

after it has been incorporated. However, other companies can commence their activities only afterthey have obtained Certificate of Commencement of Business. For this purpose, the following

additional formalities have to be complied with :-

1. If a company has share capital and has issued a prospectus, then :-

a. Shares upto the amount of minimum subcription must be allotedb. Every director has paid to the company on each of the shares which he has taken

the same amount as the public have paid on such sharesc. No money is or may become payable to the applicants of shares or debentures forfailure to apply for or to obtain permission to deal in those shares or debentures in

any recognised stock exchange.d. A statutory declaration in Form 19 signed by one director or the employee -

company secretary or a Company secretary in whole time practice that the aboveprovisions have been complied with must be filed

2. If a company has share capital but has not issued a prospectus, then :-

a. It must file a statement in lieu of prospectus with the Registrar of Companiesb.

Every director has paid to the company on each of the shares which he has takenthe same amount as the other members have paid on such shares

c. A statutory declaration in Form 20 signed by one director or the employee -company secretary or a Company secretary in whole time practice that the aboveprovisions have been complied with must be filed

Once the above provisions have been complied with, the Registrar of Companies grants

"Certificate of Commencement of Business" after which the company can commence its activities.

Doctrine of Ultra Vires

The ultra vires doctrine typically applies to a corporate body, such as a limited company, a government

department or a local council so that any act done by the body which is beyond its capacity to act (and

not intra vires) will be considered invalid. In corporate law, ultra vires describes acts attempted by a

corporation that are beyond the scope of powers granted by the corporation's objects clause, articles of

incorporation or in a clause in its Bylaws, in the laws authorising a corporation's formation, or similar

founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void

or voidable.

Doctrine of Constructive Notice


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In Companies law the doctrine of constructive notice is a doctrine where all persons dealing witha company are deemed (or "construed") to knowledge of the company's Articles of association and

Memorandum of association. It seeks to protect the company against the outsider.

The doctrine of constructive notice is a legal idea which means has the person been notified,

whether they know it or not. Notification doesn't necessarily mean that this person has beenspecifically notified, only that this information is available, in a recognized way, such that thedoctrine of constructive notice requirements are met in your legal system, and therefore it is

assumed that this person knows this information.

For instance, if you have registered your company, and your constitution is lodged with somegoverning body, you are said to having notified other parties of your constitution.

The doctrine of indoor management is an exception to this rule.

Doctrine of Indoor Management

The Doctrine of indoor management is a presumption on the part of the people dealing with the

company such as the shareholders that the internal requirements with regard to the articles ofassociation and memorandum of association have been complied with. The doctrine helps in

protection of external members from the company and states that the people are entitled to presumethat the internal proceedings are as per the documents submitted with the registrar of companies.

They are not allowed to go into the procedural aspect, such as the fact that the internal proceedingsmight not happen regularly, or what are the proceedings before the directors, in an extraordinary

general meeting.

The rule is beneficial for convenience in business relations.

An outsider is presumed to know the constitution of a company, but not what may or may nothave taken place within the doors that are closed to him.

It operates to protect outsiders against the company


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Definition of 'Prospectus'

A formal legal document, which is required by and filed with the Securities and Exchange

Commission, that provides details about an investment offering for sale to the public. Aprospectus should contain the facts that an investor needs to make an informed investment

decision.

Also known as an "offer document."

There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary

prospectus is the first offering document provided by a securities issuer and includes most of the

details of the business and transaction in question. Some lettering on the front cover is printed in

red, which results in the use of the nickname "red herring" for this document. The final

prospectus is printed after the deal has been made effective and can be offered for sale, and

supersedes the preliminary prospectus. It contains finalized background information including

such details as the exact number of shares/certificates issued and the precise offering price.

In the case of mutual funds, which, apart from their initial share offering, continuously offer

shares for sale to the public, the prospectus used is a final prospectus. A fund prospectus contains

details on its objectives, investment strategies, risks, performance, distribution policy, fees and

expenses, and fund management.

