Company Law

Board of Studies

Prof. H. N. Verma Prof. M. K. GhadoliyaVice- Chancellor Director, Jaipur National University, Jaipur School of Distance Education and Learning Jaipur National University, JaipurDr. Rajendra Takale Prof. and Head AcademicsSBPIM, Pune

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Subject Expert Panel

Dr. Daniel J. Penkar Vijayalakshmi R.HDirector, SBS, Sinhgad Subject Matter ExpertPune

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Content Review Panel

Shreya SarafSubject Matter Expert

___________________________________________________________________________________________Copyright ©

This book contains the course content for Company Law.

First Edition 2013

Printed byUniversal Training Solutions Private Limited

Address05th Floor, I-Space, Bavdhan, Pune 411021.

All rights reserved. This book or any portion thereof may not, in any form or by any means including electronic or mechanical or photocopying or recording, be reproduced or distributed or transmitted or stored in a retrieval system or be broadcasted or transmitted.

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I

Index

ContentI. ...................................................................... II

AbbreviationsII. ...........................................................VI

Case StudyIII. ............................................................ 130

BibliographyIV. ........................................................ 136

Self Assessment AnswersV. ....................................... 139

Book at a Glance

II

Contents

Chapter I ....................................................................................................................................................... 1Introduction to Company Law ................................................................................................................... 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction .............................................................................................................................................. 21.2 Nature and Characteristics of a Company ............................................................................................... 21.3 Brief History of Company Law in India and England ............................................................................. 5 1.3.1 Background of English Company Law .................................................................................... 6 1.3.2 Development of Indian Company Law .................................................................................... 71.4 Amendments by the Depositories Act, 1996 ............................................................................................ 91.5 The Companies (Amendment) Act, 1999 .............................................................................................. 101.6 The Companies (Amendment) Act, 2000 .............................................................................................. 101.7 The Companies (Amendment) Act, 2002 ...............................................................................................111.8 The Companies (Amendment) Act, 2006 .............................................................................................. 121.9 The Companies Bill, 2011 ...................................................................................................................... 131.10 Company as Distinguished from Other Business Enterprises ............................................................. 131.11 Corporate Form of Enterprise .............................................................................................................. 15 1.11.1 Advantages of Corporate Form of Enterprise ...................................................................... 151.12 Disadvantages of Corporate Form of Enterprise ................................................................................. 151.13 Concept of Corporate Personality ........................................................................................................ 161.14 Illegal Association ................................................................................................................................ 17Summary ..................................................................................................................................................... 18References ................................................................................................................................................... 18Recommended Reading ............................................................................................................................. 19Self Assessment ........................................................................................................................................... 20

Chapter II ................................................................................................................................................... 22Financial Structure of a Company ........................................................................................................... 22Aim .............................................................................................................................................................. 22Objectives .................................................................................................................................................... 22Learning outcome ........................................................................................................................................ 222.1 Introduction ............................................................................................................................................ 232.2 Factors Determining Financial Structure ............................................................................................... 232.3 Shares ..................................................................................................................................................... 24 2.3.1 Nature of Shares ..................................................................................................................... 24 2.3.2 Classes of Shares ................................................................................................................... 252.4 Prospectus .............................................................................................................................................. 27 2.4.1 Role of Prospectus ................................................................................................................. 28 2.4.2 Types of Prospectus ............................................................................................................... 282.5 Information Memorandum ..................................................................................................................... 292.6 Debt-Equity Ratio ................................................................................................................................. 30Summary ..................................................................................................................................................... 33References ................................................................................................................................................... 33Recommended Reading ............................................................................................................................. 34Self Assessment ........................................................................................................................................... 35

Chapter III .................................................................................................................................................. 37Management and Control of Company ................................................................................................... 37Aim .............................................................................................................................................................. 37Objectives .................................................................................................................................................... 37Learning outcome ........................................................................................................................................ 373.1 Introduction ............................................................................................................................................ 38

III

3.2 Types of Directors .................................................................................................................................. 383.3 Appointment of Directors ...................................................................................................................... 40 3.3.1 Director Identification Number (DIN) ................................................................................... 41 3.3.2 Appointment of First Directors .............................................................................................. 41 3.3.3 Appointment of Directors by Members in General Meeting ................................................. 42 3.3.4 Appointment of Person other than Retiring Director ............................................................. 43 3.3.5 Appointment of Directors by the Board ................................................................................. 44 3.3.6 Appointment of Directors by Third Parties (Nominee Directors) ......................................... 443.4 Removal of Directors ............................................................................................................................. 453.5 Remuneration of Directors ..................................................................................................................... 46 3.5.1 Remuneration to Non-Executive Directors ............................................................................ 47 3.5.2 Remuneration for Non-Managerial Services of Directors ..................................................... 473.6 Office or Place of Profit ......................................................................................................................... 483.7 Duties of Directors ................................................................................................................................. 48 3.7.1 Statutory Duties ..................................................................................................................... 48 3.7.2 Fiduciary and General Duties ................................................................................................ 503.8 Company Secretary ................................................................................................................................ 50 3.8.1 Duties of a Company Secretary ............................................................................................. 50 3.8.2 Role of Company Secretary ................................................................................................... 51Summary ..................................................................................................................................................... 53References ................................................................................................................................................... 53Recommended Reading ............................................................................................................................. 54Self Assessment ........................................................................................................................................... 55

Chapter IV .................................................................................................................................................. 57Accounts and Audit .................................................................................................................................... 57Aim .............................................................................................................................................................. 57Objectives .................................................................................................................................................... 57Learning outcome ........................................................................................................................................ 574.1 Introduction ............................................................................................................................................ 584.2 Requirement of Keeping Books of Account .......................................................................................... 584.3 Persons Responsible for Keeping the Books of Account ....................................................................... 594.4 Annual Accounts: Balance Sheet and Profit and Loss Account ............................................................. 59 4.4.1 Balance Sheet ......................................................................................................................... 60 4.4.2 Profit and Loss Account ......................................................................................................... 604.5 Audit ....................................................................................................................................................... 60 4.5.1 Appointment of Auditor ......................................................................................................... 61 4.5.2 Qualifications and Disqualifications of Auditors ................................................................... 61 4.5.3 Method of Appointment of Auditors ...................................................................................... 624.6 Cost Audit .............................................................................................................................................. 64Summary ..................................................................................................................................................... 66References ................................................................................................................................................... 66Recommended Reading ............................................................................................................................. 67Self Assessment ........................................................................................................................................... 68

Chapter V .................................................................................................................................................... 70Dividend ...................................................................................................................................................... 70Aim .............................................................................................................................................................. 70Objectives .................................................................................................................................................... 70Learning outcome ........................................................................................................................................ 705.1 Introduction ............................................................................................................................................ 715.2 Types of Dividend .................................................................................................................................. 715.3 Ascertainment of Divisible Profits and Dividends ................................................................................. 72 5.3.1 Depreciation ........................................................................................................................... 73 5.3.2 Dividend in Absence or Inadequacy of Profits ...................................................................... 73

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5.4 Declaration of Dividend ......................................................................................................................... 735.5 Payment of Dividends ............................................................................................................................ 745.6 Establishment of Investor Education and Protection Fund .................................................................... 755.7 Payment of Interest Out of Capital ........................................................................................................ 76 5.7.1 Payment of Dividend Out of Capital Profits .......................................................................... 765.8 Board’s Report and Disclosure .............................................................................................................. 765.9 Disclosures Pursuant to Employee Stock Option and Employees Stock Purchase Schemes ................ 77 5.9.1 Approval of the Board’s Report ............................................................................................. 77 5.9.2 Signing and Dating of the Board’s Report ............................................................................. 785.10 Compliance Certificate under Section 383A ........................................................................................ 78 5.10.1 Need for Compliance Certificate ......................................................................................... 79 5.10.2 Penalty for False Compliance Certificate ............................................................................ 80Summary ..................................................................................................................................................... 81References ................................................................................................................................................... 81Recommended Reading ............................................................................................................................. 81Self Assessment ........................................................................................................................................... 82

Chapter VI .................................................................................................................................................. 84Registers and Returns ................................................................................................................................ 84Aim .............................................................................................................................................................. 84Objectives .................................................................................................................................................... 84Learning outcome ........................................................................................................................................ 846.1 Introduction ............................................................................................................................................ 856.2 Statutory Books Elaborated ................................................................................................................... 85 6.2.1 Register of Investments not held in Company’s Name .......................................................... 85 6.2.2 Register of Deposits ............................................................................................................... 85 6.2.3 Register of Securities Bought Back ....................................................................................... 86 6.2.4 Register of Charges ................................................................................................................ 86 6.2.5 Register of Members .............................................................................................................. 86 6.2.6 Register of Debenture Holders .............................................................................................. 87 6.2.7 Register and Index of Beneficial Owners .............................................................................. 88 6.2.8 Annual Return ........................................................................................................................ 89 6.2.9 Minutes Books ....................................................................................................................... 89 6.2.10 Register of Postal Ballot ...................................................................................................... 89 6.2.11 Books of Account ................................................................................................................. 90 6.2.12 Register of Contracts (Section 301) ..................................................................................... 90 6.2.13 Register of Directors ............................................................................................................ 91 6.2.14 Register of Directors’ Shareholdings ................................................................................... 916.3 Non-Statutory Registers ......................................................................................................................... 92Summary ..................................................................................................................................................... 97References ................................................................................................................................................... 97Recommended Reading ............................................................................................................................. 97Self Assessment ........................................................................................................................................... 98

Chapter VII .............................................................................................................................................. 100Producer Companies ................................................................................................................................ 100Aim ............................................................................................................................................................ 100Objectives .................................................................................................................................................. 100Learning outcome ...................................................................................................................................... 1007.1 Introduction .......................................................................................................................................... 1017.2 Objects of Producer Company ............................................................................................................. 1017.3 Formation of Producer Company and its Registration ........................................................................ 102 7.3.1 Membership and Voting Rights of Members of Producer Company ................................... 102 7.3.2 Benefits to Members ............................................................................................................ 1027.4 Memorandum of Association and Articles of Association ................................................................... 103

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7.4.1 Contents of Memorandum of Producer Company ............................................................... 103 7.4.2 Contents of Articles of Association of Producer Company ................................................. 103 7.4.3 Other Provisions or Contents of Articles of Producer Company ......................................... 1047.5 Conversion of Inter-State Co-Operative Societies to Producer Companies ........................................ 1057.6 Vesting of Undertaking in Producer Company .................................................................................... 1057.7 Provisions of Inter-State Cooperative Society ..................................................................................... 1067.8 Directors ............................................................................................................................................... 106 7.8.1 Vacation of Office by Directors ........................................................................................... 106 7.8.2 Powers and Functions of Board ........................................................................................... 107 7.8.3 Liability of Directors ........................................................................................................... 107 7.8.4 Committee of Directors ....................................................................................................... 1077.9 Meetings of the Board and Quorum ..................................................................................................... 108 7.9.1 Annual General Meetings [Section 581ZA] ........................................................................ 1097.10 Share Capital ...................................................................................................................................... 1097.11 General and Other Reserves ................................................................................................................1107.12 Investment in other Companies; Formation of Subsidiaries etc. [Section 581ZL] .............................110Summary ....................................................................................................................................................112References ..................................................................................................................................................112Recommended Reading ............................................................................................................................112Self Assessment ..........................................................................................................................................113

Chapter VIII ..............................................................................................................................................115Limited Liability Partnerships ................................................................................................................115Aim .............................................................................................................................................................115Objectives ...................................................................................................................................................115Learning outcome .......................................................................................................................................1158.1 Introduction ...........................................................................................................................................1168.2 Salient Features of LLP .........................................................................................................................116 8.2.1 LLP and Partnership .............................................................................................................117 8.2.2 Distinction Between LLP and Company ..............................................................................1178.3 Incorporation of Limited Liability Partnership .....................................................................................1188.4 Partners and Designated Partners ..........................................................................................................1198.5 Roles and Responsibilities of Designated Partners .............................................................................. 1208.6 LLP Agreement .................................................................................................................................... 1218.7 Statement of Account and Solvency (Rule 24 of LLP Rules) .............................................................. 122 8.7.1 Audit of Limited Liability Partnership (Rule 24 of LLP Rules) .......................................... 123 8.7.2 Filing of Annual Return (Rule 25 Of LLP Rules) ................................................................ 123 8.7.3 Electronic Filing of Documents ........................................................................................... 1238.8 Investigation of the Affairs of Limited Liability Partnership (Section 43) .......................................... 1248.9 Foreign Limited Liability Partnership ................................................................................................. 1248.10 Comparison of LLP with Private Limited Company ......................................................................... 125Summary ................................................................................................................................................... 126References ................................................................................................................................................. 126Recommended Reading ........................................................................................................................... 127Self Assessment ......................................................................................................................................... 128

VI

Abbreviations

AGM - Annual General MeetingsAOA - Articles of AssociationBIFR - Board of Industrial and Financial ReconstructionCARO - Companies Auditors Report OrderCLB - Company Law BoardDIN - DirectorIdentificationNumberDPIN - DesignatedPartnershipIdentificationNumberEBIT - Earning Before Interest and TaxEBITDA - Earnings Before Interest, Taxes, Depreciation and AmortisationECS - Electronic Clearing ServiceEPS - Encapsulated Postscript GSRTC - Gujarat State Road Transport CorporationLLP - Limited Liability PartnershipLLPA - Limited Liability Partnership AgreementMCA - Ministry of Corporate AffairsMOA - MedicalOfficeAdministratorNBFC - Non-Banking Financial CompanyROC - Return On CapitalRTA - Registrar and Transfer AgentSEBI - Security and Exchange Board of IndiaSICA - Sick Industrial Companies ActU.K. - United Kingdom

1

Chapter I

Introduction to Company Law

Aim

The aim of this chapter is to:

definecompany•

elucidate the characteristics of a company•

explain the history of company law•

Objectives

The objectives of this chapter are to:

explain the amendment made to the Companies Act•

explicate the Companies Bill•

elucidate the difference between company and corporation•

Learning outcome

At the end of this chapter, you will be able to:

understand the concept of corporate personality•

identify the disadvantages of corporate form of enterprise•

recognise the difference between company and corporation•

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1.1 IntroductionThe word “company” is derived from the Latin word (Com=with or together; panis=bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Now-a-days, the business matters have become more complicated and cannot be discussed at length at festive gatherings. Therefore, the word company has assumed greater importance. It denotes a joint stock enterprise in which the capital is contributed by a large number of people. Thus, in popular parlance, a company denotes an association of like minded persons formed for the purpose of carrying on some business or undertaking. A company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it.

It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word “corporation” is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, “corporation” is a legal person created by the process other than natural birth. Itis,forthisreason,sometimescalledartificiallegalperson.Asalegalperson,acorporateiscapableofenjoyingmany of the rights and incurring many of the liabilities of a natural person.

The incorporated company owes its existence either to a special Act of Parliament or to company legislation. The public corporations like Life Insurance Corporation of India and Damodar Valley Corporation have been brought into existence through special Acts of Parliament, whereas companies like Tata Iron and Steel Co. Ltd., Reliance Industries Limited have been formed under the Company’s Legislation i.e., Companies Act, 1956. The trading partnership which is governed by Partnership Act is the most apt example of an unincorporated association.

Inthelegalsense,acompanyisanassociationofbothnaturalandartificialpersonsincorporatedundertheexistinglaw of a country. In terms of the Companies Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as the Act] a “company means a company formed and registered under the Companies Act, 1956 or under the previous laws relating to companies” [Section 3(1)(ii)]. In common law, a company is a “legal person” or “legal entity” separate from, andcapableofsurvivingbeyondthelivesofitsmembers.However,anassociationformednotforprofitacquiresacorporate life and falls within the meaning of a company by reason of a licence under Section 25(1) of the Act.

However, a company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. “It is a means of cooperation and organisation in the conduct of an enterprise”. It is “an intricate, centralised, economic and administrative structure run by professional managers who hire capital fromtheinvestor(s)”.LordJusticeJameshasdefinedacompanyas“anassociationofmanypersonswhocontributemoneyormoney’sworthtoacommonstockandemployitinsometradeorbusinessandwhosharetheprofitandloss arising, therefore, the common stock so contributed is denoted in money and is the capital of the company. The persons who form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his “share”.

From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct and separate from that of its members. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body.

1.2 Nature and Characteristics of a CompanySinceacorporatebody(i.e.,acompany)isthecreationoflaw,itisnotahumanbeing,itisanartificialperson(i.e., created by law); it is clothed with many rights, obligations, powers and duties prescribed by law; it is called a “person”. Being the creation of law, it possesses only the properties conferred upon it by its Memorandum of Association. Within the limits of powers conferred by the charter, it can do all acts as a natural person may do.

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The most striking characteristics of a company are:Corporate personalityBy incorporation under the Act, the company is vested with a corporate personality quite distinct from individuals who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different “person” from the members who compose it. As such it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, “incorporation” is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law.

Limited liability“The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organisation.” The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder extends to contribution to the assets of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the company’s undertakings, nor liable for its debts. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of Rs. 1,000 and has already paid Rs. 500/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited byguarantee,theliabilityofmembersislimitedtoaspecifiedamountmentionedinthememorandum.

Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: The statutes relating to limited liability have probably donemore than any legislation of the last fifty years to further thecommercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of “great public utility largely increasing the wealth of the country”.

There are, however, some statutory exceptions to the principle of limited liability. As provided by Section 45 of the Companies Act, 1956, the members become personally liable if the membership falls below prescribed minimum and the business is carried on for more than six months thereafter. It is also provided in the Act vide Section 323 that a limited company may, if so authorised by its articles, alter its memorandum by special resolution so as to render the liability of its directors or of any of its director or manager as unlimited. Further, where in the course of winding up it appears that any business of the company has been carried on with intent to defraud creditors, the Court may declare the persons who were knowingly parties to the transaction as personally liable without limitation of liability for all or any of the debts/liabilities of the company.

Perpetual successionAn incorporated company never dies except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and remains the same entity, despite total change in the membership. A company’s life is determined by the terms of its Memorandum of Association. It may be perpetual oritmaycontinueforaspecifiedtimetocarryonataskorobjectaslaiddownintheMemorandumofAssociation.Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect its continuity.

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The membership of an incorporated company may change either because one shareholder has transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on for ever. During the war all the members 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 it”.

Separate propertyA company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed off. Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”. A member does not even have an insurable interest in the property of the company.

Transferability of sharesThe capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established, the object was that their shares should be capable of being easily transferred. Section 82 of the Companies Act, 1956 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. If the articles do not provide anything for the transfer of shares and the Regulations contained in Table “A” in Schedule I to the Companies Act, 1956, are also expressly excluded, the transfer of shares will be governed by the general law relating to transfer of movable property.

A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures stability to the company (as the member is not withdrawing his money from the company). The Stock Exchanges provide adequate facilities for the sale and purchase of shares.

Further, as of now, in most of the listed companies, the shares are also transferable through Electronic mode i.e., through Depository Participants instead of physical transfers.

Common sealOn incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under thesealofthecompany.TheCommonSealactsastheofficialsignatureofacompany.Thenameofthecompanymust be engraved on its common seal. A rubber stamp does not serve the purpose. A document not bearing common seal of the company is not authentic and has no legal force behind it.

The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully becauseanydeed,instrumentoradocumenttowhichsealisimproperlyorfraudulentlyaffixedwillinvolvethecompany in legal action and litigation.

Capacity to sue and be suedA company being a corporate body can sue and be sued in its own name. To sue means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A company’s right to sue arises when some loss is caused to the company, i.e., to the property of the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be. A company, as a person separate from its members, may even sue one of its own members for libel.

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A company has a right to seek damages where a defamatory material published about it, affects its business. Where video cassettes were prepared by the workmen of a company showing, their struggle against the company’s management, it was held to be not actionable unless shown that the cassette would be defamatory. The court did not restraintheexhibitionofthecassette.Thecompanyisnotheldliableforcontemptcommittedbyitsofficer.

Contractual rightsA company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contractnorentitledtothebenefitofit,asacompanyisnotatrusteeforitsshareholders.Likewise,ashareholdercannotbesuedoncontractsmadebyhiscompany.Thedistinctionbetweenacompanyanditsmembersisnotconfinedto the rules of privacy; however, it permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties to his company, and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract. Similarly, a member of a company cannot sue in respect of torts committed against the company, nor can he be sued for torts committed by the company. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members.

Limitation of actionA company cannot go beyond the power stated in the Memorandum of Association. The Memorandum of Association ofthecompanyregulatesthepowersandfixestheobjectsofthecompanyandprovidestheedificeuponwhichtheentire structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations inmostcases,sufficientpowersaregrantedintheMemorandumofAssociation.Butoncethepowershavebeenlaiddown, it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so.

Separate managementAsalreadynoted,themembersmayderiveprofitswithoutbeingburdenedwiththemanagementofthecompany.They do not have effective and intimate control over its working and elect their representatives to conduct corporate functioning. In other words, the company is administered and managed by its managerial personnel.