Companies Act 1956, defines a Prospectus as any document described or issued as prospectusand includes any notice, circular, advertisement inviting deposits from the public or inviting

offers from the public for subscription or purchase of any shares in, or debentures of a bodycorporate.In simple words, it may be defined as an invitation to the public to subscribe to a

companys shares or debentures.

The statutory requirements for the issue of prospectus

1. Contents of Prospectus:2. Dating and signing of Prospectus:

3. Vetting/approval of prospectus4. Registration of prospectus with ROC:

5. Issue within 90 days of registration6. Terms of contract cannot be varied:

7. The expert's consent to the issue of prospectus.8. Abridged prospectus must accompany application forms


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Contents of a Prospectus

The following are the contents of Prospectus;

1. Name and Registered office of the company

2. The main objects of the company3. Remuneration of the Directors4. Names, addresses, descriptions and occupations of the Directors, Managing Directors,

Secretaries, Treasurers and Managers5. Particulars of the property of the company

6. Amount of preliminary expenses7. Amount of expenses of the issue

8. Details of every contract with the company9. Time and Place where contracts may be inspected

10. Name and address of the auditors and bankers of the company11. Particulars of reserves and reserves capitalized

12. Time of opening and closing of subscription list

Abridged Prospectus

'Abridged Prospectus' is a shorter version of the Prospectus and contains all the salient features

of a Prospectus. It accompanies the application form of public issues.

According to sec 56(3), no one can issue any form of application for shares or debentures of acompany unless it is accompanied by a memorandum containing such salient features of a

prospectus as may be prescribed. Such memorandum is called an abridged prospectus.

As per SEC 56(3)2a such salient features are1.name,address of the company, opening and closing of the issue, name and address of the book

running lead manager (BRLM)2.terms of the present issue

3.particulars of the issue4.company management and projects

5.financial position of the company

Deemed Prospectus

Sometimes the company may instead of offering its shares and debentures to the public allot themto any intermediary called issuing house. These issuing house, in turn, allot them for sale to the

public by advertisement or circular of its own. Such a prospectus is called deemed prospectus. Themain purpose for issuing an offer for sale through an issuing house is that that the company saves

underwriting expenses and in turn obtains the expertise of an issuing house.

When a public company does not issue a prospectus and it issues a notification to the generalpublic, it is called a deemed prospectus.


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Shelf Prospectus

Self Prospectus is discussed in Sec-60(A) of the Companies Act. It is made compulsory for any

public financial institution, public sector bank whose main object is financing to file a shelf

prospectus. Shelf prospectus means a prospectus issued by any financial institution or bank for oneor more issues of the securities or class of securities specified in that prospectus. For the purposeof this section financing means making loans to, or subscribing in the capital of, a private

industrial enterprise engaged in infrastructural financing or such other company as the centralgovernment may notify in this behalf.

The advantage of filing is that the company who has filed the self prospectus with the Registrar

shall not be required to file prospectus afresh at every stage of offer of securities within a periodof validity of such self prospectus.

Information Memorandum

An IM is a document provided by a company to prospective investors after the investors have reviewed a

brief Investment Summary, or teaser, and signed a Confidentiality Agreement.

Document used generally in syndicate financing of projects to define the work and to detail its

financing arrangements

Red-herring Prospectus

A preliminary registration statement that must be filed with the SEC describing a new issue of

stock and the prospects of the issuing company.There is no price or issue size stated in the red herring, and it is sometimes updated several times

before being called the final prospectus. It is known as a red herring because it contains apassage in red that states the company is not attempting to sell its shares before the registration is

approved by the SEC.

"Red-herring prospectus" means a prospectus that does not have complete particulars on the

price of the securities offered and quantum of securities offered. The red herring statement

contains:

1. purpose of the issue;2. disclosure of any option agreement;3. underwriter's commissions and discounts;4. promotion expenses;5. net proceeds to the issuing company (issuer);6. balance sheet;


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7. earnings statements for last 3 years, if available;8. names and address of all officers, directors, underwriters and stockholders owning 10%

or more of the current outstanding stock;9. copy of the underwriting agreement;10.legal opinion on the issue;11.

copies of the articles of incorporation of the issuer.