Voluntary association for profitAcompanyisavoluntaryassociationforprofit.It isformedfor theaccomplishmentofsomepublicgoalsandwhatsoeverprofitisgainedisdividedamongitsshareholdersorrestoredforthefutureexpansionofthecompany.OnlyaSection25companycanbeformedwithnoprofitmotive.

Termination of existenceAcompany,beinganabstractandartificialperson,doesnotdieanaturaldeath.Itiscreatedbylaw,carriesonitsaffairs according to law throughout its life and ultimately is effaced by law. Generally, the existence of a company is terminated by means of winding up. However, to avoid winding up sometimes companies change their form by means of reorganisation, reconstruction and amalgamation.

Tosumup,“acompanyisavoluntaryassociationforprofitwithcapitaldivisibleintotransferableshareswithlimitedliability, having corporate entity and a common seal with perpetual succession”.

1.3 Brief History of Company Law in India and EnglandThe history and development of Company Law in India is closely linked with that of England and for that reason it becomes essential to have a brief account of the history of English Company law for proper appreciation of our law.

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1.3.1 Background of English Company LawThe history of modern company law in England began in 1844 when the Joint Stock Companies Act was passed. TheActprovidedforthefirsttimethatacompanycouldbeincorporatedbyregistrationwithoutobtainingaRoyalCharterorsanctionbyaspecialActofParliament.TheofficeoftheRegistrarofJointStockCompanieswasalsocreated. But the Act denied to the members the facility of limited liability. The English Parliament in 1855 passed the Limited Liability Act providing for limited liability to the members of a registered company. The Act of 1844 was superseded by a comprehensive Act of 1856 which marked the beginning of a new era in company law in England. This Act introduced the modern mode of creating companies by means of Memorandum and Articles of Associations.

Thefirstenactmenttobearthetitle“CompaniesAct”wastheCompaniesAct,1862.BytheseActssomeofthemodern provisions of a company were clearly laid down. Firstly, two documents, namely, (a) the Memorandum of association, and (b) the Articles of association formed the integral part for the formation of a limited liability company. Secondly, a company could be formed with liability limited by guarantee. Thirdly, any alteration in the object clause of the memorandum of association was prohibited. Provisions for winding-up were also introduced. Thus, the basic structure of the company as we know had taken shape. Sir Francis Palmer described this Act as the “magna carta of cooperative enterprises”.

The Companies (Memorandum and Association) Act, 1890 made relaxation with regard to change in the object clause under the leave of the Court obtained on the basis of special resolution passed by the members in general meeting.ThentheliabilityofthedirectorsofacompanywasintroducedbytheDirectors‟LiabilityAct,1890,andthe compulsory audit of the company’s accounts was enforced under the Companies Act, 1900.

TheconceptofprivatecompanywasintroducedforthefirsttimeintheCompaniesAct,1908.Theearlieroneswere called public companies. Two subsequent Acts were passed in 1908 and in 1929 to consolidate the earlier Acts. The Companies Act, 1948 which was the Principal Act in force in England then was based on the report of a Committee under Lord Cohen. The Act introduced ‘inter alia’ another new form of company known as exempt private company.

Another outstanding feature of the 1948 Act was the emphasis on the public accountability of the company. Generally recognised principles of accountancy were given statutory force and had to be applied in the preparation of the balance sheetandprofitandlossaccount.Further,the1948legislationextendedtheprotectionoftheminority(Section210)and the powers of the Board of Trade to order an investigation of the company’s affairs (Sections 164-175); and for thefirsttimetheshareholdersingeneralmeetingweregivenpowertoremoveadirectorbeforetheexpirationofhisperiodofoffice.Theindependenceofauditorsvis-a-visthedirectorswasstrengthened.

The 1948 Act was amended by the Companies (Amendment) Act, 1967. The Amending Act was based upon the report and recommendations of the Jenkins Committee presented in 1962.The 1967 Act adopted and considerably extended in some respects, the recommendations of the Committee as to disclosure. The Act abolished the exempt privatecompany,andrequiredalllimitedcompaniestofileaccounts.Morestringentprovisionswereimposedinrelation to director’s interests in the company and disclosure thereof.

The Companies Act, 1976 attempted to remedy a variety of defects which had become evident in the application of the Acts of 1948 and 1967. The 1976 Act strengthened the requirements of public accountability and those relating to the disclosure of interests in the shares of the company. The Companies Act, 1980 was a major measure of company law reform in England. Insider dealing was made a criminal offence. The shareholders were given a rightofpre-emptioninthecaseofnewissuesofsharesinspecifiedcircumstances.Dealingsbetweenthedirectorsandtheircompaniesbecamegreatlyrestrictedandmaximumfinanciallimitswereintroducedforsuchdealings.The protection to the minority shareholders was extended by enabling them to petition for relief if their position was unfairly prejudiced.

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The Companies Act, 1981 introduced other important changes. For the purposes of accounting and disclosure, companies were divided into small, medium-sized and other companies and their disclosure requirements were differentiatedaccordingly.TheLawrelatingtothenamesofcompanieswassimplifiedbytheabolition,inprinciple,of the approval of the name by the Department of Trade. The company was authorised, subject to certain conditions, to issue redeemable equity shares and to purchase its own shares. The 1981 Act further abolished the register of business names which had to be kept under the Registration of Business Names Act, 1916.

Active steps were taken to prepare consolidating measures relating to the Companies Acts 1948 to 1981. In November, 1981, the Department of Trade published a consultative document entitled “Consolidation of Companies Acts”. In this document the various methods of consolidation and their relative advantages for the practice were discussed.

All of the existing statute relating exclusively to companies was consolidated in the Companies Act, 1985, and the Companies Acts 1948 and 1983 repealed by the Companies Consolidation (Consequential Provisions) Act, 1985. At the same time two minor consolidating enactments, the Business Names Act, 1985 and the Company Securities (Insider Dealing) Act, 1985, were passed to consolidate certain provisions of the Companies Acts of 1980 and 1981, which affected sole traders and partnerships and persons other than companies as well as companies regulated by the Companies Act, 1985. The whole of the present statute, therefore, was contained in the Companies Act, 1985 and the two minor consolidating enactments together with the temporary and transitional provisions of the Companies Consolidation (Consequential Provisions) Act, 1985, all of which have come into force from 1st July, 1985.

The U.K. company law was further amended and had been substituted by U.K. Companies Act, 2006 (which received Royal Assent on November 8, 2006). The Act was brought into force in stages and circumscribes enhanced duties of directors, simpler regime for private companies, increased use of e-communication, enhanced auditor liabilities etc.

1.3.2 Development of Indian Company LawCompany Law in India, as indicated earlier, is the cherished child of the English parents. Our various Companies Acts have been modelled on the English Acts. Following the enactment of the Joint Stock Companies Act, 1844 inEngland,thefirstCompaniesActwaspassedinIndiain1850.Itprovidedfortheregistrationofthecompaniesand transferability of shares. The Amending Act of 1857 conferred the right of registration with or without limited liability. Subsequently this right was granted to banking and insurance companies by an Act of 1860 following the similar principle in Britain. The Companies Act of 1856 repealed all the previous Acts. The Act provided inter alia for incorporation, regulation and winding up of companies and other associations. The Act was then recast in 1882, embodying the amendments which were made in the Company Law in England upto that time. In 1913, a consolidating Act was passed, and major amendments were made to the consolidated Act in 1936. In the meantime England passed a comprehensive Companies Act in 1948. In 1951, the Indian Government promulgated the Indian Companies (Amendment) Ordinance under which the Central Government and the Court assumed extensive powers to intervene directly in the affairs of the company and to take necessary action in the interest of the company. The ordinance was replaced by an Amending Act of 1951.

The Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws relating to companies and certain other associations. The Act came into force on 1st April, 1956. The present Companies Act is based largely on the recommendations of the Company Law Committee (Bhabha Committee) which submitted its report in March, 1952. This Act is the longest piece of legislation ever passed by our Parliament. Amendments have been made in this Act periodically. The Companies Act consists of 658 Sections and 15 Schedules.

Some of the main features of the Companies Act, 1956 are:Full and fair disclosure of various matters in prospectus.•Detailedinformationofthefinancialaffairsofcompanytobedisclosedinitsaccount.•Provision for intervention and investigation by the Government into the affairs of a company.•Restrictions on the powers of managerial personnel.•Enforcement of proper performance of their duties by company management.•Protection of minority shareholders.•

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The Companies Act, 1956 has undergone changes by amendments in 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999, 2000, 2002 (Amendment), 2002 (Second Amendment), and 2006. The Companies Act, 1956 was also amended by enactment of Depositories Act, 1996.

Based on the recommendations of Shastri Committee, the Companies (Amendment) Act, 1960 introduced several new provisions relating to various aspects of company management which were overlooked in the 1956 Act. The Companies (Amendment) Act, 1963 provided for the appointment of a Companies Tribunal and constitution of the Board of Company Law Administration. It also empowered the Central Government to remove managerial personnel involved in cases of fraud, etc.

Based on the recommendations of the Vivian Bose Commission, the Companies (Amendment) Act, 1965 introduced someofthemajorchanges,suchascleardefinitionofthemainandsubsidiaryobjectsofacompanyinitsMemorandumof Association; Strengthening the provisions relating to investigation into the affairs of the company, etc. The Companies Act was amended twice in 1966. These amendments consisted of four sections only. Two important changes were introduced by the Companies (Amendment) Act, 1969. The institutions of managing agents and secretaries and treasurers were abolished with effect from April 3, 1970. Secondly, contributions by companies to any political party or for any political purpose were prohibited.

The Companies (Amendment) Act, 1974 which came into force from February 1, 1975 had introduced some important and major changes in the Companies Act, 1956.The object of the Amendment Act was to inject an element of public interest in the working of the corporate sector. The important changes introduced by the Amendment Act of 1974 are given below:

Deemed to be public limited companies.•Acceptance of deposits from the public to be in accordance with the Rules.•Maintenance of a separate account for unclaimed dividend by public limited companies.•Control over foreign-owned companies brought within the purview of the Act.•Appointment of Company Law Board benches in metropolitan cities.•Power to prohibit the appointment of a sole-selling agent by Central Government.•Appointment of a whole-time secretary.•

The Companies (Amendment) Act of 1977The Companies (Amendment) Act of 1977 brought about certain changes in Sections 58A, 220, 293, 620 and 634A. The amended Section 58A empowered the Central Government to grant extension of time or to exempt any company in deserving cases from all or any of the provisions of Section 58A. Section 293 empowered a company to make donationsforcharitablepurposesupto5percentofitsaveragenetprofitoruptoRs.25,000whicheverwashigher.This section as amended by the Act of 1977 which raised the ceiling to Rs. 50,000.

The Companies (Amendment) Act, 1985The amending Act substituted Section 293A with a new section permitting Non-Government companies to make political contributions, directly or indirectly. With a view that legitimate dues of workers rank pari passu with secured creditors in event of closure of the company and above, even the dues to Government, Sections 529 and 530 of the Companies Act, 1956, were amended and a new Section 529A was introduced.

In order to give effect to the recommendations of the Committee on Subordinate Legislations (Seventh Lok Sabha) that the Company Law Board should be empowered to reassess compensation on appeal from the order of the prescribed authority assessing the compensation payable under an order of amalgamation under Section 396, and that the order of amalgamation itself may provide for the continuation of any pending legal proceeding by or against the transferee company on the lines of the existing provisions of Section 394 of the Act under which the High Court orders amalgamation, Section 396 of the Act was amended.

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The Companies (Amendment) Act, 1988Based on the recommendations made by the Expert Committee (Sachar Committee), the Companies (Amendment) Act, 1988 substantially amended the Companies Act, 1956 in order to streamline some of the existing provisions of the Companies Act, 1956 and to ensure better working and administration of the Act.

ItwasforthefirsttimethattheCompaniesActprovidedthateverypubliccompanyofacertainsizeshallhaveamanagingorwhole-timedirector.Thecompanieswerealsogivenfreedomtofixthemanagerialremunerationonthe basis of certain limits. The important changes introduced by the Amendment Act of 1988 were:

DefinitionofSecretarybroughtinlinewiththedefinitionof“CompanySecretary”intheCompanySecretaries•Act,1980andincludesanindividualpossessingprescribedqualification.TheconceptofcompanysecretaryinpracticewasintroducedforthefirsttimeintheCompaniesAct.Apractising•secretaryhasbeenauthorisedtofiledeclarationofcomplianceunderSections33and149.EverylistedcompanyisrequiredtofileannualreturnunderSection161whichmustalsobesignedbyapractisingsecretaryapartfrom other signatories. In the absence of a company secretary, the practising secretary may also certify that the requirements of Schedule XIII have been complied with.The amended Act, among other things, also set up an independent Company Law Board to exercise such judicial •and quasi-judicial functions, earlier being exercised either by the Court or the Central Government.It also dispensed with the requirement of getting Government approval for managerial appointments and •remuneration subject to the fulfilment of certain statutory guidelineswhichwere incorporated in theActitself.ItdelinkedtheratesofdepreciationfromtheratesspecifiedundertheIncome-taxActandlaiddownratesof•depreciationintheActitselftoreflectthetrueandfairviewofthestateofaffairsofthecompany.

1.4 Amendments by the Depositories Act, 1996The amendments made to the Companies Act by the Depositories Act, 1996 are as follows:

Everypersonholdingequitysharecapitalofacompanyandwhosenameisenteredasbeneficialownerinthe1. records of the depository shall be deemed to be a member of the concerned company. [Section 41(3)]Section 83 was repealed, as requirement of distinguishing each share in a company by an appropriate number 2. is no more mandatory. However, section 83 was reintroduced by the Depositories Related Laws (Amendment) Act, 1997.Stamping of transfer instruments are not required where both the transfer or and transferee are entered as 3. beneficialownersintherecordsofadepository.[Section111(13)]Power of company to refuse to register transfer of shares would apply to a private company only. [Section 4. 111(14)]The securities of a company other than a private company have been made freely transferable. The transfer 5. has to be effected immediately by the company/depository. However, if it is provided that the transfer is in contravention of SEBI Act/SICA the aggrieved party can move to CLB to determine if the alleged contravention has taken place. [Section 111A]The register of members shall indicate the shares held by a member in demat mode but such shares need not be 6. distinguished by a distinct number. [Section 150(1)(b)].The register of debenture holders shall indicate the debentures held by a holder in demat form but such debentures 7. need not be distinguished by distinct numbers.The company is required to indicate in the offer document that an investor has the option to subscribe for 8. securities in the demat mode.Sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act made inapplicable to the securities held 9. inadepositoryonbehalfofthebeneficialowners.

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1.5 The Companies (Amendment) Act, 1999The salient features of the Companies (Amendment) Act, 1999 are:

The Infrastructure Development Finance Company Limited was recognised as one of the Public Financial •Institutions.Companies were allowed to buy-back their own securities.•Companies were enabled to issue Sweat Equity shares.•Facilityfornominationwasprovidedforthebenefitofshare/debenture/depositholders.•An Investor Education and Protection Fund were proposed to be established.•National Advisory Committee on Accounting Standards for companies was proposed to be established.•Companies were freed from obtaining prior approval of Central Government for their inter-corporate investment/•lending proposals.

1.6 The Companies (Amendment) Act, 2000The major provisions of this the Companies (Amendment) Act, 2000, in brief, are as follows:

PrivateCompaniesandPublicCompaniestohaveaminimumpaid-upcapitalofRupeesonelakhandfivelakh1. respectively. This is also applicable to existing companies.ChangeofplaceofregisteredofficefromthejurisdictionofoneRegistrarofCompaniestoanotherRegistrar2. ofCompanieswithinthesamestaterequiresconfirmationfromtheRegionalDirector.Provisions relating to deemed public companies (Section 43A companies) became inoperative and a new sub-3. section (2A) relating to conversion of a public company to a private company on or after the commencement of Companies (Amendment) Act, 2000 inserted in the Companies Act, 1956.SEBI entrusted with powers with regard to issue and transfer of securities and non-payment of dividend by 4. listed public companies.Certain measures included for protecting the interest of small deposit holders in a company.5. Preferentialoffer/Privateplacementofsecuritiesto50(fifty)personsormoretreatedaspublicissue.Thisshall6. notapplytoapreferentialoffermadebypublicfinancialinstitutionsandNBFCs.Provisions for issuing equity share capital with differential rights as to dividend, voting or otherwise included 7. in the Act.Provisions relating to “shelf-prospectus” and information memorandum included in the Act.8. Every listed company making initial public offer of any security for a sum of Rupees ten crores or more will 9. have to issue the same only in a dematerialised form.Specificprovisions for appointmentofDebentureTrustees, liabilityof the company to create security and10. debenture redemption reserve included in the Act.Provisions for appointment of Public Trustees by the Central Government deleted with a view to enable the 11. Truststodirectlyexercisetheirvotingpower.Similarly,provisionsrelatingtodeclarationofbeneficialinterestby registered holders also deleted.With a view to ensuring good corporate governance, voting through postal ballot for important items (as may 12. benotified)wasprescribed.The period for disbursing dividend including interim dividend was reduced to thirty (30) days from the date 13. of declaration of dividend. The amount of dividend declared to be deposited in a separate bank account within fivedaysfromthedateofdeclarationofsuchdividend.Board of directors report to include a “Directors Responsibility Statement” to highlight the accountability of 14. directors with a view to ensure good corporate governance.Private companies to be excluded in reckoning the number of companies which an auditor can audit.15. Aholderofsecuritywhichcarriesvotingrightsinacompanytobedisqualifiedforappointmentasanauditor16. of the said company.Auditors to report “in thick type or in italics”, their observations which have an adverse effect on the functioning 17. of the company.Apubliccompanyhavingapaid-upsharecapitaloffivecrorerupeesormoreandonethousandormoresmall18. shareholders may appoint at least one director elected by small shareholders (holding shares of nominal value of Rs. 20,000 or less) on the Board of the said company.

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Nopersoncanholdofficeofdirectorinmorethan15(fifteen)companiesatatime.19. Everypubliccompanyhavingpaidupcapitalofnotlessthanrupeesfivecroresshallconstitute“AuditCommittee”20. of the Board.ForthepurposeofmanagerialremunerationtheamountofdepreciationtobethesamesprovidedinProfitand21. Loss Account of the Company.Companies with paid-up share capital of Rs. 10 lakhs or more and which are not required to have whole time 22. secretaryintheiremploymentrequiredtofileaComplianceCertificatefromaSecretaryinwhole-timepracticewithRegistrarofCompanies.Acopyofsuchcertificateshallalsobeattachedwiththe“DirectorsReport”.CertainnewexpressionsdefinedintheActe.g.abridgedprospectus,shelfprospectus,depository,information23. memorandum, dividend etc.Asathumbrule,penalprovisions(fiscalpenalties)containedundervarioussectionsoftheCompaniesAct,24. 1956 were increased ten fold.

1.7 The Companies (Amendment) Act, 2002The key features of the Companies (Amendment) Act, 2002 are as follows:

New Part IXA consisting of Section 581A to 581ZT relating to Producer Companies inserted vide Companies •(Amendment) Act, 2002 effective from 6.2.2003.The existing Company Law Board is proposed to be dissolved and in its place a National Company Law Tribunal •(Tribunal) is to be constituted.Substantial enhancement in the number of members of the Tribunal. Similarly, the number of Benches would •also increase.The Tribunal will consist of a President, Judicial and technical Members. The maximum number of members •should not exceed sixty-two. The actual number will be decided by the Central Government, as it may deem fit.TheappointmentswillbedonebytheGovernment,bynotificationintheOfficialGazette.Setting up of National Company Law Appellate Tribunal (Appellate Tribunal). Appeals against the orders of the •TribunalcanbefiledwiththeAppellateTribunal.Further,appealsagainsttheordersoftheAppellateTribunalwould lie to the Supreme Court.The Board for Industrial and Financial Reconstruction is to be abolished and SICA will be repealed.•Transfer of all the powers from the BIFR to the Tribunal.•Transfer of certain powers of the High Court to the Tribunal.•Greater role for professionals in the administration of Company Law.•The Amendment Act seeks to transfer powers relating to winding up, mergers and amalgamations from the •Court to the Tribunal.Thedefinitionofa“sickindustrialcompany”tobechangedanditshallmeananindustrialcompanywhich•has:

theaccumulatedlossesinanyfinancialyearequaltofiftypercentormoreofitsaveragenetworthduring �fouryearsimmediatelyprecedingsuchfinancialyearsfailed to repay its debts within any three consecutive quarters on demand for its repayment by a creditor or �creditors of such company.