Statement in Lieu of Prospectus

If a company does not want to issue a prospectus to the public for subscription of the shares,this statement is required to be issued to the public for necessary information. It must be signedby every person named in it as director or by his agent authorized in writing: The nature of theinformation of this document is more or less similar to that given in the prospectus. A copy ofthis statement must be filed with registrar within prescribed time. This provision does not applyto private company.

Misstatement of Prospectus

As per Sec-65, a statement included in a prospectus shall be deemed to be untrue if the statement

is misleading in the form and context in which it is included. Where there is any omission of amatter from the prospectus and this is made to mislead, the prospectus is deemed to be called as

a prospectus in which an untrue statement is included. Not only in prospectus, but a statementcan be said to mislead even if it is present in any report or memorandum by referenceincorporated therein or issued therewith. The liability accrues where any person subscribes for

any shares or debentures on the faith of the prospectus for any loss or damage he may havesustained by reason of untrue statement included therein.

CIVIL LIABILITY FOR MISSTATEMENT:

Section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to everyperson who subscribes for any shares of debentures on the faith of the prospectus for any loss or

damage he may have suffered due to any untrue statement made in the prospectus. These wouldinclude Directors of the company, Promoters, or even the company. Thus, this section deals with

the cases of misstatements of facts in a prospectus. It is immaterial for the purpose of this sectionwhether the Director sees the prospectus or not; it is enough that he authorizes its issue.

The provision of the section is to protect the rights of the deceived shareholders who acted uponthe wrong statement given in the prospectus. This tightens up the duties of the directors and

others who are related to the issue of the prospectus. So this section provides for the statutorycivil liability for untrue statement.


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CRIMINAL LIABILITY:

Sec-63 incorporates the provision for the criminal liability for misstatement in the prospectus.According to this section every person who has authorised the issue of the prospectus shall be

punishable with imprisonment for a term which may extend to two years, or with fine which may

extend to fifty thousand rupees, or with both. The offence is compoundable under sec 621A. Ithas to be noted that under such cases, once the prosecution establishes the falsity of statement ina prospectus signed by a director, etc., the onus is shifted to the defendant of proving either that

the statement was immaterial or that he believed it to be true. An expert who has given theconsent will not be deemed to be ipso facto a person who authorized the issue of prospectus.


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SHARE AND SHARE CAPIT AL

Meaning and nature of shares:

1) The share capital of a company is divided into a number of indivisible units of a fixed amount.These indivisible units are known as shares.

10,000 shares of Rs.10 each= 1, 00,000 Rs.

2) According to sec 2 clause 46 A share is a share in the share capital of the company and includes stock

except where a distinction between stock and share is expressed or implied.

3) According to Supreme Court, as hare is right to participate in the profits made bythe company , while it

is a going concern and decreases a dividend and in the assets of the company when it is wound up.

4) According to the sale of goods act the term goods includes every kind of movable property including

stock and shares.

5) A share is not a negotiable instrument.

Share and Share Certificate:

1) Acompany will allot shares to the share holder but will issue afresh certificate.

2) Share is a movable property transferable in the manner provided in the articles. Share certificate is the

certificate issued under the common seal of the company the no. of shares held by the company.

3) Share represents the movable property. Share certificate is the prima facie evidence of title. It enables a

share holder to show his shares and sell his shares.

Features of Shares

Decision-making and voting rights: holding shares grants voting rights, so shareholders have a

say in the election of the members of the Board of Directors;

Limited liability for shareholders: for each individual share holders, the maximum value at risk isthe total value of their investment in the shares of the company. This means that, unlike in a

partnership, ordinary shareholders are not personally liable for the debt of a company in theevent of bankruptcy;

Loss absorption for other (debt) investors and other creditors: it is important to understand thatshares come last in the ranking of a companys capital structure and shareholders only hold a

residual claim. This means that in a liquidation, shareholders only get back their money if thereis anything left over after creditors have been settled. In most cases, the shares are usually

worthless in the event of bankruptcy or liquidation;

Uncertain returns: while many companies pay out dividends to shareholders, there is noobligation on companies to do so. Indeed, there is no guarantee of returns in any form to

shareholders. However, in return for this degree of uncertainty and risk, shares carry higherexpected returns over the long term than most investments. This forms the basis of the

relationship between risk and return for investors in stocks and shares.