The Amendment Act has introduced a new provision for imposition of cess. Under Sections 441A to 441G, every •company will be required to pay cess at such rate as may be decided by the Central Government. The amount so collected is proposed to be utilised for the revival and the rehabilitation of sick industrial companies. The amountwillbefirstcreditedintotheConsolidatedFundofIndia.Later,asmaybeapprovedbytheParliament,the amount so approved will be credited to a specially created Fund. Assistance to sick industrial companies will be provided out of the said Fund. The power to distribute the amount out of the said fund is vested in the Tribunal.Several powers that were earlier exercised by the Company Law Board are to be transferred to the Central •Government,includinggrantingofapprovalforshiftingofregisteredofficefromoneStatetoanotherState,extensionoftimeforfilingofcharges,permissionforholdingAnnualGeneralMeeting,etc.

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1.8 The Companies (Amendment) Act, 2006The Companies (Amendment) Bill, 2006 was introduced and passed by the Parliament in May, 2006. The Bill received President’s assent on 29th May 2006. Section 4 of the Act, which proposed to insert new Sections 610B, 610C, 610D and 610E was made effective from 16th September 2006 [vide S.O.No.1529E dated 14.9.2006]. Sections 2 and3oftheActpertainingtoDirectorIdentificationNumber(DIN)havebeenmadeeffectivefrom1stNovember2006 [vide GSR 648(E) dated 19.10.2006].

Salient features of the provisions of Companies (Amendment) Act, 2006 are as follows:DirectorIdentificationNumber(DIN)•

Director IdentificationNumber (DIN) to be obtainedby all existingdirectors and everyother person, �intending to become a director.DIN to be allotted by the Central Government within one month from the receipt of application for allotment �of DIN.Individuals prohibited to apply, obtain or possess more than one DIN. �Every existing Director to intimate his DIN to the company or all companies wherein he is a director, within �one month of receipt of DIN.IntimationofDIN, to theRegistraroranyotherofficerorotherspecifiedauthoritybyeverycompany, �within one week of the receipt of intimation by the Director. Intimation to be given in prescribed form and manner.DIN to be quoted by every person or company while furnishing any return, information or particulars �required to be furnished under the Act, if such return etc. relate to the director or contain any reference of the director.

Filing of applications, documents inspection etc. through electronic form Rules may be framed by Central •Government to provide for the following:

The applications, balance sheet, prospectus, return, declaration, memorandum and articles of association, �particularsofchargesoranyotherparticularsordocumentwhichisrequiredtobefiledordeliveredunderthisActorrulesmadethereunder,aretobefiledthroughelectronicformandauthenticatedinamannerspecifiedintherules.The document, notice, any communication or intimation, required to be served or delivered under the Act, �shouldbeservedordeliveredthroughtheelectronicformandauthenticatedinmannerspecifiedin therules.The applications, balance sheet, prospectus, return, register, memorandum and articles of association, �particularsofchargesoranyotherdocumentandreturnfiledundertheActorrulesmadethereundershallbemaintainedbyRegistrarinelectronicformandregisteredorauthenticatedinmannerspecifiedintheRules.The inspection of the MOA, AOA, register, index, balance-sheet, return or any other document maintained �in the electronic form, which is otherwise available for such inspection under the Act or rules made there under,maybemadebyanypersonthroughelectronicformasmaybespecifiedintherules.Fees, charges or other sums, payable under the Act or rules made there under, shall be paid electronically �andinsuchmannerasmaybespecifiedintherules.Registrarshallregisterchangeofregisteredoffice,alterationofMOAorAOA,prospectus,issuecertificate �ofincorporationorcertificateofcommencementofbusiness,registersuchdocument,issuesuchcertificate,record notice, receive such communication required to be registered or issued or recorded or received, as the case may be, under this Act or rules made thereunder by electronic form, in the manner as may be specifiedintherules.

Providing of value added services through electronic form•Central Government may provide such value added services through the electronic form and levy such fees �as may be prescribed.

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Application of provisions of Information Technology Act, 2000•All the provisions of Information Technology Act, 2000 relating to the electronic records (including the �mannerandformatinwhichtheelectronicrecordsshallbefiled),insofarastheyarenotinconsistentwiththis Act, shall apply to the records in electronic form.

1.9 The Companies Bill, 2011The Companies Bill, 2011 was introduced in Lok sabha on 14th December, 2011. The highlighted or key features of the Companies Bill, 2011 are as follows:

The Bill has 470 clauses and 7 schedules as against 658 Sections and 15 schedules in the existing Companies •Act, 1956. The entire bill has been divided into 29 chapters. •The following chapters have been introduced, viz. •

Registered Valuers ( Chapter 17) �Government companies (Chapter 23) �Companies to furnish information or statistics (Chapter 25) �Nidhis (Chapter 26) �National Company Law Tribunal & Appellate Tribunal (Chapter 27) �Special Courts (Chapter 28) �

The Bill empowers Central Government to make rules, etc. through delegated legislation after having detailed •consultative process (clause 470 and others).The Bill provides for self-regulatory process and stringent compliance regime.•

1.10 Company as Distinguished from Other Business EnterprisesThough there are a number of similarities between a limited company and other forms of associations, there are a great number of dissimilarities as well. In both the cases individuals are the subjects, and trading is generally the object.Inthefollowingparagraphs,alimitedcompanyisdistinguishedfromapartnershipfirm,aHinduJointfamilybusiness and a registered society.

Company and partnershipTheprincipalpointsofdistinctionbetweenacompanyandapartnershipfirmareasfollows:

Acompanyisadistinctlegalperson.Apartnershipfirmisnotdistinctfromtheseveralpersonswhocompose•it.Inapartnership,thepropertyofthefirmisthepropertyoftheindividualscomprisingit.Inacompany,itbelongs•to the company and not to the individuals comprising it.Creditorsofapartnershipfirmarecreditorsofindividualpartnersandadecreeagainstthefirmcanbeexecuted•against the partners jointly and severally. The creditors of a company can proceed only against the company and not against its members.Partnersaretheagentsofthefirm,butmembersofacompanyarenotitsagents.Apartnercandisposeofthe•propertyandincurliabilitiesaslongasheactsinthecourseofthefirm’sbusiness.Amemberofacompanyhas no such power.Apartnercannotcontractwithhisfirm,whereasamemberofacompanycan.•Apartnercannottransferhisshareandmakethetransfereeamemberofthefirmwithouttheconsentofthe•other partners, whereas a company’s share can ordinarily be transferred.Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders; whereas such •restrictions incorporated in the Articles are effective, because the public are bound to acquaint themselves with them.A partner’s liability is always unlimited whereas that of shareholder may be limited either by shares or a •guarantee.

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A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not •affectthelifeofthecompany,whereasthedeathorinsolvencyofapartnerdissolvesthefirm,unlessotherwiseprovided.A company may have any number of members except in the case of a private company which cannot have more •thanfiftymembers(excludingpastandpresentemployeemembers).Inapubliccompanytheremustnotbelessthansevenpersonsandinaprivatecompanynotlessthantwo.Ontheotherhand,apartnershipfirmcannothave more than 20 members in any business and 10 in the case of banking business.A company is legally required to have its accounts audited annually by a chartered accountant, whereas the •accountsofafirmareauditedatthediscretionofthepartners.Acompany,beingacreationoflaw,canonlybedissolvedaslaiddownbylaw.Apartnershipfirm,ontheother•hand, is the result of an agreement and can be dissolved at any time by agreement.

Company and corporationGenerally speaking, an association of persons incorporated according to the relevant law and clothed with legal personality separate from the persons constituting it is known as a corporation. The word “corporation” or words “bodycorporate”is/arebothusedintheCompaniesAct,1956.Definitionofthesamewhichisreproducedbelowis contained in Clause (7) of Section 2 of the Act:

“Body corporate” or “corporation” includes a company incorporated outside India but does not include:a corporation sole•a cooperative society registered under any law relating to cooperative societies and•anyotherbodycorporatenotbeingacompanywhichtheCentralGovernmentmay,bynotificationintheOfficial•Gazette, specify in this behalf.”

The expression “corporation” or “body corporate” is wider than the word “company”. A corporation sole is a single individualconstitutedasacorporationinrespectofsomeofficeheldbyhimorfunctionperformedbyhim.TheCrown and a Bishop under the English law are examples of this type of corporation. It may be noted that though acorporationsoleisexcludedfromthedefinitionforthepurposesoftheCompaniesAct,itcontinuestobealegalperson capable of holding property and becoming a member of a company.

A society registered under the Societies Registration Act has been held by the Supreme Court in Board of Trustees v. State of Delhi, A.I.R. 1962 S.C. 458, not to come within the term “body corporate” under the Companies Act, though it is a legal person capable of holding property and becoming a member of a company.

An industrial society formed under Industrial and Provident Societies Acts is not a “Company”. In Board of Trustees, Ayurvedic and Unani Tibbia College, Delhi v. State of Delhi, A.I.R. 1962 S.C. 458, the Supreme Court laid down the essence of a corporation. It consists of lawful authority of incorporation, the persons to be incorporated, a name bywhichthepersonsareincorporated,aplace,andwordssufficientinlawtoshowincorporation.Noparticularwords are necessary for the creation of a corporation. Any expression showing an intention to incorporate will be sufficient.ItwasheldinthatcasethattheoldBoardofTrusteesoftheAyurvedicandUnaniTibbiaCollegeofDelhion being registered under the Societies Registration Act, 1860 did not become a corporation within the meaning of Entry 44 of list I of the Seventh Schedule of the Constitution. It remained and continued to be an unincorporated society though under the several provisions of the Societies Registration Act, 1860 it had certain privileges, some of them being analogous to those of corporations.

In view of the said decision it has been decided that such a society should not be deemed to be a “body corporate” within the meaning of Section 2(7) of the Companies Act, 1956, although such a society can be treated as a “person” having separate legal entity apart from the members constituting it and thereby capable of becoming a member of a company under Section 41(2) of the Act. The expression “body corporate” occurring in various provisions of the Companies Act viz. Sections 295, 303, 372 etc. should therefore be interpreted so as to exclude a society registered under the Societies Registration Act from the scope of the expression “body corporate”.

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Company and limited liability partnership (LLP)LLPisanalternativecorporatebusinessformthatgivesthebenefitsoflimitedliabilityofacompanyandtheflexibilityof a partnership. LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

Further, no partner is liable on account of the independent or un-authorised actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

SinceLLPcontainselementsofboth“acorporatestructure”aswellas“apartnershipfirmstructure”LLPiscalleda hybrid between a company and a partnership. LLP is a body corporate and a legal entity separate from its partners, having perpetual succession. LLP form is a form of business model which:

is organised and operates on the basis of an agreement •providesflexibilitywithoutimposingdetailedlegalandproceduralrequirements•enables professional/technical expertise and initiative to combinewithfinancial risk taking capacity in an•innovativeandefficientmanner

A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e., Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners. The management-ownership divide inherent in a company is not there in a limited liability partnership. LLPhavemoreflexibilityascomparedtoacompany.LLPhavelessercompliancerequirementsascomparedtoacompany.

1.11 Corporate Form of EnterpriseThe corporate form of enterprise has its own advantages and disadvantages. They are explained in the section below.

1.11.1 Advantages of Corporate Form of EnterpriseThe nature and characteristics of a company as explained earlier in the chapter are also the advantages of corporate form of enterprise. They can be highlighted in the following points:

Corporate Personality•Limited Liability•Perpetual Succession•Transferable Shares•Separate Property•Capacity to Sue•Flexibility and Autonomy •

1.12 Disadvantages of Corporate Form of EnterpriseThere are, however, certain disadvantages and inconveniences in Incorporation. Some of these disadvantages are:

Formalities and expenses: Incorporation of a company is coupled with complex, cumbersome and detailed •legal formalities and procedures, involving considerable amount of time and money. Even after the company is incorporated, its affairs and working must be conducted strictly in accordance with legal provisions. Thus variousreturnsanddocumentsarerequiredtobefiledwiththeRegistrarofCompanies,someperiodicallyandsome on the happening of an event. Certain books and registers are compulsorily required to be maintained by a company. Approval and sanction of the Company Law Board, the Government, the Court, the Registrar of Companies or other appropriate authority, as the case may be, is necessarily required to be obtained for certain corporate activities.

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Corporate disclosures: Notwithstanding the elaborate legal framework designed to ensure maximum disclosure •of corporate information, the members of a company comparatively have restricted accessibility to its internal management and day-to-day administration of corporate working.Separation of control from ownership: Members of a company do not have an effective and intimate control over •itsworkingasonecanhaveinotherformsofbusinessorganisation,say,apartnershipfirm.Thisisparticularlyso in big companies in which the number of members is too large to exercise any effective control over its day-to-day affairs.Greater social responsibility: Having regard to the enormous powers wielded by the companies and the impact •they have on the society, the companies are called upon to show greater social responsibility in their working and, for that purpose, are subject to greater control and regulation than that by which other forms of business organisation are governed and regulated.Greater tax burden in certain cases: In certain circumstances, the tax burden on a company is more than that on •otherformsofbusinessorganisationincludingpartnershipfirms.Detailed winding-up procedure: The Act provides elaborate and detailed procedure for winding-up of companies •which is more expensive and time consuming than that which is applicable to other forms of business organisation.

1.13 Concept of Corporate PersonalityBy the provision of law, a corporation is clothed with a distinct personality, yet in reality it is an association of personswhoareinfact,inaway,thebeneficialownersofthepropertyofthebodycorporate.Acompany,beinganartificialperson,cannotactonown;itcanonlyactthroughnaturalpersons.

Lifting of or piercing through the corporate veilIt means the company has a separate legal entity from the persons constituting its members. Indeed, the theory of corporate entity is still the basic principle on which the whole law of corporations is based. But as the separate personality of the company is a statutory privilege, it must be used for legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will breakthrough the corporate shell and applies the principle of what is known as “lifting of or piercing through the corporate veil”. The Court will look behind the corporate entity and take action as though no entity separate from the members existed and make the members or the controlling persons liable for debts and obligations of the company.

The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity relies on its corporate personality as a shield to cover its wrong doings. However, the shareholders cannot ask for lifting veil for their purposes. This was upheld in Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were allotted on a licence to the individual licence. She set up a wholly owned private company and transferred the premises to that company with the Government consent. She could not remove the illegality by saying that she and her company was virtually the same person.

Statutory Recognition of Lifting of Corporate VeilThe Companies Act, 1956 itself contains some provisions which lift the corporate veil to reach the real forces of action.TaxationLawshavealsomadedeepinroadstocrackthecorporateshellforefficientadministrationoftaxlaws. For the purpose of Wealth Tax and Estate Duty Legislation, new statutory formulae have been enacted for shares of private companies which substantially disregard the separate corporate entity and proceed on the basis that the ownership of such corporate property belongs to the shareholders. In terms of Income-tax Law, directors of private companies have been made personally liable for the tax liabilities of such companies. The face of the corporation is examined in order to pay regard to the economic realities behind the legal facade.

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1.14 Illegal AssociationInordertopreventthemischiefarisingfromlargetradingundertakingsbeingcarriedonbylargefluctuatingbodiesso that persons dealing with them did not know with whom they were contracting, the law has put a ceiling on the number of persons constituting an association or partnership. An unincorporated company, association or partnership consisting of large number of persons has been declared illegal.

By virtue of Section 11 of the Companies Act, no company, association or partnership consisting of more than 20 persons can be formed for the purpose of carrying on any business for gain, unless it is registered as a company under the Companies Act, or is formed in pursuance of some other Indian Law, or is a Joint Hindu Family carrying on business for gain.

Section 11 of the Act does not apply to the case of a single joint family carrying on any business whatever may be thenumberofitsmembers.ButiftwoormorejointHindufamilyfirmscarryonbusinesstogetherandthecombinednumber of members exceed 20, then their association will become illegal. In computing the number, minor members of joint families are to be ignored. If by reason of minor members of such joint families on attaining majority, the number of persons exceeds the statutory limit, it will ipso facto become an illegal association.

Associations,likecharitable,religiousorscientific,whicharenotformedforthepurposeofacquisitionofgain,are excluded from the scope of the section. Foreign companies are also excluded from the scope of this section. On discovery of illegality of an association, the members may choose either to register it under the Act or to dissolve it immediately. In the absence of any such steps, they continue to be in the association on paying of the penalty under this section. To protect the interest of the outsiders this public mischief of unregistered large trading association is suppressed by this section. It is with this end in view, an illegal association formed by combination of two or more joint families ought to be governed by the provisions of the section.

The effect of non-registration of an association which falls within the terms of Section 11 is that such association is illegal and has no existence in the eyes of law. The law does not recognise it, so no relief can be granted either to the association or to any of its members, as the contractual relationship on which it is founded is illegal.

Since, the law does not recognise it, an illegal association:Cannot enter into any contract•Cannot sue any member, or outsider, not even if the company is subsequently registered•Cannot be sued by a member, or an outsider for, it cannot contract any debts•Cannot be wound up by the order of Court..•

However, an illegal association is liable to be. The members of an illegal association are individually liable in respect of all acts or contracts made on behalf of the association; they cannot either individually or collectively, bring an action to enforce any contract so made, or to recover any debt due to the association. Under Sub-sections (4) and (5) of Section 11, every member of an illegal association is:

Personally liable for all liabilities incurred in carrying on such business•PunishablewithfineuptoRs.10,000•

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SummaryA company denotes an association of like minded persons formed for the purpose of carrying on some business •or undertaking.The word “corporation” is derived from the Latin term ‘corpus’ which means ‘body’.•The proportion of capital to which each member is entitled is his “share”.•The privilege of limited liability for business debts is one of the principal advantages of doing business under •the corporate form of organisation.A company’s life is determined by the terms of its Memorandum of Association.•Section 82 of the Companies Act, 1956 enunciates the principle by providing that the shares held by the •members are movable property and can be transferred from one person to another in the manner provided by the articles.The Stock Exchanges provide adequate facilities for the sale and purchase of shares.•TheCommonSealactsastheofficialsignatureofacompany.•Thedistinctionbetweenacompanyanditsmembersisnotconfinedtotherulesofprivacy;however,itpermeates•the whole law of contract.TheMemorandumofAssociationofthecompanyregulatesthepowersandfixestheobjectsofthecompany•andprovidestheedificeuponwhichtheentirestructureofthecompanyrests.Acompanyisavoluntaryassociationforprofit.•Thefirstenactmenttobearthetitle“CompaniesAct”wastheCompaniesAct,1862.•TheconceptofprivatecompanywasintroducedforthefirsttimeintheCompaniesAct,1908.•The Amending Act was based upon the report and recommendations of the Jenkins Committee presented in •1962.The Companies Act, 1956 was enacted with a view to consolidate and amend the earlier laws relating to •companies and certain other associations.Creditorsofapartnershipfirmarecreditorsofindividualpartnersandadecreeagainstthefirmcanbeexecuted•against the partners jointly and severally.Acorporationsoleisasingleindividualconstitutedasacorporationinrespectofsomeofficeheldbyhimor•function performed by him.LLPisanalternativecorporatebusinessformthatgivesthebenefitsoflimitedliabilityofacompanyandthe•flexibilityofapartnership.The members of an illegal association are individually liable in respect of all acts or contracts made on behalf •of the association.

ReferencesCompany Law• [Pdf] Available at: <http://www.icsi.in/Study%20Material%20Executive/CL.pdf> [Accessed 25 June 2013].The Essential Elements of Corporate Law: What is Corporate Law?• [Pdf] Available at: <http://www.law.harvard.edu/programs/olin_center/papers/pdf/Kraakman_643.pdf> [Accessed 25 June 2013].Davies, P. P., 2010• . Introduction to Company Law, 2nd ed., Oxford University Press, USA.Dignam, A. and Lowry, J., 2012. • Company Law, 7th ed., Oxford University Press, USA.Introduction business law• [Video online] Available at: <http://www.youtube.com/watch?v=viyVBPvFFkQ> [Accessed 25 June 2013].Introduction to the Companies Act, 1956.• [Video online] Available at: <http://www.youtube.com/watch?v=QNYzlBnLLtY> [Accessed 25 June 2013].

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Recommended ReadingSingh, A., 2006. • Introduction to Company Law, 6th ed., Eastern Book Co.Beatty, J. F., 2012. • Introduction to Business Law, 4th ed., Cengage Learning.Davies, P. L., 2002. • Company Law, Oxford University Press, USA.

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Self Assessment____________ denotes a joint stock enterprise in which the capital is contributed by a large number of 1. people.

Managementa. Membersb. Companyc. Legislationd.

Which of the following is not one of the characteristics of a company?2. Unlimited liabilitya. Corporate personalityb. Perpetual successionc. Separate propertyd.

WhenwasthefirstCompaniesActpassedinIndia?3. 1860a. 1985b. 1850c. 1857d.

Which of the following is not one of the salient features of The Companies (Amendment) Act, 1999?4. Companies were allowed to buy-back their own securities.a. Companies were enabled to issue Sweat Equity shares.b. An Investor Education and Protection Fund were proposed to be established.c. SEBI entrusted with powers with regard to issue and transfer of securitiesd.

The Companies (Amendment) Bill, 2006 was introduced and passed by the Parliament in May, 5. ______________.

2006a. 2000b. 1999c. 2002d.

An association of persons incorporated according to the relevant law and clothed with legal personality separate 6. from the persons constituting it is known as a ___________.

Managementa. Membersb. Corporationc. Legislationd.

A_________________isasingleindividualconstitutedasacorporationinrespectofsomeofficeheldbyhim7. or function performed by him.

corporation solea. memberb. directorc. body corporated.

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Whichofthefollowingisanalternativecorporatebusinessformthatgivesthebenefitsoflimitedliabilityofa8. companyandtheflexibilityofapartnership?

LLPa. Enterpriseb. Corporate structurec. A.I.Rd.

Which of the following is not one of the disadvantages of corporate form of Enterprise?9. Formalities and expensesa. Provision of lawb. Greater social responsibilityc. Separation of control from ownershipd.

The Companies Act was amended twice in _______________.10. 1966a. 1970b. 1974c. 1956d.

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Chapter II

Financial Structure of a Company

Aim

The aim of this chapter is to:

definefinancialstructure•

elucidatethefactorsdeterminingfinancialstructure•

explain the rights attached to shares•

Objectives

The objectives of this chapter are to:

enlist the types of shares•

explicate the categories of prospectus•

elucidate the term information memorandum•

Learning outcome

At the end of this chapter, you will be able to:

understand debt equity ratio•

identify the variants of debit equity ratio•

recognise the various types of equity ratios•

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2.1 IntroductionTheword‘structure’,originatedfromthefieldofengineering,meansdifferentpartsofabuilding.Similarly,financialstructure consists of three elements namely assets, liabilities and capital.

Financialstructurereferstothewaythefirm’sassetsarefinanced.Itistheentireleft-handside(liabilitiesplusequity) of the balance sheet which represents all the long-term and short term sources of capital. Capital structure refers to the mix of long-term sources of funds, such as debentures, long-term debt, preference share capital and equitysharecapitalincludingreservesandsurpluses(i.e.,retainedearnings).Itisonlyapartoffinancialstructure.Ifshort-termliabilitiesareaddedincapitalstructure,itbecomesfinancialstructure.Thus,capitalstructurereferstothatpartofthefinancialstructurewhichrepresentslong-termsources.

Toconfinetherealareaoftheterm‘capitalstructure’,itisnecessarytodistinguishitfromtheterm‘assetsstructure’.Assetsstructurereferstothe‘makeup’oftotalassetsasrepresentedbyfixedassetsandcurrentassets.Itistherighthand side of the balance sheet which represents total capital employed in the business. However it should be noted here,thatGerstenberghasusedtheterm‘capitalstructure’and‘financialstructure’interchangeably.Accordingtohim,financialstructurealsoreferstothemake-upofthepermanentcapitalofthefirm.

Taskofformattingfinancialstructureinvolvesthedecisionsregardingthetypeofsecuritiestobeissuedandtherelative proportion of each type of security namely shares, debentures, retained earnings etc. in the total capitalisation. Each corporate security has got its own advantages and disadvantages. Therefore, too much induction of one security inthecapitalstructuremayproveunprofitableorrisky.Forinstance,ifcapitalstructuremainlycomprisesofequitycapitalandhavinginadequatedebtcapital,itmaydepriveofthebenefitsoftradingonequityandhencemaynotfulfiltheobjectiveofmaximumreturntoitsowners.Ontheotherhand,ifacompany,withfluctuatingincome,hashigh capital leverage having grater risk, then such capital structure will maximise return to owners. However, in leanyearsthepositionofafirmmaybeverycriticalbecausethenetincomemightnotbeenoughtomeeteventhefixedchargeobligationsonpreferencesharesordebentures.

There is not a single capital structure which is suitable to all types of business. Whether or not, a capital structure suitable for a particular business depends upon the circumstances and nature of business. The capital structure should be framed in such a way that it maximises returns to its owners.

2.2 Factors Determining Financial StructureAfirmrequirescapitaltocontinuouslyrunitsbusiness.Hence,thefinancialstructuredecisioniscontinuousoneandhastobetakenwheneverafirmneedsadditionalfinances.Therearenumberoffactorsthatshouldbeconsideredwheneverafinancialstructuredecisionhastobetaken.Someoftheimportantfactorsareasfollows:

Trading on equity or leverage Financial leverage is an important consideration in planning the capital structure of a company because of its effects ontheearningpershare.Theuseoffixedcostsourcesoffinancesuchasdebtandpreferencecapitaltofinancetheassetsofthecompanyisknownasfinancialleverageortradingonequity.Thetradingonequityisadevicetoearn higher earnings on the share capital of a company. However, it is a double-edged sword. It has got tremendous acceleration or deceleration effect on EBIT as well as EPS. It may prove to be a blessing if an enterprise uses borrowed capital and earn more on it than pays on it. On the other hand, it may prove to be a curse for an enterprise havinghighdebtfinancingbutlowanduncertaincashflowstomeetitsdebtobligations.Theintensityoftradingonequitycanbemeasuredbythedebt-equityratioorfixedchargeratio.

Capital gearing The different forms and proportion of securities to be issued is decided on the basis of policy decision regarding capital gearing. The ratio of equity share capital to preference share capital and loan capital is described as the “capital gearing”.Ifequitysharecapital(includinganyreservesorundistributedprofitswhichmayberegardedasbeingpart of the equity of the ordinary shareholders) is lower than the loan capital, the capital structure is said to be ‘high geared’. On the other hand, if the equity share capital is higher than the loan capital, the capital structure is said to be ‘low geared’. Thus, capital gearing is important not only to the company, but also to prospective investors.

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It must be carefully planned as it affects a great deal of the company’s capacity to maintain an even distribution policy inthefaceofanydifficulttradingperiodswhichmayoccur.Remarkably,distributionpoliciesandthebuilding-upof reserves as well as an even dividend policy are all affected by the company’s “gear ratio”.

Cost of capitalThecostofcapitalisanimportantconceptinformulatingcapitalstructure.Thecostofasourceoffinanceistheminimum return expected by its suppliers. The expected return depends on the degree of risk assumed by investors. Ignoring risk, debt is a cheaper source of funds than equity. The preference share capital is also cheaper than equity capital, but not as cheap as debt. The capital structure should frame in a way it kept the total cost of capital to the minimum. So, it is necessary for alternative capital structures to be compared. The term ‘cost of capital’ includes the interest or dividend payable plus the costs incurred in raising the capital such as legal and publicity costs, etc.

Maximum controlNormally, business life consists of different groups of shareholders. They may think in different ways and due to difference of opinions, they may always try to keep the maximum control in their hands. Certain securities have voting rights and therefore, through them control can be exercised. Hence, whenever requirement of additional funds are there, proper balance between the voting capital (the equity capital) and the non voting capital (retained earnings,preferenceshares,debentures,loans)shouldbekeptsoastomaintainpropercontrol.However,itisdifficultto determine the ideal ratio. Some accountants are of the view that the absence of loans is a sign of great strength whileothersmayarguethattheexistenceofloansisanindicationofgrowthandprofitability.

Cashflow ability of the companyOne of the features of a sound capital structure is conservatism which does not mean employing no debt or small amountofdebt.Conservatismisrelatedtothefixedchargescreatedbytheuseofdebtofpreferencecapitalinthecapitalstructureandfirm’sabilitytogeneratecashtomeetthesefixedchargesunderanyreasonablypredictableadverseconditions.Thefixedchargesofacompanyincludepaymentofinterest,preferencedividendsandprincipal,and they depend on both the amount of loan securities and the terms of payment. Whenever a company thinks of raisingadditionaldebt,itshouldanalyseitsexpectedfuturecashflowtomeetthefixedcharges.Netcashinflows-fixedchargesratio(debt-servicingratio)isoneoftheimportantratioswhichshouldbeexaminedatthetimeofplanning the capital structure.

FlexibilityA business cannot run in static affairs. Accordingly, the company should change to survive when the environment changes.Flexibilityincapitalstructuremustbethereforthispurpose.Here,flexibilitymeanschangingofmixtureregardingcapitals.Suchflexibilitydependsuponcertainimportantfactorslikeflexibilityinservicecharges,restrictiveclauses in loan agreements, process of redemption and debt capacity.

Scale of CompanyThis is not an important factor and has the lowest voice in the formation of a capital structure. Normally a small-scale company can’t attract the investors and are not favoured by them. These companies are compelled to take support of equity shares mostly while large-scale companies can always get favour from investors. Such companies alwaysfindleverageasadditionaladvantageintheircapitalstructure.

2.3 SharesA share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in thefirstplace,andofinterestinthesecond,butalsoconsistingofaseriesofmutualcovenantsenteredintobyallthe shareholders in accordance with (now sec33(1) of the Companies Act 2006).

2.3.1 Nature of SharesShareholding is a complex system of joint ownership. The shareholders jointly own the company. At the same time a share is itself an item of property which (subject to the company’s articles) can be transferred by sale or gift.

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In return for investing in a company a shareholder gets a bundle of rights in the company which may vary according to the type of shares acquired. Most companies only have one class of shares (ordinary shares) but the law in the UK isextremelyflexibleandallowsanyclassesofsharestobecreated.Thisisdonebysettingoutthedifferentrightsattached to the various classes (usually in the company’s articles). What rights are attached to the different classes of shares is essentially a matter for the company to determine.

The main rights which are usually attached to shares are as follows:To attend general meeting and voteTypically shares carry one vote each at general meetings but there may be non-voting shares or shares with multiple votes. Some shares may carry the right to vote only in particular circumstances.

To a share of the company’s profitsThedistributionofprofitsispaidbymeansofadividendofacertainamountpaidoneachshare.Adividendmaybepaidonlyifthecompanyhasmadeprofitsandtotheextentthatitdecidestodistributethem.

To a final distribution on winding upIf the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages like a return of capital and distribution of surplus capital. Some shares may be given a priority as to one or both of these. The company should be run lawfully, in accordance with the Companies Acts, the general law and the company’s constitution.

In most of the circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the company.

Any company can create different classes of shares by setting out those classes and the rights attached to them in the company’s articles. If a company has only one class of shares they will be ordinary shares and will carry equal rights.

2.3.2 Classes of SharesDifferent classes of shares within a company can carry identical rights, but very often have different voting, dividend and/or capital rights. This is done for different reasons. Sometimes it is to attract a particular investor, e.g. by giving him or her preference shares. In other cases, shares are given to family members or employees so that dividends may bepaidtothem,becauseitmaybeamoretax-efficientmeansofmakingpaymentstothem.Insuchcases,theownersof the company may want to restrict the rights attached to such shares, e.g. by making them non-voting, and perhaps by making it possible to take the shares back if circumstances change (perhaps by making them redeemable). In some companies, identical classes of shares are issued to different people, and the articles provide that the directors may vary the dividends between the different classes.

Thefollowingaredescriptionsofsometypicalclassesofshares.Therearenolegaldefinitionsofsuchclassesandshares with the same name (e.g. preference shares) will have different rights in different companies.

Ordinary sharesMost companies have just ordinary shares. They carry one vote per share, are entitled to participate equally in dividends and, if the company is wound up, share in the proceeds of the company after all the debts have been paid. Some companies create different classes of ordinary shares, e.g. ‘A’ ordinary shares, ‘B’ ordinary shares, etc. This is done to create some small difference between the different classes, e.g. to allow the directors to pay different dividends to the holders of the different share classes, or to create deadlock articles, or to distinguish between the shares so that different rules apply for share transfers, etc. There can also be ordinary shares in the same company that are of different nominal values, e.g. £1 ordinary shares and 10p ordinary shares. If each share has one vote (regardless of its nominal value) the holder of the 10p shares will get 10 votes for every £1 paid for them, while the holder of the £1 shares only gets one vote per £1.

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Non-voting sharesNon-voting shares carry no rights to attend general meetings or vote. Such shares are widely used to issue to employees sothatsomeoftheirremunerationcanbepaidasdividends,whichcanbemoretax-efficientforthecompanyandthe employee. The same is also sometimes done for members of the main shareholders’ families. Preference shares are often non-voting.

Redeemable sharesThese are shares issued on terms that the company will, or may, buy them back at some future date. The date and termsmaybefixed(e.g.thattheshareswillberedeemedfiveyearsaftertheyareissued,perhapsatapricedifferentfrom their nominal value). This can be a way of making a clear arrangement with an outside investor.

They may also be redeemable at any time at the company’s option. This is often done with non-voting shares given to employees so that, if the employee leaves the company his shares can be taken back at their nominal value. There are statutory restrictions on the redemption of shares. The main requirement, like a buy-back, being that the company mayonlyredeemthesharesoutofaccumulatedprofitsortheproceedsofafreshissueofshares(unlessitmakesapermissible capital. Preference shares are often redeemable.

Preference sharesThesewillusuallyhaveapreferentialrighttoafixedamountofdividend,expressedasapercentageofthenominal(par) value of the share, e.g. a £1, 7% preference share will carry a dividend of 7p each year. It is, however, still a dividendandpayableonlyoutofprofits.Thedividendmaybecumulative(i.e.,ifnotpaidoneyearthenaccumulatesto the next year) or non-cumulative. The presumption is that it is cumulative. The dividend is usually restricted to afixedamount,butalternativelythepreferencesharemaybeparticipating,inwhichcaseitparticipatesinprofitsbeyondthefixeddividendundersomeformula.

Preference share are often non-voting (or non-voting except when their dividend is in arrears). They are sometimes redeemable. They may be given a priority on return of capital on a winding up. Often they will not be entitled to share in surplus capital (i.e., they only get their £1 back on each £1 share).

Deferred ordinary sharesShares on which no dividend is paid until other classes of shares have received a minimum dividend. Thereafter, they will usually be fully participating.

Management sharesA class of shares carrying extra voting rights so as to retain control of the company in particular hands. This may be done by conferring multiple votes to each share (e.g. they carry ten votes each) or by having a smaller nominal value for such shares so that there are more shares (and so more votes) per £1 invested. Such shares are often used to allow the original owners of a company to retain control after additional shares have been issued to outside investors.

Other classesAny class of shares may be created. Sometimes different classes are set up for particular purposes, such as the following arrangements:

Voting shares, dividend shares, capital sharesSometimes three classes of shares are created with class ‘A’ having all the voting rights, class ‘B’ having all the dividend rights and class ‘C’ having all the capital rights. It is then possible for the different shareholders to have different percentages of the rights for these purposes. As a simple example, Shareholder 1 may have 40% of the voting rights (‘A’ shares), 50% of the dividend rights (‘B’ shares) and 60% of the capital rights (‘C’ shares). Shareholder 2 then has 60% of the votes, 50% of the dividends and 40% of the capital.

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Deadlock articlesIn a company with two investors, A and B (perhaps a joint venture between two unrelated companies) the company may have two classes of shares, A shares and B shares. The shares may carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles may provide for, say, two directors to be nominated by the holders of the A shares and two by the holders of the B shares, etc.

Changing the class rightsThere is some statutory protection given to the holders of a class of shares against the rights on their shares being altered. A minority class of shares, or a class of non-voting shares, would otherwise be vulnerable to the rights on those shares being altered by the majority (e.g. by altering the articles by special resolution). This is known as a variation of class rights. Full consideration of this complex area is outside the terms of this database, but the following is a summary of the main statutory provisions:

CA 2006, sec630 provides that class rights may be varied only in accordance with the articles or if either:The holders of three-quarters in nominal value of the issued shares of that class consent in writing to the •variation; orA special resolution (75% majority) is passed at a separate general meeting of the holders of that class to sanction •the variation.

CA 2006, sec633: The holders of not less than 15% of the issued shares of the class (being persons who did not consent to or vote in favour of the resolution for the variation), may apply to the court to have the variation cancelled. More practical advice on converting shares from one class to another can be found on the Company Law Solutions website.

CautionCare needs to be taken when creating different classes of shares and, indeed, in issuing shares generally. There have been many examples over recent years where shares have been created in order to save tax without taking proper advice as to the implications of issuing such shares to employees, family members, etc. That is not to say that such schemes should be avoided, only that they should be put in place only with proper advice. Company Law Solutions provides an expert service advising on different classes of shares and the procedures for creating them. They do not give tax advice. Any company can create different classes of shares by setting out those classes and the rights attached to them in the company’s articles. If a company has only one class of shares they will be ordinary shares and will carry equal rights.

Different classes of shares within a company can carry identical rights, but very often have different voting, dividend and/or capital rights. This is done for different reasons. Sometimes it is to attract a particular investor, e.g. by giving him or her preference shares. In other cases, shares are given to family members or employees so that dividends may bepaidtothem,becauseitmaybeamoretax-efficientmeansofmakingpaymentstothem.Insuchcases,theownersof the company may want to restrict the rights attached to such shares, e.g. by making them non-voting, and perhaps by making it possible to take the shares back if circumstances change (perhaps by making them redeemable). In some companies, identical classes of shares are issued to different people, and the articles provide that the directors may vary the dividends between the different classes.

2.4 ProspectusSection2(36)oftheCompaniesActdefinesthetermProspectus.Accordingly,itmeansanydocumentdescribedorissued as prospectus, notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate. In this context, it should be noted that prospectus is not an offer in itself but an invitation to make an offer, signifying thereby that on acceptance of such an invitation by any member of the public, no binding contract between him and the company comes into being. Application for purchase of shares or debentures or for making a deposit constitutes an offer by the subscriber to the company and it is only on its acceptance by the company that a binding contract comes into existence.

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2.4.1 Role of ProspectusThe prospectus is the basic document on the basis of which the intending investors decide whether or not they should subscribe to the shares or debentures. Therefore, the law requires unstinted disclosure of various matters through prospectus and forbids variations of any terms and conditions of a contract contained therein except with the approval and authority of the company in general meeting.

Those who issue prospectus holding out to the public great advantage which will accrue to persons who take up shares on the representations contained therein, are bound to state everything with scrupulous accuracy and not only to abstain from stating as fact that which is not so but to omit no fact within their knowledge, the existence of which might in any degree affect the nature or extent or quality of the privilege and advantages which the prospectus holds out as an inducement to take shares.

It is, therefore, essential that the information statutorily needing disclosure is stated fully and precisely so that the investing public which is ignorant of the present and future prospects of the company may get all the information which is likely to affect the public mind. It is only to protect the members of the public against their being misguided by half truths or falsehoods that the law casts a liability on various persons connected with the issue of the prospectus to compensate every person (who subscribes on the faith of the prospectus) for any loss or damage he may have sustained because of the inclusion of any untrue statements in the prospectus.

2.4.2 Types of ProspectusThe various types of prospectus are as follows:Abridged form of ProspectusAs per Section 2(1) of the Companies (Amendment) Act, 2000“abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed.” By the Amendment Act of 1988 the company was permitted to furnish an abridged form of prospectus along with the application for shares or debentures instead of the full prospectus. The Government has revised the format of abridged prospectus to provide for greater disclosure of information to prospective investors so as to enable them to take an informed decision regarding investment in shares and debentures.

The abridged prospectus (in Form 2A) and the share application form should bear the same printed number. The investor may detach the share application form along the perforated line after he has had an opportunity to study the contents of the abridged prospectus, before submitting the same to the company or its designated bankers. Circumstances where details are not required in the abridged prospectus:

Where theoffer ismade inconnectionwithabonafide invitation toaperson toenter intoanundertaking•agreement with respect to the shares or debentures.Where the shares or debentures are not offered to the public.•Where the offer is made only to the existing members or debenture holders of the company.•Where the shares or debentures offered are in all respects uniform with shares or debentures already issued and •quoted on a recognised stock exchange.Where a prospectus is issued as a newspaper advertisement, it is not necessary to specify the contents of the •memorandum, or the names etc., of the signatories to the memorandum or the number of shares subscribed for by them.

Shelf ProspectusSection 60 A of the Companies Act, 1956 lays down the provisions as regards shelf prospectus. According to it, theshelfprospectusmeansaprospectusissuedbyanyfinancialinstitutionorbankforoneormoreissuesofthesecuritiesorclassofsecuritiesspecifiedinthatprospectus.

Therefore,anypublicfinancialinstitution,publicsectorbankorschedulebankwhosemainobjectisfinancingshallfileashelfprospectus.Acompanyfilingashelfprospectuswiththeregistrarshallnotberequiredtofileprospectusafresh at every stage of offer of securities by it within the period of validity of such self prospectus.

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Acompanyfilingashelfprospectusshallberequiredtofileaninformationmemorandumonallmaterialfactsrelating to charges created, and changes in thefinancial position as have occurred between thefirst offer ofsecurities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by Central Government prior to making of a second or subsequent offer of securities under the shelf prospectus. An informationmemorandumshallbefiledalongwithsuchprospectus,whichwillremainvalidforoneyearfromthedateofopeningofthefirstissueofsecuritiesunderthatprospectus.Updatedinformationmemorandafiledwiththeshelfprospectusshallconstitutetheprospectus.Herefinancingmeansmakingloansorsubscribinginthecapitalofaprivate industrialenterpriseengaged in infrastructuralfinancingorsuchothercompanywhich theCentralGovernment may so notify in this behalf.