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Deferred Shares:

1) These Shares may be issued only by private company

2) These are also known as founder s shares and they are issued only to promoters and directors

of the company .

3) These shares have low denomination carry voting rights. In fact, they have controls over a

company .

4) These share holders receive dividend only after dividend is paid to both preference and equityshare holders and known as deferred shares.

Preference Shares:

Preference shares are those shares which enjoy two preferential rights over the equity shares.

1) During the life time of the company they enjoy a fixed dividend, which is amount or ratebefore dividend to equity share holders.

2) On the winding up of the company they enjoy repayment of surplus assets (capital), before

capital is repaid to equity share holders.

Voting rights of Preference Share Holders:

1. Whether preference shareholders are members- YES

2. Whether notice of all the general meeting sent to them- YES

3. Whether they can attend General meeting- YES

4. Whether they can be counted in the Quorum- NO


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5. Whether they can Participate and Speak at G.M- NO

6. Whether they can vote at General Meeting- NO

Exceptional Circumstances:

Generally speaking, preference share holders dont have voting right however in the following

two exceptional circumstances theyenjoy voting rights.

a) When any matter directly affects their right.

Example 1: Reduction of share capital

Example 2: Winding Up

b) When there is an arrears of cumulative preference dividend for two

years or more. In this case they acquire voting rights for all the matters.

Types of Preference shares:

Participating and Non Participating Preference Shares:

Participating Preference shares are those shares which reduce a fixed preferential dividendduring the existence of the company . After dividend is paid to the equityshare holders if there is

any surplus profit. They have a right to participate in such profits along with the equityshareholders.

Non participating preference shares receive preference dividend and there after they dont havethe any right to participate in surplus profits. When the company goes into the winding up

participation preference shareholders have a right to receive the repayment of capital after therepayment of equity share capital is completed. If there are any surplus assets they have a right to

participate in such surplus assets along with the equity share holders.

Non Participating Shares preference shareholders dont have any right to participate in surplusassets along with equity shareholders.

Note: If there is provided in the memorandum (or) articles (or) terms and conditions then all

preference are shall be contested non participating.

Cumulative and Non-Cumulative Preference Shares:

Cumulative preference shares those shares which enjoy the right to receive the dividend for the

past and the current year out of future profit. If any year, there is no profit, dividend only whenthese are profits. If in any year there are no profits, dividends will not be paid and there will be

no accumulation.


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Non-Cumulative preference shares receive dividend only when there are profits. If in any yearthere are no profits, dividends will not be paid and there will be no accumulation.

Note: All preference shar es contested as cumulative unless there areexpr essly stated to be non-

cumulative.

Redeemable and Irredeemable Preference Shares:

Redeemable Preference shares or those shares which are redeemable either a fixed date or after

certain date from the date of issue.

Irredeemable preference shares are those shares which must be redeemable after the expiry of 20years from the date of issue.

Convertible and Non-Convertible Preference Shares:

Convertible Preference shares are those shares which are to be converted into equity shares aftera certain preference shares.

Non-Convertible preference shares cannot be converted into preference shares.

Ordinary (or) Equity shares without voting rights:

1) Equity shareholders dont enjoy any preferential rights.

2) During the lifetime of the company these shares receive dividend after dividend is paid to thepreference shareholders.

3) When the company is in winding up equity shareholders receive repayment of capital after the

preference share capital is repaid.

4) The rate of equity dividend will be recommended by the B.O.D and declared by the members

at the A.G.M.

However, interim dividend may be recommended and declared by the directors at the BoardMeeting.

5) Equity share holders will have a right to vote on all matters at all general meetings, that

A.G.M (or) E.G.M.

6) The voting rights of equity share holders will be in proportion to the amount of paid up share

capital.