Red- Herring ProspectusRed-herring prospectus means a prospectus which does not have complete particulars on the price of securities and the quantum of securities offered. A public company making an issue of securities may circulate information memorandum to thepublic prior tofilingof prospectus [Section60B (1)].AsperSection2(19B), informationmemorandummeansaprocessundertakenpriortothefilingofprospectusbywhichademandforthesecuritiesproposed to be issued by the company is elicited, and the price and terms of issue for such securities is assessed by means of notice, etc.

Acompanyinvitingsubscriptionbyaninformationmemorandumshallbeboundtofileaprospectuspriortotheopening of the subscription lists and the offer as red-herring prospectus, at least 3 days before the opening of offer [Section 60B (2)]. Exact issue size or issue price is not mentioned in the red-herring prospectus.

Onthebasisofoffersreceived,companywillfinalisetheissuepriceandissuesizeandthenclosetheoffer.Afterclosureofofferofsecurities,afinalprospectuswillbepreparedstatingtheamountoftotalcapitalraisedwhetherby way of debts, or share capital and the closing price of securities and any other details as were not complete in red-herringprospectus.TheprospectuswillbefilledwithROCandalsowithSEBIincaseoflistedcompany.

2.5 Information MemorandumSection 60B of the Companies Act, 1956 (inserted by the Companies Amendment Act, 2000) provides the following regarding information memorandum:

A public company making an issue of securities may circulate information memorandum to the public prior to 1. filingofaprospectus.Acompanyinvitingsubscriptionbyaninformationmemorandumshallbeboundtofileaprospectuspriorto2. the opening of the subscription lists and the offer as a red herring prospectus, at least three days before the opening of the offer.The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the 3. case of a prospectus.Any variation between the information memorandum and the red-herring prospectus shall be highlighted as 4. variations by the issuing company.Explanation – For the purposes of Sub-sections (2), (3) and (4), “red-herring prospectus’ means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered.Every variation as made and highlighted in accordance with sub-section (4) above shall be individually intimated 5. to the persons invited to subscribe to the issue of securities.In the event of the issuing company or the underwriters to the issue have invited or received advance subscription 6. by way of cash or post-dated cheques or stock invest, the company or such underwriters or bankers to the issue shall not en-cash such subscription moneys or post-dated cheques or stock invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid.The applicant or proposed subscriber shall exercise his right to withdraw from the application on any intimation 7. of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters.

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Any application for subscription which is acted upon by the company or underwriters or bankers to the issue 8. without having given enough information of any variations, or the particulars of withdrawing of offer or opportunity for cancelling the post-dated cheques or stock invest or stop payments for such payments shall be void and the applicants shall be entitled to receive a refund, or return of its post-dated cheques or stock-invest or subscription money or cancellation of its application, as if the said application had never been made and the applicantsareentitledtoreceivebacktheiroriginalapplicationandinterestattherateoffifteenpercentfromthe date of encashment till payment of realisation.Upontheclosingoftheofferofsecurities,afinalprospectusstatingthereinthetotalcapitalraisedwhetherby9. way, of debt or share capital and the closing price of the securities and any other details as were not complete in thered-herringprospectusshallbefiledinacaseofalistedpubliccompanywiththeSecuritiesandExchangeBoard and Registrar, and in any other case with the Registrar only.

2.6 Debt-Equity Ratio TheDebt-EquityRatioisoneofthebestknownmeasuresoflongtermfinancialsolvencyofafirm.Itisalsoknownas External-Internal Equity Ratio. These ratios show relationship between borrowed funds and owners’ capital. It reflectsrelativeclaimsofcreditorsandshareholdersagainsttheassetsofthefirm.Inshort,thisratioindicateslenders’contribution for each rupee of the owner’s contribution. As, the relationship between outsider’s claim and owner’s capital can be shown in different ways, there are different variants of the debt-equity ratio as discussed under:

Long Term Debt – Equity Ratio •Total Debt – Equity Ratio•

The difference between above two version of Debt/Equity Ratio is in the treatment of current liabilities. Whereas, firstapproachincludesthecurrentliabilities,letterexcludesfromthedebt.Thereiscontroversyregardingwhetheror not to include current liabilities while calculating the amount of debt. Some of the reasons in favour of including current liabilities in debt are:

Though,currentliabilitiesareshorttermandmayfluctuatewidely,certainamountofitalwaysinuse.Soin•this sense it should be treated as long-term obligation. Some current liabilities like bank credit etc. are renewed year after year and thus remain permanently in the •business. Just like long-term creditors, current liabilities have a prior right on the assets of the business and are paid along •withlong-termlendersatthetimeofliquidationofthefirm.Short-term creditors exercise as much pressure as long-term creditors on management. •The omission of current liabilities while calculating D/E Ratio may lead to misleading results.•

Ithasimportantimplicationsfromtheviewpointofthecreditors,ownersandthefirmitself.Thisratiodeterminessoundnessoflong-termfinancialpolicyofafirmbythrowinglighton:

Therelativecontributionofcreditorsandownersofbusinessinitsfinancing;and•Margin of safety to the creditors.•

Debt-Equity Ratio indicates margin of safety to the creditors. A high ratio indicates greater risk to creditors as owner’s share is lower in comparison to that of creditors which is a danger signal to them. On the other hand, lower ratio indicateshigherdegreeofprotectiontocreditorsbuttheshareholdersaredeprivedofbenefitsoftradingonequity/leverage. Thus, both low and high Debt-Equity Ratios are not desirable. There should be a proper balance between debtandequity.Generally,aDebt-EquityRatioof1:1isconsideredsatisfactory.But,whetherornotaspecificratio is satisfactory depends upon nature and size of business, nature of the industry, degree of the risk involved etc.Inshort,other’smoneyshouldbeinreasonableproportiontoowner’scapitalandownershouldhavesufficientstake in the fortunes of the enterprise.

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Long-term debt-equity ratio This ratio is just another form of proprietary ratio. It establishes relationship between the outside long-term liabilities and owners’ funds. It shows the proportion of long-term External Equities and Internal Equities i.e. proportion of funds provided by long-term creditors and that provided by shareholders or proprietors.

The Long-term Debt - Equity Ratio is calculated by dividing long-term debt by shareholders’ equity. Long-term debt excludes current liabilities and shareholder’s equity includes state and central government shares in case of GSRTC.Itisfiguredasshownbelow:

Long Term Debt -Equity Ratio =

Ahigherratioindicatesthatcreditorshavealargerclaimthantheownersofthebusinessandfirmwillhavetoacceptstricter conditions from the lenders, while borrowing money. On the contrary, lower ratio indicates that shareholders deprivedofbenefitsoftradingonequity.

Total debt-equity ratio Total debt to equity ratio relates all recorded creditors claims on assets to the owners recorded claims. It is also known as external – internal equity ratio. The creditors includes all debts, whether long term or short term while the claims of the owner consists of preference shares, equity shares, capital reserves, retained earnings etc.

The Total Debt - Equity Ratio is calculated by dividing total debt by shareholder’s equity. Total debt includes current liabilitiesandshareholder’sequityincludesstateandcentralgovernmentsharesincaseofGSRTC.Itisfiguredasshown below:

Total Debt-Equity Ratio =

Debt - assets ratio Another variant of Debt- Equity Ratio is Debt-Asset Ratio. The Debt-Asset Ratio Measures the extent to which borrowedfundssupporttheassetsoffirm.TherearevariousapproachesforDebt-AssetRatio.Oneoftheimportantapproachesrelatestotaldebttothetotalassetsofthefirm.Wheretotaldebtcomprisesoflongtermdebtpluscurrentliabilities and total assets consists of permanent capital plus current liabilities. It measures “the share of the total assetsfinancedbyoutsidefunds.”Itisfiguredasshownbelow:

Debt-Assets Ratio =

A lowerDebt-AssetsRatio indicates sufficientmargin of safety to creditorswhich is desirable for them.Butshareholdersaredeprivedofbenefitsoftradingonequity,becausethedebtisnotbeingexploited.Ontheotherhand, high Debt-Assets Ratio exposed creditors to higher risk. But in the long run, position of the company is more stablebecauseofthelowerdependenceonoutsidefunds.Thus,afirmshouldneitherhaveveryhighratio,norverylow ratio.

Proprietary ratio It is also known as ‘Equity-Asset Ratio’. It relates the owner’s/proprietor’s fund with total assets. It is calculated by dividing proprietor’s fund by total assets. It indicates the extent of shareholders, funds in relation to total funds (shareholders’funds+liabilities).Inotherwords,itindicates“theproportionoftotalassetsfinancedbyowners.”Itisfiguredasshownbelow:

Proprietor’s Ratio = 100

Interest coverage ratio Itisoneoftheconventionratiousedtomeasuredebt-servicingcapacityofafirm.Itisalsoknownas‘Time-Interest-Earned Ratio’. It indicates ‘the number of times the interest charges are covered by funds that are ordinarily available fortheirpayment’.Itisfiguredasshownbelow:

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Interest Coverage Ratio =

Ahigherratioisdesirable.Itindicatesgreaterabilityofthefirmtohandlefixedchargeliabilitiesandthemoreassuredpayment of interest to the creditors. However, too high ratio implies unused debt capacity. On the contrast, a lower ratioindicatesexcessiveuseofdebtandthefirmdoesnothavetheabilitytoofferassuredpaymentofinteresttothecreditors,whichisadangersignaltothem.Afirmshouldtrytohavecomfortablecoverageratio.

Financial leverage ratio Financialleverageratiomeasuresabilityofafirminusingdebtcapitalforthebenefitsofitsowners.ProfessorS.C.Kuchhalhasdefinedfinancialleverageas,“thefirm’sabilitytousefixedfinancialchargestomagnifytheeffectsofchangesinEBIT(EarningbeforeInterestandTax)onthefirm’sEPS(EarningperShare).TheEBITisderivedbyadding back the interest (interest on loan capital + interest on long-term loans + interest on other loans) and taxes totheamountofnetprofit.However,inGSRTC,duetolosses,amountoftaxationisabsent.

Financial leverage, sometimes, also termed as trading on equity. Neither a very high leverage nor a very low leverage representsasoundpicture.Financialleverageratioisfiguredasshownbelow:

Financial Leverage Ratio =

Capital gearing ratio Capitalgearing(leverage)referstoproportionoffixedcostcapital(preferencesharesanddebentures)tonon-fixedcost capital (equity shares). A proper proportion between the two funds is necessary to keep the cost of capital at theminimum.Thisratioindicates“theextentoftradingonequityandextraresidualbenefitsaccruingtotheequityshareholders”.Itisfiguredasshownbelow:

Capital Gearing Ratio =

Net fixed asset-net worth ratio Thisratiorelatesnetfixedasset(grossblockminusdepreciation)tonetworth.Itindicates“theextenttowhichowner’scapitalisinvestedinnetfixedasset.”Itisfiguredasshownbelow:

Net Fixed Assets-Net worth Ratio =

If Net Fixed Assets exceeds Net Worth, then it implies that the creditors have contributed towards large proportion of the Net Fixed Assets. On the contrary, if Net Worth exceeds Net Fixed Assets, then it implies that a part of the net working capital is provided by the shareholders.

Fixed asset- debt ratio Thisratiorelatesnetfixedassettolongtermdebt.Itindicates“theextenttowhichoutsideliabilityissecuredwithfixedasset.”Itisfiguredasshownbelow:

Fixed Assets - Debt Ratio =

If Net Fixed Assets exceeds long term debt, it is a good sign for the long term creditors. On the contrary if long term debt exceeds Net Fixed Assets, it is a danger signal for them.

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SummaryCapitalstructurereferstothatpartofthefinancialstructurewhichrepresentslong-termsources.•Taskofformattingfinancialstructureinvolvesthedecisionsregardingthetypeofsecuritiestobeissuedand•the relative proportion of each type of security.Afirmrequirescapitaltocontinuouslyrunitsbusiness.•Financial leverage is an important consideration in planning the capital structure of a company because of its •effects on the earning per share.The trading on equity is a device to earn higher earnings on the share capital of a company.•Theintensityoftradingonequitycanbemeasuredbythedebt-equityratioorfixedchargeratio.•Thecostofasourceoffinanceistheminimumreturnexpectedbyitssuppliers.•The term ‘cost of capital’ includes the interest or dividend payable plus the costs incurred in raising the capital •such as legal and publicity costs etc.A minority class of shares, or a class of non-voting shares, would otherwise be vulnerable to the rights on those •shares being altered by the majority.Company Law Solutions provides an expert service advising on different classes of shares and the procedures •for creating them.A class of shares carrying extra voting rights so as to retain control of the company in particular hands.•The prospectus is the basic document on the basis of which the intending investors decide whether or not they •should subscribe to the shares or debentures.Abridged prospectus means a memorandum containing such salient features of a prospectus as may be •prescribed.Theshelfprospectusmeansaprospectusissuedbyanyfinancialinstitutionorbankforoneormoreissuesof•thesecuritiesorclassofsecuritiesspecifiedinthatprospectus.Acompanyfilingashelfprospectusshallberequiredtofileaninformationmemorandumonallmaterialfacts•relating to charges created.TheDebt-EquityRatioisoneofthebestknownmeasuresoflongtermfinancialsolvencyofafirm.•Lowerratioindicateshigherdegreeofprotectiontocreditorsbuttheshareholdersaredeprivedofbenefitsof•trading on equity/leverage.Total debt to equity ratio relates all recorded creditors claims on assets to the owners recorded claims.•TheDebt-AssetRatioMeasurestheextenttowhichborrowedfundssupporttheassetsoffirm.•AlowerDebt-AssetsRatioindicatessufficientmarginofsafetytocreditorswhichisdesirableforthem.•Financialleverageratiomeasuresabilityofafirminusingdebtcapitalforthebenefitsofitsowners.•Capitalgearing(leverage)referstoproportionoffixedcostcapital(preferencesharesanddebentures)tonon-•fixedcostcapital(equityshares).If Net Fixed Assets exceeds long term debt, it is a good sign for the long term creditors.•

ReferencesFinancial Structure Analysis• [Pdf]Availableat:<http://shodhganga.inflibnet.ac.in/bitstream/10603/705/14/15_chapter6.pdf> [Accessed 4 July 2013].Brief notes on shares and its types • [Pdf] Available at: <http://www.preservearticles.com/201104085061/brief-note-on-share-and-its-types.html> [Accessed 4 July 2013].Border, J., 2012.• Stock Market For Beginners Book. Amazon Digital Services, Inc.Wainman, D., 1999. • Company Structures. 2nd ed., Carswell Legal Publications.Types of shares• [Video online] Available at: <http://www.youtube.com/watch?v=YmfUtCbsTbs> [Accessed 4 July 2013].

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Introduction of Debt Equity Ratio• [Video online] Available at: <http://www.youtube.com/watch?v=jkPSJvTHfZQ> [Accessed 4 July 2013].

Recommended ReadingFontanills, G. A. and Gentile, T., 2001. • The Stock Market Course. Wiley.Karmann, A., 2008. • Financial Structure and Stability. Physica.Baker, H. K. and Martin, G. S., • Capital Structure and Corporate Financing Decisions. Wiley.

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Self Assessment_______________referstotheway;thefirm’sassetsarefinanced.1.

Financial structurea. Structureb. Capitalc. Assetsd.

_________________ refers to the mix of long-term sources of funds, such as debentures, long-term debt, 2. preference share capital and equity share.

Assets structurea. Financial structureb. Capital structurec. Capitald.

_______________referstothe‘makeup’oftotalassetsasrepresentedbyfixedassetsandcurrentassets.3. Assets structurea. Financial structureb. Capital structurec. Capitald.

Whichofthefollowingisnotoneofthefactorsdeterminingfinancialstructure?4. Trading on equity or leveragea. Capital gearingb. Costs of assetsc. Maximum controld.

A ________________ is the interest of a shareholder in the company measured by a sum of money.5. share holdinga. joint ownershipb. classesc. shared.

Which of the following is not one of the rights attached to shares?6. To attend the general meeting and votea. Toashareofthecompany’sprofitb. Toafinaldistributiononwindingupc. To set out different rights attached to various classesd.

Which of the following is not a type of shares?7. Voting sharesa. Ordinary sharesb. Redeemable sharesc. Preference sharesd.

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Shares on which no dividend is paid until other classes of shares have received a minimum dividend are called 8. ____________________.

Management sharesa. Deferred ordinary sharesb. Preference sharesc. Redeemable sharesd.

_______________________ means any document described or issued as prospectus, notice, circular, 9. advertisement or other document inviting deposits from the public.

Information memoranduma. Prospectusb. Deadlock articlesc. Management sharesd.

__________________ prospectus means a prospectus which does not have complete particulars on the price 10. of securities and the quantum of securities offered.

Red herringa. Shelf b. Abridged form c. Information memorandumd.

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Chapter III

Management and Control of Company

Aim

The aim of this chapter is to:

definethemanagementofthecompany•

elucidate the various authorities functional in a company•

explain the types of directors•

Objectives

The objectives of this chapter are to:

explain the role of company secretary•

explicate the appointment process of directors•

elucidatetheDirectorIdentificationNumber•

Learning outcome

At the end of this chapter, you will be able to:

understandtheappointmentoffirstdirectors•

identify the duties of directors•

recognise the functions of a company secretary•

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3.1 IntroductionThe supreme executive authority in the control of a company and its affairs resides in persons known as “Board of directors”.Section253oftheActprovidesthatonlyanindividual,andnotabodycorporate,associationorfirmshallbeappointedasadirector.Section2(13)definesadirectorasincludinganypersonoccupyingthepositionofdirector by whatever name called.

Thisisadefinitionbasedpurelyonfunction;apersonisadirectorifhedoeswhateveradirectordoesnormally.The Act offers no further guidance on the functions and duties of directors. One may, therefore, attempt a functional definitionofdirectorsastheindividualswhodirect,control,manageorsuperintendtheaffairsofacompanyintheform of the Board of directors. As a body, they frame the general policy of the company, direct its affairs, appoint the company‘sofficers,ensurethattheycarryouttheirdutiesandrecommendtotheshareholdersregardingdistributionof dividend as per its Articles of Association. The collective body in whom the authority is vested and through whom the company acts is called the -Board of directors or the -Board. The Supreme Court has in Ram Autar Jalan v. Coal Products (P) Ltd. (1970) held that when a question arises as to whether a person is (in law) a director of a company, the minutes books and returns sent to Registrar of Companies are important evidence, rather than fact that the person was de facto functioning as director.

3.2 Types of DirectorsThe various types of directors are:Executive DirectorExecutivedirectororEDisacommonpostinmanyorganisations,buttheCompaniesActdoesnotdefinethephrase.Executive directors perform operational and strategic business functions like managing peoples looking after assets hiringandfiringenteringintocontracts.Executivedirectorsareusuallyemployedbythecompanyandpaidasalary,so they are protected by the employment law.

Managing DirectorSection2(26)oftheCompaniesAct,1956givesthedefinitionofManagingDirectoras-managingdirectormeansa director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or article of association, is entrusted with [substantial powers of management] which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.

[Provided that the power to do administrative acts of a routine nature when so authorised by the Board such as thepowertoaffixthecommonsealofthecompanytoanydocumentortodrawandendorseanychequeontheaccountofthecompanyinanybankortodrawandendorseanynegotiableinstrumentortosignanycertificateofshare or to dire registration of transfer of any share, shall not be deemed to be included within substantial powers of management. Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of directors;]

Whole time DirectorAccording to Explanation to Section 269(1), a Whole-time Director includes a director in the whole-time employment of the company. Thus, a whole-time director means a director who devotes all his time and attention to the management of the company. Where a director is appointed to act as Technical Director, Legal Director, Work Director and Sales Director on full time basis he is a whole-time director of the company. A whole-time director is also a managerial person [See Section 268(1)].

Non-executive DirectorNon-executive directors do not get involved in the day-to-day running of the business. Non-executive Director may or may not be an independent director.

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Nominee DirectorsNomineedirectorsareappointedbyfinancialinstitutionsorbanks,whichextendtermloansand/orworkingcapitalassistanceoranyothertypeoffinancialassistancetocompanies.Nomineedirectorsareapowerfultoolofprojectsupervision,monitoringandcontrol,particularlyfollowingtheissueofGovernmentguidelinesenjoiningfinancialinstitutions to nominate directors on the boards of companies enjoying substantial assistance.

Independent DirectorsInClause49ofthelistingagreement,thetermIndependentDirectorshasbeendefinedasthenon-executivedirectorof the company who:

apart from receiving director‘s remuneration, does not have any material pecuniary relationships or a. transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;is not related to promoters or persons occupying management positions at the board level or at one level b. below the board;hasnotbeenanexecutiveofthecompanyintheimmediatelyprecedingthreefinancialyears;c. is not a partner or an executive or was not partner or an executive during the preceding three years, of any d. of the following:

thestatutoryauditfirmortheinternalauditfirmthatisassociatedwiththecompany,andi. thelegalfirm(s)andconsultingfirms(s)thathaveamaterialassociationwiththecompany.ii.

e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director.

f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.

g. is not less than 21 years of age.

Forthepurposesofabovedefinitionofindependentdirectors:Associateshallmeanacompany,whichisanassociateasdefinedinAccountingStandard(AS)23,Accountinga. for Investments in Associates in Consolidated Financial Statements, issued by the institute of Chartered Accountants of India.“Senior management” shall mean personnel of the company who are members of its core management team b. excluding Board of Directors. Normally, this would comprise all members of management one level the executive directors, including all functional heads.“Relative”shallmean―relativeasdefinedinsection2(41)andSection6readwithScheduleIAofthec. Companies Act, 1956.

As per clause 49 of the Listing Agreement which deals with good Corporate Governance Practices, every company, to which this clause is applicable, shall have an optimum combination of executive and non-executive directors with notlessthanfiftypercentoftheBoardofdirectorscomprisingofnon-executivedirectors.Thenumberofindependentdirectors would depend whether the Chairman is executive or non-executive. In case of a non-executive Chairman, at least one-third of Board should comprise of independent directors and in case of an executive Chairman, at least half of Board should comprise of independent directors. Further where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions and the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent director. Further, all pecuniary relationship or transactions of the non-executive directors vis-à-vis the company should be disclosed in the Annual Report.

Interested DirectorsInterested Director means any director whose presence cannot, by reason of Section 300, count for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.

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Government DirectorsThe Central Government has the power to appoint directors under Section 408 of the Act. The detailed provisions in this regard have been discussed later in this study lesson.

3.3 Appointment of DirectorsDirectors may be appointed in the following ways:

By subscribers to the Memorandum (First Directors) Section 254.•By members in general meeting — Sections 255, 256, 257, 265.•By Board of directors (Sections 260, 262 and 313)•By Central Government (Sections 408 and 409)•By third-parties if the articles provide.•By small shareholders, if the articles so provide.•

Restrictions on appointment or re-appointment of directorsSection 266 of the Act lays down that a person shall not be capable of being appointed director of a company by the articles, and shall not be named as a director or proposed director of a company in prospectus issued by or on behalf of the company, or as proposed director of an intended company in a prospectus issued in relation to that intendedcompany,orinastatementinlieuofprospectusfiledwiththeRegistrarbyoronbehalfofacompany,unless,beforetheregistrationofthearticles,thepublicationoftheprospectus,orthefilingofthestatementinlieuof prospectus, as the case may be, he has, by himself or by his agent authorised in writing:

SignedandfiledwiththeRegistraraconsentinwritingtoactassuchdirector;anda. Either - b.

signedthememorandumforsharesnotbeinglessinnumberorvaluethanthatofhisqualificationi. shares, if any; ortakenhisqualificationshares,ifany,fromthecompanyandpaidoragreedtopayforthem;orii. signedandfiledwiththeRegistraranundertakinginwritingtotakefromthecompanyhisqualificationiii. shares, if any and pay for them; ormadeandfiledwiththeRegistraranaffidavittotheeffectthatshares,notbeinglessinnumberoriv. valuethanthatofhisqualificationshares,ifany,areregisteredinhisname.

Sub-section(2)ofthesaidsectionprovidesthatwhereapersonhassignedandfiledasaforesaidanundertakingtotakeandpayforhisqualificationshares,heshall,asregardsthoseshares,beinthesamepositionasifhehadsignedthe memorandum for shares of that number or value.

ReferencesinSection266tothesharequalificationofadirectororproposeddirectorshallbeconstruedasincludingonlyasharequalificationrequiredwithinaperioddeterminedbyreferencetothetimeofappointment,andreferencesthereintoqualificationsharesshallbeconstruedaccordingly.ThedirectororthepersonnamedasaproposeddirectormustsignandfilewiththeRegistrarofCompanieshis/herconsenttoactassuchdirector,ine-FormNo.32.

This section, however, shall not apply to:a company not having share capital•a private company•a public company which was originally formed as a private company•a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company •was entitled to commence business

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3.3.1 Director Identification Number (DIN)TheconceptofaDirectorIdentificationNumber(DIN)hasbeenintroducedforthefirsttimewiththeinsertionofSections 266A to 266G of Companies (Amendment) Act, 2006. As such, all the existing and intending Directors havetoobtainDINwithintheprescribedtime-frameasnotified.

DirectorIdentificationNumber(DIN)isauniqueIdentificationNumberallottedtoanindividualwhoisanexistingdirector of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956.

Step by step processStep by step process to be followed by the applicant is as under:As per the revised procedure for DIN Allotment, any person intending to apply for DIN shall have to make an applicationine-FormDIN1andshouldfollowtheprocedureasprovidedinDirectorIdentificationNumberRules,2006.

Documents required to be attached with DIN 1High resolution photograph of the applicant PAN card is mandatory. So, a copy of PAN is mandatory for identity, name, father’s name and date of birth. Proof of father’s name is not required in the case of foreign nationals Copy of passport is mandatory as an ID proof in the case of foreign nationals. The present address proof should not be older than2monthsAnnexure–1aspertheformatgivenonthewebsitewww.mca.gov.ini.e.,verificationofapplicantin case of Form DIN – 1.

For DIN1 e-Form, only electronic payment of the fees shall be allowed (i.e. Net banking/Credit Card). No challan payment will be accepted under revised procedure of DIN allotment.

Incase,DIN1getscertifiedbytheprofessional(i.e.CA(inwholetimepractice)/CS(inwholetimepractice)/CWA(in whole time practice)/secretary (who is member of ICSI) in whole time employment of the existing company in which applicant is to be associated), the DIN will be approved by the system immediately online (in case it is not potential duplicate).

On the approval of DIN, intimate the DIN to all the company or companies (within a period of 30 days from the date of approval) in which you are a Director, in form DIN-2.

After the Director has intimated the DIN allotted to the company/companies. The Company or companies is/are then required to intimate the DINs of its directors to the ROC in Form DIN-3 within a period of seven days of receiving form DIN-2.(Filing of DIN-3 is applicable only in cases, where the date of appointment of director(s) in such company/companies, is prior to September 1 , 2007).If there is any change in the particulars submitted in form DIN-1, applicant can submit e-form DIN-4 online. The e-Form DIN-4 is required to be digitally signed by a Chartered Accountant or a Company Secretary or a Cost Accountant in whole- time practice or Secretary (who is member of ICSI) in whole time employment of the existing company.

3.3.2 Appointment of First DirectorsFirstdirectormeansthedirectorofthecompanywhoassumesofficefromthedateofincorporationofthecompany.Thefirstdirectorsofacompanymaybenamedinitsarticlesofassociation.Incase,nodirectorsaresonamedinthearticles,thearticlesmayauthorisethesubscriberstothememorandumtoappointthefirstdirectors.

Section 254 of the Act, provides that in the absence of any such provision in the articles of association, the subscribers ofthememorandumwhoareindividuals,shallbedeemedtobethefirstdirectorsofthecompanyuntilthedirectorsaredulyappointedinaccordancewithSection255.Ifthearticlesprovideforanysharequalification,onlysuchofthesubscribersaspossessthenecessarysharequalificationshallbedeemedtobedirectors.Thisprovisionrelatingtosharequalificationisapplicableonlytoapubliccompanyandnottoaprivatecompanyunlessthearticlesmakeit applicable.

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If all the subscribers to the memorandum are bodies corporate, none of the subscribers can be deemed to be directors, andthecompanywillhavenodirectorsuntilthefirstdirectorsareappointedunderSection255,intheabsenceofotherprovisionsinthearticles.Thearticlesatthetimeofregistrationmaycontainthenamesofthefirstdirectorsuntildirectorsareappointedatthefirstgeneralmeeting.

3.3.3 Appointment of Directors by Members in General MeetingSection 255 of the Act, provides that unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company, or of a private company which issubsidiaryofapubliccompany,shallbepersonswhoseperiodofofficeisliabletodeterminationbyretirementofdirectors by rotation and except as otherwise expressly provided in the Act, be appointed by the company in general meeting. Any fraction is to be rounded off to next higher number. Sub-section (2) of the said section provides that the remaining directors in the case of any such company, and the directors generally in the case of a private company which is not subsidiary of a public company shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting. When there are no validly appointed directors functioning, the shareholders have the right to appoint directors at the annual general meeting.

Section 256 of the Act, provides that in the case of a public company or a private company which is subsidiary of a publiccompany,atthefirstannualgeneralmeetingheldaftertheholdingofthegeneralmeetingatwhichthefirstdirectors are appointed in accordance with Section 255 and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, shall retire at every annual general meeting or if their number is not three or multiples of three then the number nearest to one-third, shall retire from office.Thosedirectorswhohavebeenlongestinofficesincetheirappointmentshallretirefirst.Asbetweenpersonwho became directors, on the same day, retirement among themselves, be determined by lot.

The Directors nominated by Financial Institutions pursuant to their loan agreements are not liable to retirement. Also, the directors appointed by the Central Government in pursuance of Section 408 of the Act shall also not be liable to retire by rotation. Articles of most of the companies contain an express provision excluding the managing or whole-time director from the requirement of retirement by rotation and provide that a person shall not be liable toretirebyrotationaslongashecontinuestoholdtheofficeofthemanagingorwhole-timedirector.

Wherethearticlesofacompanyprovidedthateveryyearsubsequenttothefirstannualgeneralmeetingone-thirdof the directors or if their number is not a multiple of three, then the number nearest to but not exceeding one-third, shallretirefromoffice.ThestrengthoftheBoardbecamereducedtotwoandthequestionwaswhethereitherofthem ceased to be a director under this article. It was held that in this case there are two directors and therefore one cannotfindanumberwhichisnearesttobutdoesnotexceedonethird.Inanothersimilarcase,itwasheldthatoneof the two directors should have retired at the annual general meeting.

Sub-section (3) of Section 256 of the Act provides that where a director retires by rotation at the annual general meeting, the company at the same meeting may appoint (i) the retiring director or (ii) some other person in the vacancy.Ifatthesaidannualgeneralmeetingthevacancyisnotsofilledandthemeetinghasnotexpresslyresolvednottofillthevacancy,themeeting,thoughithasdisposedoffallothermattersontheagenda,shallstandadjournedtillthe same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.

Section256(4)providesthatifattheadjournedmeetingalso,thevacancyisnotfilledupandthatmeetingalsohasnotexpresslyresolvednottofillthevacancy,theretiringdirectorsshallbedeemedtohavebeenre-appointedattheadjourned meeting except in the following cases:

at that meeting or at a previous meeting a resolution for the re-appointment of such a director has been put to •the meeting and lost;the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed •his unwillingness to be so appointed;heisnotqualifiedorisdisqualifiedforappointment;•

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a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any •provisions of the Act; orthe proviso to Sub-section (2) of Section 263 is applicable to the case.•

Thissub-sectiondealwithameetingadjournedbecausenodecisionistakenonfillingupavacancycausedbyretirement of a director and not with a meeting adjourned for lack of quorum as provided in Section 174. The meeting contemplated in this sub-section is a meeting capable of taking a decision. Section 174 does not apply to a case coming within this sub-section. If a meeting is adjourned for want of quorum and no decision is taken at the adjourned meeting on re-appointment of a director, the director is not deemed to be re-appointed by virtue of sub-clause (b) of this sub-section.

Where no annual general meeting is called or held, there is no scope for the application of the deeming provision of clause (b) at all. When a general meeting is adjourned for the purpose of taking a poll, the provisions of Sub-section (4)(a) and (b) relating to automatic re-election of retiring directors are not attracted for the time being. The re-appointment as above shall be effective from the day of the adjourned meeting.

Incasethevacancyisnotfilledattheannualgeneralmeetingandalsotheretiringdirectorsdonotgetautomaticallyre-appointed,thevacanciesmaybefilledbytheBoardofdirectors.Thedirectorsduetoretirebyrotationatanannualgeneralmeetingvacateofficeatthelatestonthelastdayonwhichthemeetingwasdueoroughttohavebeenheld.In case the meeting is not called by the directors, they cannot be allowed to take advantage of their own default and cannot extend their directorship after the date on which the meeting should have been called and held.

Additionaldirectors,holdofficetillthenextannualgeneralmeetingand,therefore,theywouldnotbe,includedin the whole number of directors for the purpose of computing the proportion of directors who should retire at the meeting.

Re-election of directorsTheprovisionsofSection303(2)requiringthefilingofareturntotheRegistrarofanychangeintheparticularsofdirectors are not applicable to directors who are re-elected after retirement and, therefore, no document in reference to them is necessary.

3.3.4 Appointment of Person other than Retiring DirectorSection 257 contains provision regarding the right of persons other than the retiring directors to stand for directorship and provides for the machinery for the election of such persons. It enables a person to stand for directorship at any general meeting and not necessarily only at an annual general meeting.

A person who is not retiring director is also eligible for appointment as director. Section 257 of the Act provides that a person (even a non member) other than a retiring director may give a notice in writing to a public company or a private company which is subsidiary of a public company not less than fourteen days before a general meeting about his candidature as a director or any member may give such notice signifying his intention to propose him as acandidateforthatoffice.Suchnoticeshouldbeaccompaniedwithadepositoffivehundredrupees,whichshallbe refunded to such person or, as the case may be, to such member, if the person succeeds in getting elected as a director. The Department of Company Affairs (Now, Ministry of Company Affairs) has vide circular No. 5/89 dated15.9.1989clarifiedthatifintermsofSection257,thepersondoesnotgetelected,asadirectorthenheorthemember proposing him, as the case may be will not be entitled to the refund of Rs. 500 and the amount deposited shall stand forfeited to the company.

On receipt of such a notice the company must inform its members of the candidature of a person or the intention of a member to propose such person as a candidate either by serving individual notice on the members or by advertising not less than seven days before the meeting in at least one English Language newspaper and one regional language newspapercirculatingintheplacewheretheregisteredofficeofthecompanyissituated.(Sub-section1AtoSection257)

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A notice given to members under Sub-section (1A) not less than seven days in advance of the election is valid notwithstanding that it does not comply with the requirement of twenty one days set out in Section 171. Appending an explanatory note to the notice under Sub-section (1A) is valid compliance with Section 173(2).Section 257 is a specificprovisiongivingarighttoanindividualmembertogivenoticethereunder.Thespecificrightthathasbeengiven under Section 257 does not provide that the implementation of such a right will have to be in accordance with the procedure laid down in Section 188 of the Act. The Department of Company Affairs (Now, Ministry of Company Affairs), in this regard, has expressed the views that if a person who is appointed as an additional director wants to be elected as a director at the next annual general meeting, the provisions of section 257 will have to be complied with since he cannot be considered to be a director retiring by rotation at that meeting.

Applicability of the provisions of Section 257 to a private companySection 257(1) does not apply to a private company which is not subsidiary of a public company. Thus, a private company, unless its articles so require, is not bound to receive a notice of candidature of a person for directorship at a general meeting and inform the same to its members in respect of convened general meeting. The proposal to appointapersonasadirectorcanbeginstraightawayatthemeetingitself.AffirmedinK.MeenakshiAmmavs.Sree Rama Vilas Press and Publications Ltd., (1992) 73 Com Cases 285 at 295 (Ker-DB). Appointment of director other than the retiring one in general meeting will, in case of a private company not being a subsidiary of a public company, is governed by its Articles of Association.

3.3.5 Appointment of Directors by the BoardThe Board of directors of a company may appoint additional directors. Section 260 of the Act lay down that if the articles of association of a company empower its directors to appoint additional directors, the Board may exercise suchpower.Suchadditionaldirectorshallholdofficeonlyuptothedateofthenextannualgeneralmeetingofthecompany. The Section further provides that the number of additional directors together with the existing directors shallnotexceedthemaximumnumberfixedfortheBoardbythearticles.

The power of the Board of directors to appoint an additional director is not affected by the provisions of Section 255 (Section 260). The restriction imposed by Section 255 regarding the proportion of directors liable to retire by rotation and non-rotational need not be complied with while appointing an additional director. If the annual general meetingofacompanyisnotheldorcannotbeheld,thepersonappointedasadditionaldirectorvacateshisofficeon the last day on which annual general meeting should have been held in terms of Section 166 of the Act. He cannotcontinueinofficethereafteronthegroundthatthemeetingwasnotorcouldnotbecalledwithinthetimeprescribed in the Section.

3.3.6 Appointment of Directors by Third Parties (Nominee Directors)Sometimesfinancialinstitutionsorbanksorotherlenders,etc.,nominateadirectortorepresenttheirinterestontheBoard.Thelendinginstitutionsassumeapivotalroleinfinancingthevariousprojectsofthecompanies.SuchFinancial Institutions have to safeguard their interests. They have to ensure that the money is only used for the purposes for which it was borrowed. The right and the terms of nominating the directors on the Boards of companies areusuallycontainedintheagreementitself.SpeciallegislationsgoverningcertainpublicfinancialinstitutionsandStatefinancialcorporationsenvisagetheappointmentofcertaindirectorsontheBoardsofborrowingcompaniesand such a provision has an overriding applicability to the Companies Act.

Nominee directors can be appointed only if a provision to that effect exists in the Memorandum of Association or Articles of Association of the company unless where a statute provides for such nomination. Therefore, it would be necessaryforthecompanytospecificallyprovideinitsArticles,oramenditsArticlestoprovide,forappointmentofanon-rotationaldirectorbytheassistingfinancialinstitution(s).

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3.4 Removal of DirectorsAdirectormayberemovedfromofficebeforetheexpiryofhistermby:Removal by shareholdersPursuant to Section 284(1) of the Act, the shareholders of a company may, by passing an ordinary resolution at a generalmeeting,removeadirectorbeforetheexpiryoftheperiodofhisoffice.However,thefollowingdirectorscannot be removed by the company unless otherwise stipulated in the terms of their appointment:

a director appointed by the Central Government under Section 408;•adirectorofaprivatecompanyholdingofficeforlifeonthefirstdayofApril,1952whetherornotheissubject•to retirement under an age limit by virtue of the articles or otherwise;where the company has availed itself of the option to appoint not less than two-thirds of the total number of •directors according to the principle of proportional representation under Section 265;a director appointed by a Financial Institution/Bank under the terms of a loan agreement•The right given by Section 284 is a statutory right which cannot be taken away by the memorandum, articles or •by any contract or any other document and if it is sought to be taken away, such a provision will be void [see Section 9].

Removal of directors by the Central GovernmentChapter IVA of the Act comprising Section 388B to 388E contains provisions regarding power of the Central GovernmenttoremovemanagerialpersonnelofaCompanyfromofficeontherecommendationoftheCompanyLaw Board. The Central Government may state a case against the person and refer the same to the Company Law Board with the request that Company Law Board may inquire into the case and record the decision as to whether ornotsuchpersonisafitandproperpersontoholdtheofficeofdirectororothermanagementoffice.TheCentralGovernment may make such a reference to the Company Law Board where it is of the opinion that there are circumstances suggesting:

that any person concerned in the conduct and management of the affairs of company is or has been in connection •therewith guilty of fraud, misfeasance persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust; orthat the business of a company is not or has not been conducted and managed by such person in accordance •with sound business principles or prudent commercial practices; orthat a company is or has been conducted and managed by such person in a manner which is likely to cause, or •has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; orthat the business of a company is or has been conducted and managed by such person with intent to defraud •its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

Formation of the opinion by the Central Government as stated above is subjective process and cannot be questioned. However,ifthebonafidesoftheGovernmentarechallengedandiftheGovernmentiscalledupontoexplain,suchmaterials must be disclosed to the Company Law Board.

The person against whom the case is presented under this section is joined as a respondent to the application. The application shall contain a concise statement of circumstances and materials as the Central Government may considernecessaryforthepurposeoftheinquiry.TheapplicationshallbesignedandverifiedinthemanneraslaiddownintheCodeofCivilProcedure,1908forsigningandverificationoftheplaintinasuitbytheCentralGovernment. The Company Law Board may at any stage allow amendments to such application presented by the Central Government. The Company Law Board may by interim order direct that the respondent shall not discharge anydutyofhisofficeuntilthefurtherorderoftheCompanyLawBoardandappointsuitablepersoninplaceoftherespondenttodischargethedutiesoftheofficeheldbytherespondent,subjecttosuchtermsandconditionsastheBoard may specify in the order. Every such person is treated as a public servant within the meaning of Section 21 of the Indian Penal Code (Section 388C).