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Ordinary or Equity shares with Differential Voting rights

1) A company may issue equity shares with differential voting rights, provided, it will beprovided by the articles such shares are not shares 25% of the total issued.

2) These shareholders are entitled to received-

a. Higher rate of dividend

b. Right shares.

c. Bonus shares

EQUITY VS PREFERENCE SHARES


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ISSUE OF SHARES

By Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.Investors involved in private placements are usually large banks, mutual funds, insurancecompanies and pension funds. Private placement is the opposite of a public issue, in which

securities are made available for sale on the open market.

Since a private placement is offered to a few, select individuals, the placement does not have to be

registered with the Securities and Exchange Commission. In many cases, detailed financial

information is not disclosed and the need for a prospectus is waived. Finally, since the placements

are private rather than public, the average investor is only made aware of the placement after it has

occurred.

By Offer for SaleThe offer for sale of shares through stock exchangesis akin to selling shares on the bourses

through auction. The stock exchanges will offer a separate window for such share sales that would

be open during normal trading hours.

Under this method, the issuer company has to offer at least 1% of its paid-up capital or equity

worth a minimum of Rs 25 crore. Only the promoters will be allowed to offer shares for sale. The

bidders will be required to pay 100% margin in cash upfront against every buy order.

http://www.bseindia.com/Static/Markets/PublicIssues/aboutOFS.aspx

By Inviting Public through Prospectus

A public company invites the public to subscribe towards its share capital through the issue of

prospectus. A prospective investor would naturally like to know the financial background of thecompany. Its activities, future programs, nature of investment, element of risk involved etc. Every

investor would like to receive reasonable but sure returns. Prospectus of a company provides thisinformation, through the prospectus an investor is informed of the soundness of the companys

venture.

A private company invites the public to subscribe towards its share capital in view of the restriction

as discussed earlier. It is only the privilege of a public company to invite general public toparticipate in its investment. This is done by issue of the prospectus.


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ESOPS

An employee stock ownership plan (ESOP) is an employee-owner scheme that provides a company's

workforce with an ownership interest in the company. In an ESOP, companies provide their employeeswith stock ownership, often at no cost to the employees. Shares are given to employees and may be held in

an ESOP trust until the employee retires or leaves the company. The shares are then sold.

How an Employee Stock Ownership Plan (ESOP) Works

Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly,be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan.

Some employees become owners through worker cooperatives where everyone has an equal vote.But by far the most common form of employee ownership in the U.S. is the ESOP, or employee

stock ownership plan. Almost unknown until 1974, about 11,000 companies now have these plans,covering over 13 million employees.

Companies can use ESOPs for a variety of purposes. Contrary to the impression one can get from

media accounts, ESOPs are almost never used to save troubled companiesonly at most a handfulof such plans are set up each year. Instead, ESOPs are most commonly used to provide a market

for the shares of departing owners of successful closely held companies, to motivate and rewardemployees, or to take advantage of incentives to borrow money for acquiring new assets in pretax

dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase.

Uses for ESOPs

1. To buy the shares of a departing owner: Owners of privately held companies can use an ESOP tocreate a ready market for their shares. Under this approach, the company can make tax-deductiblecash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money

to buy the shares (see below).2. To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability

to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of

existing owners. The company then makes tax-deductible contributions to the ESOP to repay theloan, meaning both principal and interest are deductible.

3. To create an additional employee benefit: A company can simply issue new or treasury shares toan ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or a company

can contribute cash, buying shares from existing public or private owners. In public companies,which account for about 5% of the plans and about 40% of the plan participants, ESOPs are oftenused in conjunction with employee savings plans. Rather than matching employee savings with

cash, the company will match them with stock from an ESOP, often at a higher matching level.

SEBI(ICDR) Guidelines, 2009

http://www.slideshare.net/CaAgrawal/recentamendementsinicdrnirc22052010-12823120802274phpapp02


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BOOK BUILDING

The process by which an underwriter attempts to determine at what price to offer an IPO based

on demand from institutional investors. Book building refers to the process of generating,

capturing, and recording investor demand for shares during an IPO(Initial public offering)(or

othersecurities during theirissuance process) in order to support efficientprice discovery.[1]Usually, the issuerappoints a majorinvestment bankto act as a majorsecurities underwriteror

bookrunner. The book is the off-market collation of investor demand by thebookrunnerand is

confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred

via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an

exchanges clearing house.

Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an

acquirer or non-delivery by the seller. An underwriter "builds a book" by accepting orders from

fund managers indicating the number of shares they desire and the price they are willing to pay.

Book building is actually a price discovery method. In this method, the company doesn't fix up aparticular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to bid for

the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this

range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80)

is known as the floor price and the highest price (Rs 100) is known as cap price.

The price at which the shares are allotted is known as cut off price. The entire process begins

with the selection of the lead manager, an investment banker whose job is to bring the issue to

the public.

Both the lead manager and the issuing company fix the price range and the issue size. Next

syndicate members are hired to obtain bids from the investors. Normally the issue is kept open

for 5 days.

Once the offer period is over, the lead manager and issuing company fix the price at which the

shares are sold to the investors. If the issue price is less than the cap price, the investors who bid

at the cap price will get a refund and those who bid at the floor price will end up paying the

additional money.

For e.g if the cut off in the above example is fixed at Rs 90, those who bid at Rs 80, will have to

pay Rs 10 per share and those who bid at Rs 100, will end up getting the refund of Rs 10 per

share. Once each investor pays the actual issue price, the shares are allotted.


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STEPS INVOLVED

ADVANTAGES OF BOOK BUILDING

This process will help to discover the demand and the price of the shares. also, the costs of public issue

are much reduced and the time taken for completion of the entire process is much less than the in the

normal public issueUNDERWRITING

The term Underwriting refers to a contract between the underwriter and the company whereby (by

which) the underwriter agrees to take up and pay for the shares, if they are not taken by the public.

In return, the company agrees to pay him.


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2) An underwriting agreement is therefore in the nature of Insurance against the possibility of

inadequate subscription.

3) Firm Underwriting:

In this case the underwriter agrees to take up and pay for a certain no. of shares, whether they issue

is oversubscribed or undersubscribed.

4) Conditions for payment of underwriting Commission: (Sec 76)

a. The payment of underwriting commission must be authorized by the articles. Any authorized

in the memorandum of association is not adequate.

b. The rate of underwriting commission should not exceed 5% of the issue price of share or 2.5%

of the issue price of Debentures. However the articles may prescribe the lower rate.

c. The commission maybe paid either in cash or either in shares or a lump sum amount or as a

percentage.

Note: If the articles prescribe a percentage, a lump sum amount cannot be paid.

d. The details of the underwriting agreement including the amount of underwriting commission

However detaching sub underwriting agreements are not required to dispose.

e. Acopyof underwriting agreement must be filed with the R.O.C.

f. Commission may be paid out of any sources available.

Example: Out of the proceeds of the share capital.


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RIGHTS ISSUE


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NOMINATION OF SHARES

Every holder of shares in, or holder of debentures of, a company may, at any time, nominate, inthe prescribed manner, a person to whom his shares in, or debentures of, the company shall vest

in the event of his death.

(2) Where the shares in, or debentures of, a company are held by more than one person jointly,the joint-holders may together nominate, in the prescribed manner, a person to whom all the rightsin the shares or debentures of the company shall vest in the event of death of all the joint-holders.

(3) Notwithstanding anything contained in any other law for the time being in force or in any

disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, thecompany, where a nomination made in the prescribed manner purports to confer on any person the

right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the


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shareholder or holder of debentures of, the company or, as the case may be, on the death of thejoint-holders become entitled to all the rights in the shares or debentures of the company or, as the

case may be, all the joint-holders, in relation to such shares in, or debentures of the company tothe exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed

manner.

(4) Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder ofdebentures, to make the nomination to appoint, in the prescribed manner, any person to become

entitled to shares in, or debentures of, the company, in the event of his death, during the minority.

company law test i

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