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Attheconclusionofthehearingofthecase,theCompanyLawBoardshallreferitsdecisionstatingspecificallywhetherornottherespondentdirectorisafitandproperpersontoholdtheofficeofdirectororanyotherofficeconnected with the conduct and management of any company. After such an order is made under Section 388D, the CentralGovernmentshall,byanorder,removetherespondentfromtheoffice.Thepersonagainstwhomanorderismadebecomesdisqualifiedfromholdingtheofficeofdirectororanyotherofficeconnectedwiththeconductandmanagementoftheaffairsofthecompanyforfiveyearsfromthedateoftheorderofremoval.Further,theCentralGovernmentmay,withthepreviousconcurrenceoftheCompanyLawBoard,permitsuchpersontoholdofficebeforetheexpiryofsuchperiodoffiveyears.

Theremoveddirectorshallnotbeentitledtoorbepaidanycompensationforthelossorterminationofoffice.Thecompany with the previous approval of the Central Government appoint another person in place of the respondent who has been removed.

Removal by company law boardWhere on an application to the Company Law Board for prevention of oppression under Section 397 and mismanagementunderSection398oftheAct,theCLBfindsthatthereliefoughttobegranted,itmaybyorder,terminate or set aside any agreement of the company with a director or managing director or other personnel on such terms and conditions as it may think just and equitable. The Court may constitute an advisory board for proper managementofthecompany.ItcanappointaspecialofficerorAdministrator.

Where the appointment of the director is so terminated or set aside, he cannot, except with leave of the Company LawBoard,serveanycompanyinamanagementcapacityforaperiodoffiveyears.Healsocannotsuethecompanyfordamagesorcompensationforlossofoffice.

3.5 Remuneration of DirectorsDirectorsarenottheservantsofthecompanyandintheabsenceofaspecificagreementarenotentitledtoremunerationfor their services. Lindley L. J. observed that Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company‘s assets, unless authorised so to do by the instrument which regulates the company (i.e. the articles) or by the shareholders at a properly convened meeting. In short, directors are not entitled to payment in the absence of express provisions. The remuneration paid to directors is subject to the provisions of Section 198, 309 and Schedule XIII of the Companies Act.

Meaning of managerial remunerationTo remunerate means to pay, decompensate, or reward for work, etc. Managerial remuneration may take the form ofmonthlypayments,say,salaryoraspecifiedpercentageofnetprofitsoracommissionand/orbywayofafeefor each meeting of the Board (called sitting fee). Besides, as per Explanation of Section 198(4), the expression remuneration shall also include:

anyexpenditureincurredbythecompanyinprovidinganyrentfreeaccommodation,oranyotherbenefitor•amenity in respect of accommodation free of charge, to any of its directors or manager;anyexpenditure incurredby thecompany inprovidinganyotherbenefitoramenity freeofchargeorat a•concessional rate to any of the persons aforesaid;any expenditure incurred by the company in respect of any obligation or service, which, but for such expenditure •by the company, would have been incurred by any of the persons aforesaid; andany expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, •annuity or gratuity for any of the persons aforesaid or his spouse or child.

Again,paymentreceivedbyadirectorforholdinganofficeorplaceofprofitunderthecompanyisnotmanagerialremuneration.ThishasbeenmadeclearbythespecificprovisionofSub-section(1)ofSection309.

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3.5.1 Remuneration to Non-Executive DirectorsSection 309(4) provides that neither a director who is in the whole-time employment of the company nor a man-aging director may be paid remuneration either:

by way of a monthly, quarterly or annual payment with the approval of the Central Government; or•by way of commission, if the company by special resolution authorises such payment.•

Provided that in either case, the remuneration paid to such director, or where there are more than one such direc-tors, to all of them together shall not exceed:

one per cent of the net profits of the company, if the company hasmanaging orwhole-time director or•manager;threepercentofthenetprofitsofthecompanyinanyothercase.•

The company in general meeting may, by a special resolution and with the approval of the Central Government, authorisethepaymentofcommissionataratehigherthanonepercentor,threepercentofitsnetprofitsasthecasemaybe.Thespecialresolutionbywhichpaymentissanctionedwillremaininoperationfornotmorethanfiveyears,butmayberenewedforfiveyearstermfromtimetotimeprovidedtherenewalismadeinthelastyearoftheprevious term. However, the approval of Central Government will be necessary for payment of any remuneration to non-executive directors in terms of Section 310.

A company shall not require approval of the Central Government for making payment of remuneration by way of commission to its Non-whole time Director(s) in addition to the sitting fee if the total commission to be paid to all thoseNon-wholetimeDirectorsdoesnotexceed1%ofthenetprofitofthecompanyifithasawholetimedirector(s)or3%ofthenetprofitoftheCompanyifitdoesnothaveaManagingDirectororWhole-timedirector(s).

3.5.2 Remuneration for Non-Managerial Services of DirectorsSection 309, provides that subject to the general provisions of Section 198, the remuneration be determined by the Articles, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting. The remuneration so payable shall be inclusive of the remuneration payable for services rendered by a director in any other capacity except where:

the services are of a professional nature, anda. intheopinionoftheCentralGovernment,thedirectorpossessestherequisitequalificationforthepracticeofb. the profession.

Remuneration to director in a professional capacityWhile Sub-section (1) of Section 309 brings within its purview the remuneration payable to any director for services rendered by him in any capacity, its proviso excludes any remuneration for professional services rendered by a director provided the Central Government has expressed an opinion that the director possesses the requisite professional qualification.Exceptionunderthisprovisionwillbemadeonlyinrespectofthosedirectorswhopossesstherequisitequalificationforpractisingtheprofessioninrespectofwhichtheyrenderspecialservices.Whileadirectorisamedical man or an engineer or a legal advisor or a company secretary having the membership of the Institute of CompanySecretariesofIndiaorisaprofessionallyqualifiedaccountantbeingamembereitheroftheInstituteofChartered Accountants or the Institute of Costs and Works Accountants, the remuneration received by him in such professional capacity will not be hit by the provisions of section 309 provided the Central Government is of the opinion that the director holds the position by virtue of which he can render services in his professional capacity. There is nothing in Section 309 of the Act which empowers the Central Government to put any restriction on the remuneration payable to him in respect of the professional services; the remuneration being excluded from managerial remuneration [Strip Consultants Ltd., vs. Union of India [1987] 61 Comp. Cas 784 (Delhi) and SreeGajanana Motor Transport Co. Ltd vs. Union of India [1992] 73 Comp. Cas 348 (Kar)].

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Additionalremunerationfromsubsidiary,whenprohibited–Sub-section(6)ofSection309specifiesthatnodirectorof a company who is in receipt of any commission from the company and who is either in the whole time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.

3.6 Office or Place of ProfitSection314oftheAct,whichcontainsregulatoryprovisionswithregardtoanofficeorplaceofprofittobeheldunder a company by the director and others was introduced by the Companies (Amendment) Act, 1960.

Sub-section (1) of Section 314 provides that except with the consent of the company accorded by a special resolution

nodirectorofacompanyshallholdanyofficeorplaceofprofit,anda. nopartnerorrelativeofsuchdirector,nofirminwhichsuchdirector,orarelativeofsuchdirector,isab. partner, no private company of which such director is a director or member, and no director or manager of suchaprivatecompanycanholdanyofficeorplaceofprofitcarryingatotalmonthlyremunerationofsuchsum as may be prescribed, except that of managing director, manager, banker or trustee for the debenture holders of the company:

under the company; ori. under any subsidiary of the company, unless the remuneration received from such subsidiary in respect ii. ofsuchofficeorplaceofprofitispaidovertothecompanyoritsholdingcompany.

The sum prescribed vide Sub-rule (1) of Rule 10C of Companies (Central Government‘s) General Rules and Forms 1956ispresentlyRs.10,000.ThefirstprovisiontoSub-section(1)ofSection314statesthatitshallbesufficientifthe special resolution according the consent of the company is passed at the general meeting of the company held forthefirsttimeaftertheholdingofsuchofficeorplaceprofit.Itisfurtherprovidedthatincasearelativeofadirectororafirminwhichsuchrelativeisapartner,isappointedtoanofficeorplaceofprofitunderthecompanyor subsidiary thereof without the knowledge of the director, the consent of the company may be obtained either in the general meeting aforesaid or within three months from the date of the appointment, whichever is later.

3.7 Duties of DirectorsThe duties of directors are multifarious and they vary from company to company depending upon the type and size of its activities. The duties of directors may be divided under two heads:

3.7.1 Statutory DutiesStatutory duties are the duties and obligations imposed by the Companies Act. Important amongst them are:(A) Duty to attend Board meetings: Section 283(1) (g) imposes a statutory duty on the directors to attend Board

Meeting. Although a director may not be able to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months whichever is longer, without obtaining leave of absence fromtheBoard,hisofficeshallautomaticallyfallvacant.

(B) Duty not to contract without Board’s consent: The directors should not enter into contracts with company in violation of the provisions of Section 297 of the Act.

(C) Duty to disclose interest (Sections 299-300): Section 299 imposes an obligation on a director to disclose the nature of his concern or interest whether (direct or indirect) if any, at a meeting of the Board of directors. A directorisinafiduciaryposition.Apersoninfiduciarypositionisnotpermittedtoobtainprofitfromhispositionexceptwiththeconsentofhisbeneficiariesorotherpersonstowhomheowestheduty.IntermsofSection300,an interested director shall not participate or vote in Board’s proceedings.

(D) Duty of Director etc. to make disclosure: Section 305 imposes an obligation on every director managing director, managerorsecretaryofacompanywhoisappointedtoorrelinquishestheofficeordirector,managingdirector,manager or secretary or any other body corporate (including foreign company) shall within twenty days of such change,disclosetothecompany.Ifhefailstodoso,heshallbepunishablewithfinewithmayextendtofivethousand rupees.

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(E) Duty of Directors to make disclosure of Shareholding: Section 308 imposes an obligation that every director and every person deemed to be a director by virtue of Sub-section (10) of Section 307 shall give notice, in writing, of the matters relating to him/her as required under Section 307 of the Act. The Directors and deemed director(s) giving the notice shall take all reasonable steps to secure that it is brought up and read at the meeting of the Board next after it is given. Any person, who fails to comply with the provisions, shall be punishable withimprisonmentforatermwhichmayextendtotwoyearsorwithfinewhichmayextendtofiftythousandrupees or with both.

(F) Duty in connection with the general meeting: the directors have to convene statutory meeting, annual general meetings (AGMs) and also extraordinary general meetings [Sections 165, 166 & 169]. The Companies Act confers the duty of the preparation and placing at the annual general meeting along with the balance sheet and profitandlossaccount,areportonthecompany‘saffairs.TheBoard‘sreportmustalsoincludeaDirectorsResponsibility Statement as provided under sub-section (2AA) of Section 217. Closely related thereto is the duty ofauthenticatingandapprovingannualfinancialstatementunderSection215oftheCompaniesAct.

(G) To disclose receipt from transfer of property: Section 319 of the Companies Act provides that any money received by the directors from the transferee in connection with the transfer of the company‘s property or undertaking must be disclosed to the members of the company or the amount shall be held by the directors in trust for the company.Thismoneymaybeinthenatureofcompensationforlossofofficebutinessencemaybeonaccountoftransferofcontrolofthecompany.But,ifitisbonafidepaymentofdamagesofthebreachofcontract,thenit is protected by Section 321(3). Even no director other than the managing director or whole time director can receive any such payment from the company itself.

(H)Todisclosereceiptofcompensationfromtransfereeofshares:Section320providesthatifthelossofofficeresults from the transfer (under certain conditions) of all or any of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place. If the approval is not sought or the proposal is not approved, any money received by the directors shall be held in trust for the shareholders who have sold their shares.Section 320 also provides that in pursuance of any agreement relating to any of the above transfers, if the director receives any payment from the transferee within one year before or within two years after the transfer, it shall be accounted for to the company unless the director proves that it is not by way of compensation for lossofoffice.Section 321 further provides that if the price paid to a retiring director for his shares in the company is in excess of the price paid to other shareholders or any other valuable consideration has been given to him, it shall also be regarded as compensation and should be disclosed to the shareholders. No director can receive any such payment from the company itself.

(I)DutytofiledeclarationofSolvency:Section77Aimposesanobligationonthedirectorsof thecompanyinconnection with passing special resolution for buy-back of its own shares/securities to enquire into the affairs of thecompanyandformopinionaboutsolvencyof thecompanyand tofiledeclarationofsolvency in theprescribedformwithaffidavit.

(J) To make a declaration of solvency in the case of a Members’ voluntary winding up:(Section 488) states:

Maintenance of books of account, audit, auditors report, directors report.1. Restriction on loans to directors and their associates.2. Certain powers to be exercised only at Board Meetings and certain powers to be exercised with shareholders 3. consent.Inspection and investigation into the affairs of the company.4.

(K)Tofilereturnofallotments:Section75oftheCompaniesAct,1956requiresacompanytofilewiththeRegistrar,withinaperiodof30days,areturnoftheallotmentsstatingthespecifiedparticulars.Failuretofilesuchreturnshallmakethedirectorsliableasofficerindefault.AfineuptoRs.500perdaytillthedefaultcontinuesmaybe levied.

(L)Dutytointimatedisqualification:EverydirectorinapubliccompanyregisteredundertheCompaniesAct,1956shallfileformDD-A,intimatinghisdisqualificationtothecompanyundersection274(1)(g)oftheCompaniesAct, 1956, before he is appointed or re-appointed by the company. Form DD-A is prescribed under the Companies (DisqualificationofDirectorsundersection274(1)(g)oftheCompaniesAct,1956)Rules,2003.

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3.7.2 Fiduciary and General DutiesThe directors have several duties to discharge under the common law some of which have been evolved by courts from time to time, having regard to the position of directors in the company. Some of these duties are:

Duty not to be negligent and not to commit or let others to commit tortuous acts.•Duty not to exceed powers.•Duty to have regard to and act in the best interests of the company and its stakeholders.•Duty to creditors if business is conducted with intends to defraud them.•Dutyofconfidentiality.•Duty not to exercise powers for a collateral purpose.•Duty not to misapply company assets.•Duty not to compete with the company.•

3.8 Company SecretaryAccording to Section 2(45) of the Companies Act, 1956, a secretary means a company secretary within the meaning of Clause (c) of Sub-section (1) of Section 2 of the Company Secretaries Act, 1980 and includes any other individual possessingtheprescribedqualificationsandappointedtoperformthedutieswhichmaybeperformedbyasecretaryunderthisActoranyotherministerialoradministrativeduties.ThisdefinitionbroughttheearlierdefinitionofthesecretaryinlinewithadefinitionofcompanysecretarycontainedinCompanySecretariesAct,1980.Clause(c)ofSub-section(1)ofSection2oftheCompanySecretariesAct,definesacompanysecretaryasapersonwhoisamember of the Institute of Company Secretaries of India.

Importance of secretaryInancienttimes,thetermsecretaryappliedsolelytotheofficerwhoconductedcorrespondencefortheking,butinmodern times the duties and functions of a secretary have become wide and varied and he no longer resembles his ancient counterpart. Not only are there company secretaries, but secretaries are also appointed by institutions like clubs, trade and professional associations, cooperative societies, local bodies, etc. His duties range from conducting allcorrespondence,keepingallrecordsandaccounts;fromwritingofminutestoactingasapublicrelationsofficerof the employer.

In modern times, the secretary has become almost an indispensable person in trade, industry and other social institutions. Any organisation from a sports club right upto the State cannot think of managing its affairs without appointing a secretary. However, the importance and nature of the functions of a secretary differ from organisation to organisation.

The importance of a secretary is specially felt in the business world since the business organisations have to abide by certain legal requirements. The secretary is entrusted with the responsibility for due compliance with all such legal formalities. The Secretary also acts as the company’s spokesperson between the management and the staff as well as the outsiders and the shareholders.

3.8.1 Duties of a Company SecretaryTheroleandpositionofacompanysecretaryvariesfromcompanytocompanyand,therefore,itwouldbedifficultto codify his duties. However, it can be said that the company secretary acts in three-fold capacity, namely:

Statutory DutiesUnder the Companies Act:

To sign any document or proceedings requiring authentication by the company (Section 54).•Toarrangetofilestatementinlieuofprospectus(Section70).•To deliver for registration of return of allotment and contracts relating to allotment of shares for consideration •other than cash (Section 75).

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To give notice of the increase in the share capital to the Registrar (Section 97).•Todelivertheshareordebenturecertificatewithin3monthsofallotmentorwithin2monthsofregistrationof•transfer (Section 113).To make entries in the register of members on issue of share warrants (Section 115).•To make available for inspection trust deed to every member or debenture holder and to forward a copy of it to •the members or debenture holders on their request and within 7 days of request on payment of prescribed fee (Section 118).To deliver for registration particulars of mortgages and charges to the Registrar (Sections 125-127).•TofileNoticeofsituationofregisteredofficeorchangethereofofthecompanyintheprescribede-Form18•(Section 146).Togetpaintedoraffixedthenameplateofthecompanyoutsideeveryofficeortheplaceofitsbusiness,toget•it printed on documents of the company and to get it engraved on the seal of the company (Section 147).Tomakeastatutorydeclarationforobtainingthecertificateofcommencementofbusinessandfileitwiththe•Registrar (Section 149).To sign the Annual Return (Section 161).•To allow inspection of and to furnish copies of register of members and register of debenture holders (Section •163).To send notices of general meetings to every member of the company (Section 171).•TofileresolutionsandagreementsrequiringregistrationwiththeRegistrar(Section192).•To prepare minutes of every general meeting and of every meeting of Board of directors or of every committee •of the Board within 30 days of the conclusion of every such meeting (Section 193).To make available for inspection the minute books of general meetings (Section 196).•To sign the Balance Sheet of the company (Section 215).•To send notices of the meetings of Directors (Section 286).•To make available Register of directors for inspection (Section 304).•To assist in preparing the statement of affairs in a winding up for the purpose of submitting it to the liquidator •(Section 454).To inform auditor of his appointment (Section 224).•TofilereturnswithRegistrar,ifapplicableunderSection95,103,187C,220,394(3)and395.•To maintain the following statutory books:•

Register of investments held by company in name of its nominee (Section 49).1. Register of charges (Section 143).2. Register and index of members (Section 150).3. Register and Index of Debenture holders (Section 152).4. Register of contracts in which the directors are interested (Section 301).5. Register of directors, manager and secretary (Section 303).6. Registerofdirectors‟shareholdings(Section307).7. Register of Loans and Investments (Section 372A).8. Registerofrenewedandduplicatecertificates(IssueofShareCertificateRules).9.

3.8.2 Role of Company SecretaryGenerally speaking, the roleofa secretary is three-fold,viz., asa statutoryofficer,asacoordinatorandasanadministrativeofficerifsoauthorised.Similarly,theresponsibilityofcompanysecretariesextendsnotonlytoacompany, but also to its shareholders, depositors, creditors, employees, consumers, society and government.

The relevant judicial pronouncements give a picture of the scope and ambit of the role of a company secretary. However,neitherthedefinitionnorthelawscasecangivetherealandtruepositionofacompanysecretaryinthehierarchy of any company. We have already seen that his role varies in different companies.

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The role of a company secretary may conveniently be studied from three different angles:asastatutoryofficer•as a coordinator•asanadministrativeofficer•

MeetingsAmeetingmaybegenerallydefinedasagatheringorassemblyorgettingtogetherofanumberofpersonsfortransactinganylawfulbusiness.MeetingsundertheCompaniesAct,1956maybeclassifiedas:

Shareholders‘ meetings•Meetings of the debenture holders•

Meetings of creditors for purpose other than winding up � Meetings of creditors for winding up � Meetings of contributories in winding up �

Board Meetings of the Board of Directors•Meetings of the Board Committees•

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SummaryThe collective body in whom the authority is vested and through whom the company acts is called the Board •of directors.Executive directors perform operational and strategic business functions such as: managing peoples looking •afterassetshiringandfiringenteringintocontracts.Non-executive directors do not get involved in the day-to-day running of the business.•Nomineedirectorsareappointedbyfinancialinstitutionsorbanks,whichextendtermloansand/orworking•capitalassistanceoranyothertypeoffinancialassistancetocompanies.The number of independent directors would depend whether the Chairman is executive or non-executive.•The Central Government has the power to appoint directors under Section 408 of the Act.•DirectorIdentificationNumber(DIN)isanuniqueIdentificationNumberallottedtoanindividualwhoisan•existing director of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956.Copy of passport is mandatory as an ID proof in the case of foreign nationals.•Firstdirectormeans thedirectorof thecompanywhoassumesofficefromthedateof incorporationof the•company.Section 255 of the Act, provides that unless the articles provide for the retirement of all directors at every annual •general meeting.Articles of most companies contain an express provision excluding the managing or whole-time director from •the requirement of retirement by rotation.Section 257 contains provision regarding the right of persons other than the retiring directors to stand for •directorship and provides for the machinery for the election of such persons.The Board of directors of a company may appoint additional directors.•Section 309, provides that subject to the general provisions of Section 198, the remuneration be determined by •the Articles, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting.The duties of directors are multifarious and they vary from company to company depending upon the type and •size of its activities.Statutory duties are the duties and obligations imposed by the Companies Act.•Section 305 imposes an obligation on every director managing director, manager or secretary of a company •whoisappointedtoorrelinquishestheofficeordirector.The role and position of a company secretary varies from company to company and, therefore, it would be •difficulttocodifyhisduties.The relevant judicial pronouncements give a picture of the scope and ambit of the role of a company •secretary.Ameetingmaybegenerallydefinedasagatheringorassemblyorgettingtogetherofanumberofpersonsfor•transacting any lawful business.

ReferencesCompany Law• [Pdf] Available at: <http://www.icsi.in/Study%20Material%20Executive/CL.pdf> [Accessed 25 June 2013].The Role of Directors• [Pdf] Available at: <http://www.ecgi.org/codes/documents/hampel25.pdf> [Accessed 25 June 2013].Drucker, P. F., 1993. • Management: Tasks, Responsibilities, Practices. HarperBusiness.Mortimore• , S., 2013. Company Directors: Duties, Liabilities, and Remedies. 2nd ed., Oxford University Press, USA.

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Company Directors - Good Board Meetings• [Video online] Available at: <http://www.youtube.com/watch?v=nfP5N9Yc72A> [Accessed 4 July 2013].Company Secretary Part1• [Video online] Available at: <http://www.youtube.com/watch?v=sDGc6fYPRak> [Accessed 4 July 2013].

Recommended ReadingBowen, W. G., 2012. • The Board Book: An Insider’s Guide for Directors and Trustees. W. W. Norton & Company.Gupta, P., 2004. • The Role of Board Members in Venture Capital Backed Companies. Aspatore Books.Callow, D., • The Company Directors Manual. Indicator Ltd.

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Self AssessmentWhich of the following is not a type of directors?1.

Executive directora. Managing directorb. Part time directorc. Non- executive directord.

____________________ do not get involved in the day-to-day running of the business.2. Nominee directora. Non-executive directorb. Independent directorc. Whole time directord.

___________________areappointedbyfinancialinstitutionsorbanks,whichextendtermloansand/orworking3. capitalassistanceoranyothertypeoffinancialassistancetocompanies.

Independent directora. Managing directorb. Executive directorc. Nominee directorsd.

Which of the following is not a way in which the appointment of directors is conducted?4. By subscribers to the Memoranduma. By members in general meetingb. By Board of directorsc. Always through third partyd.

Which of the following is not a document required to be attached with DIN1?5. High resolution photograph of the applicanta. Copy of PANb. Copy of passportc. Proof of father’s named.

_________________meansthedirectorofthecompanywhoassumesofficefromthedateofincorporationof6. the company.

Independent directora. First directorb. Managing directorc. Executive directord.

A person who is not retiring director is also eligible for appointment as _______________.7. membera. sharerb. directorc. board of directord.

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_____________________ can be appointed only if a provision to that effect exists in the Memorandum of 8. Association.

Nominee directorsa. Financial institutionb. Memberc. Legislatured.

To ____________________ means to pay, decompensate, or reward for work, etc.9. Memoranduma. Serviceb. Placeofprofitc. Remunerated.

The __________ is entrusted with the responsibility for due compliance with all such legal formalities.10. Secretarya. Directorb. Spokespersonc. Capacityd.

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Chapter IV

Accounts and Audit

Aim

The aim of this chapter is to:

introduce books of account•

elucidate the requirements for using books of account•

explain the term annual accounts•

Objectives

The objectives of this chapter are to:

explain balance sheet•

explicateprofitandlossaccount•

elucidate the term Audit•

Learning outcome

At the end of this chapter, you will be able to:

understand the need of audit•

identifythequalificationofauditors•

recognise the rights and powers of auditor•

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4.1 IntroductionThe shareholders offer capital to the company for running the business. They are in a way, the owners of the company. But, all of them cannot take part in managing the affairs of the company as their number is usually much more. But theyhaveeveryrighttoconfirmastohowtheirmoneyhasbeendealtwithbythedirectorsinaspecificperiod.Thisis why perhaps compulsive disclosure, through annual information, to the shareholders, by the directors, about the workingandfinancialpositionofthecompanyenablesthemtoexerciseamoreintelligentanddirectedcontroloverthe affairs of the company. For building of annual accounts the maintenance of proper books of account is necessary. Section 209 of the Companies Act, 1956 contains the provisions for maintenance of proper books of accounts.

TherequirementofmaintenanceofproperbooksofaccountshasbeenfurtheramplifiedthroughtheprovisionsofSection 541 of the Companies Act. Though the provisions of this section relate to a situation involving winding up of a company, as a general rule, they are relevant.

In terms of Section 541(2) of the Companies Act, 1956, proper books of accounts shall be deemed to have been keptbyacompanyif(i)suchbooksexhibitandexplainthetransactionsandfinancialpositionofthebusinessofthe company, including books containing detailed entries of daily cash receipts and payments; and (ii) where the business of the company has involved dealings in goods, statements of the annual stock takings (except in the case of goods sold by way of ordinary retail trade) of all goods sold and purchased, showing the goods and the buyers andthesellersthereofinsufficientdetailtoenablethosegoodsandthosebuyersandsellerstobeidentifiedhavebeen maintained.

4.2 Requirement of Keeping Books of AccountSection209oftheCompaniesActrequireseverycompanytokeepatitsregisteredofficeproperbooksofaccountwith respect to the following transactions:

all sums of money received and expended by the company and the matters in respect of which the receipt and •expenditure took place;all sales and purchases of goods by the company;•the assets and liabilities of the company;•in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars •relating to utilisation of material or labour or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.

From the above it can be seen that this section does not name the books of accounts which a company should keep. They may keep whatever books they like, provided all the aforesaid transactions are recorded therein. Sub-section (3) of Section 209 provides that proper books of account shall not be deemed to have been kept with respect to aforesaid matters if there are not kept such books as are necessary to give a true and fair view of the state of affairs ofthecompanyorthebranchoffice,ifany,andtoexplainitstransactions;andifsuchbooksarenotkeptonaccrualbasis and according to double-entry system of accounting.

Apart from the aforesaid books of account Sub-section (1)(d) of Section 209 provides that in case a company is engaged in production, processing, manufacturing or mining activities, the Central Government may prescribe the maintenance of cost accounting records for recording the utilisation of materials or labour or other items of cost. So far, the Government has issued Cost Accounting Records Rules for about forty-seven different classes of companies engaged in the manufacture of Cement, Sugar, Vanaspati, Fans etc. The aforesaid provision of maintaining proper books as in Sub-section (3) also applies to Cost Records.

Place of keeping books of accountSection209requireseverycompanytokeeptheaforesaidbooksofaccountatitsregisteredoffice.However,allorany of the books of accounts may be kept at such other place in India as the Board of directors may decide. When theBoardsodecidesthecompanyisrequiredwithinsevendaysofsuchdecisiontofilewiththeRegistraranoticeinwritinggivingfulladdressofthatotherplaceine-FormNo.23AAalongwithrequisitefilingfee.

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Books of accountsWhenacompanyhasabranchofficeinoroutsideIndia,thebooksofaccountrelatedtotransactionseffectedatthebranchofficemaybekeptatthatoffice.However,properexaminedreturnsmadeuptodatesatintervalsbutofnotmorethanthreemonthsmustbesentbythebranchofficetotheregisteredofficeortosuchotherplacewherethebooks are kept [Section 209(2)].

True and fair viewThe books of account should be kept on accrual basis and according to double entry system of accounting. Further, theymustgiveatrueandfairviewoftheaffairsofthecompanyorbranchofficeandexplainitstransactions.Thebooksofaccountshouldnotsuppressanytransactionnorshouldtheycontainanyfictitioustransaction.Theseandother books and papers shall be open to inspection by any director during business hours, as also by the Registrar oranofficerauthorisedbytheCentralGovernment/SEBI.

Preservation of books of accountSection 209(4A) casts an obligation upon a company to preserve in good order the books of account together with the vouchers relevant to the entry in such books, relating to the period of at least 8 years immediately preceding the current year, or if the company has not been in existence for 8 years, then for the whole period of its existence. As per Section 2(8) of Act, book includes a voucher also. Therefore, the related vouchers and documents for 8 years havealsotobepreserved.IthasbeenclarifiedbytheDepartmentofCompanyAffairsinitsCircularNo.2/83dated2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil) for giving a proper and adequate meaning to the words, proper books of account in Section 209.

4.3 Persons Responsible for Keeping the Books of AccountSub-section(6)ofSection209specifiesthepersonswhohavebeenmaderesponsibleforkeepingthebooksofaccount and securing compliance by the company with the requirements of Section 209 of the Act, they are:

managingdirectorormanagerandallofficersandotheremployeesofthecompany,and•where the company has neither a managing director nor manager then every director of the company.•

If any of the persons referred to above fails to take all reasonable steps to secure compliance by the company with the requirements for keeping books of account or has by his own wilful act been the cause of any default by the companyinthisrespect,heshallbepunishablewithimprisonmentuptosixmonthsorwithfinewhichmayextendto 10,000 or with both.

However, in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty. It is also provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.

If any person other than those mentioned above, having been charged by the managing director, manager or Board of directors, as the case may be, with the duty of seeing that the requirements of this section are complied with, makes default in doing so, he shall in respect of each offence, be punishable with imprisonment for a term which mayextendtosixmonths,orwithfinewhichmayextendtotenthousandrupeesorwithboth.

4.4 Annual Accounts: Balance Sheet and Profit and Loss AccountInfact,theexpressionannualaccountembracesbothbalancesheetandprofitandlossaccount.Inawidersense,italsocoverscashandfundflowstatements,director’sreportetc.Section210(1)oftheCompaniesActprovidesforlaying of annual accounts before Annual General Meeting and Section 211 relates to form and contents of balance sheetandprofitandlossaccount.

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4.4.1 Balance SheetThetermBalanceSheetmeansastatementdrawnupattheendofeachtradingorfinancialperiod,settingforththevariousassetsandliabilitiesofaconcernataparticulardate.ItisalsodescribedasaclassifiedsummaryofthedebitandcreditbalanceexistingintheledgeraftertheProfitandLossAccounthasbeenconstructed,becauseabalancesheet often contains items which cannot, strictly speaking, be characterised either as assets or as liabilities. The balance sheet is arranged in such a way as to show the assets and debit balances on the right hand side and liabilities and credit balances on the left hand side and it represents the culmination of the system of book-keeping and it should be a document setting forth the true position of the business on the date as on which it is drawn up. It was stated in Legal Remembrance v. Aktul Bandhu Gupta, ILR (1937) 1 Cal 328 - A balance sheet is a pictorial representation of the trading position of a company, easily appreciated, not by the ignorant people, persons who are reasonably able to understand commercial expressions and commercial conditions. The balance sheet is a shareholders quick guide toascertainthefinancialpositionofthecompany.AproperlydrawnupBalanceSheetshouldgivethefollowing:

The nature and the cost of assets of the company on the date of the balance sheet•The nature, extent and the type of liabilities on that date•Whether the company is solvent and is over trading•

If the total assets exceed the total liabilities, the company is said to be solvent i.e. it is able to pay its debts in full. Ontheotherhand,ifthetotalliabilityofacompanyexceedsitstotalassets,thecompanyissaidtobefinanciallyunsound.

4.4.2 Profit and Loss AccountProfitandlossaccountistheaccountbywhichthedirectorsdisclosetotheshareholdersofthecompanytheresultof the actual working of the company. It serves to give the shareholders an outline of the earning capacity of the company in relation, to its capital, and facilitate them to judge the administration and management of the affairs of thecompany.Manypeoplepaytoomuchattentiontoacompany’sbalancesheetandtoolittleattentiontoitsProfitand Loss Account. It is true that a company’s balance sheet exhibits a position which is the result of transactions that havetakenplaceallitslife,buttheprofitandlossaccountonlyshowswhattheprofitsarefortheyear.Itmayalsobetruethatowningtospecialcircumstancestheprofitforthatparticularyearisabnormallyhighorabnormallylowandthereforeaffordlittleguidetofutureprofitability;butanevaluationoftheresultwiththatofprecedingyears,coupled with such information, as is given in the Directors Report should furnish a reliable guide to the earning capacityofthebusiness.Bymakingthepublicationoftheannualprofitandlossaccountcompulsory,thelawhasrecognised its importance for the purpose of assessing the value of a company’s business.

4.5 AuditAudit is an examination of accounting records undertaken with a view to establishing the correctness or otherwise of thetransactionsreflectedtherein.Itinvolvestheperfectscrutinyofthebooksofaccountofacompanywithreferenceto documents, vouchers and other relevant records to guarantee that the entries made therein give a true picture of the business conducted during the period under review, that each transaction has been authorised by the appropriate authorityandthateffectofalltheentriesinthebooksofaccounthasbeendulyreflectedinthefinalaccounts.

Themainobjectofauditistoensurethatthestatementofaccountsoftherelevantfinancialyeartrulyandfairlyreflectthestateofaffairsofthecompany.Auditalsoprovidesamoralcheckonthosewhoareentrustedwiththetask of running business and of keeping and maintaining the books of account of the company.

Need for AuditAudit of accounts is a sine qua non of any business, however big or small it may be. During the course of business, proprietor,creditor,purchaserorasellerhastodealwithvariousfinancialstatements.Nobodywouldrelyonanauditedfinancialstatementspreparedbythemanagementbecausethiswouldbejustlikehavingajudgeforhearinga case in which he himself is a litigant. When a business is run by a proprietor himself, the need for audit may be limited because the business is under his direct control. But where the business is run by persons other than the owners in a company, an independent review of the books of account becomes absolutely necessary in order to safeguard the interest of the shareholders who with the help of the audited accounts are enabled to know how their funds

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havebeenutilisedduringthefinancialyear,whetherproperbooksofaccounthavebeenmaintained,whetherprofitandlossaccountdisclosestrueaffairsofthecompany,profitearnedorlosssufferedbythecompanyandwhetherthe balance sheet gives a true and fair view of the state of affairs of the company on the date on which it is drawn. Another reason for making audit compulsory in a company is the fact that the shareholders and the directors who areshareholdersenjoythebenefitoflimitedliability.Auditisalsoatooltosafeguardtheinterestofthecreditors.

An audit of accounts is conducted with two-fold purpose:detection and prevention of errors•detection and prevention of fraud•

Auditisusefulonlyifitisconductedbysomeindependentandqualifiedauthority.Theauditormustpossessrequisitequalificationsandmustactinanindependentcapacity.Heshouldnotbeanemployeeofthecompanyandhisactionshould not be subject to the supervision of the management of the company. The provisions relating to audit and auditorsincludingtheirqualifications,rightsandpowersarecontainedinSections216,218andfrom224to233Bof the Act. Section 216 lays down that auditors report should be attached with the balance sheet. Circulation of anybalancesheetandprofitandlossaccountwithoutauditor’sreportisanoffencepunishablewithafineofRs.5000/- under Section 218 of the Act.

4.5.1 Appointment of AuditorSection 224 of the Companies Act provides for compulsory appointment of an auditor by every company whether public or private. It provides that every company shall, at each annual general meeting appoint an auditor or auditors toholdofficefromtheconclusionofthatmeetinguntiltheconclusionofnextannualgeneralmeeting.

The auditors are selected at the yearly general meeting by an ordinary resolution. However, special resolution may becomenecessaryincertainsituationsasarespecifiedunderSection224A.FirstauditorsaretobeappointedbytheBoard of directors within one month of the date of registration of the company and auditor or auditors so appointed aretoholdofficeuntiltheconclusionoffirstannualgeneralmeeting.

4.5.2 Qualifications and Disqualifications of AuditorsSection226containsprovisionasregardsqualificationsanddisqualificationsofauditors.Theseapplytoallcompanieswhether public or private or Section 25 companies or a Government company.

Qualification of auditorsSection 226 provides that only a Chartered Accountant within the meaning of Chartered Accountants Act, 1949 can act as an auditor of a limited company. Though the auditor should be a Chartered Accountant, only Chartered Accountants in practice can act as auditors of companies. It may be pointed out that Section 6 of the Chartered Accountants Act, 1949 lays down that no Chartered Accountant can practice in India or elsewhere unless he obtains acertificateofpracticefromtheInstituteofCharteredAccountantsofIndia.Thus,onlythoseCharteredAccountants,whohaveobtainedacertificateofpracticefromthesaidInstitute,canactasanauditorofacompany.AssoonasthecertificateofpracticeissuspendedorwithdrawnbythesaidInstitutehebecomesineligibletocontinueortoact as auditor.

AfirmwhereofallthepartnersarepractisingCharteredAccountantscanbeappointedbyitsfirm’snameasauditor.Inthatcaseanypartnermayactinthenameofthefirm.Further,theDepartmentofCompanyAffairshasexpressedits view vide Circular No. 29/76, dated 27.8.1976 amended by 5/77, dated 8.4.1977 that the auditor of a company should not accept the job of an internal auditor of the company because he would thereby become an employee and his independent position will be undermined and he will also not be able to perform his duty under the CARO, to report whether there is adequate internal control procedure commensurate with the size of the company, the nature ofitsbusiness,etc.andinthecaseofcompanieshavingmorethanrupeestwenty-fivelakhspaid-upsharecapital,to report whether there is any internal audit system commensurate with the size and nature of business.

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Appointmentofafirmasauditorsshallbemadeinthenameofthefirmwhereastheappointmentofaproprietaryconcern as auditor shall be made in the name of the individual i.e., the proprietor.

A Statutory auditor of a subsidiary company is a director of its holding company. It was held that such appointments will not be considered as professional misconduct.

Disqualification of auditorsUnderSection226(3),noneofthefollowingshallbequalifiedforappointmentasauditorofacompany:

A body corporate.•Anofficeroremployeeofthecompany(officer’sincludesdirector,managerorsecretary).•Apersonwhoisapartnerorwhoisintheemploymentofanofficeroremployeeofthecompany.•A person who is indebted to the company for more than Rs. 1,000/- or who has guaranteed the repayment of •any debt of more than Rs. 1,000/- due to the company by a third person.A person holding any security of that company after a period of one year from the date of commencement of •the Companies (Amendment) Act, 2000 i.e. 13 December, 2000 [Section 226(4)].Apersonwhoisdisqualifiedforappointmentasauditorofthecompany‘ssubsidiaryorholdingcompany,ora•subsidiary of its holding company.

TheDepartmentofCompanyAffairsvideCircularNo.5/77dated8.4.1977hasclarifiedthatastatutoryauditorcannot act also as internal auditor of the company.

When the Chartered Accountant is employed whole-time, he is an employee of the company. In other cases, there would appear to be only a contract for service and not a contract of service between the company and the Chartered. Therefore, the Chartered Accountant who is in whole-time employment of the company cannot be appointed as its auditor.Ifanauditorbecomesdisqualifiedinanyoftheabovewaysafterhisappointmentasanauditor,thenheshallbedeemedtovacatehisoffice.

TheMinistryofCorporateAffairs(MCA)videitsnotificationS.O.1152(E)dated23.05.2011,hasnotifiedthatLLP,which is a Body Corporate as per the Limited Liability Partnership Act 2008, shall not be treated as Body Corporate, for the purpose of section 226(3)(a) of the Companies Act 1956, in exercise of its powers under 2(7)(c) of the Companies Act1956.Assection2(7)(c)oftheCompaniesAct1956,theCentralGovernmentmaybynotification,notifythataBody Corporate, will not be recognised as Body Corporate for the purpose of the Companies Act 1956.

TheMCAbyitsaforesaidnotificationhastakenLLPoutofthepurviewoftheBodyCorporateunderthissubsectionand therefore, LLP can be appointed as the Auditor of the company.

4.5.3 Method of Appointment of AuditorsProvisions relating to the appointment of auditor are contained in Sections 224 and 224A of the Companies Act, 1956. The provisions with regard to the appointment of an auditor can be divided into three categories:

First auditor•Subsequent auditor•Filling of casual vacancy•

Appointment of first auditorsSection224(5)providesthatthefirstauditororauditorsaretobeappointedbytheBoardofdirectorswithinonemonth of the date of the registration of the company.

ItisfurtherprovidedthatiftheBoardofdirectorsfailstoappointthefirstauditorswithinonemonthofitsintegration,thecompanyingeneralmeeting,mayappointthefirstauditor.Further,theappointmentofauditorismandatoryinthe annual general meeting for the ensuing year.

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Period of officeThefirstauditororauditorssoappointedaretoholdofficeuntiltheconclusionofthefirstannualgeneralmeetingof the company. However, the auditor or auditors so appointed may be removed earlier, if the company at a general meeting appoints another auditor, of whose nomination, notice has been given by any member to the members not lessthan14daysbeforethemeeting.Thismeans,thatthefirstauditorcanberemovedatanygeneralmeetingpriortothefirstannualgeneralmeeting.Specialnoticeisnotrequiredfortheremovalofthefirstauditororauditors.

Subsequent appointment of auditorsSection 224(1) provides that every company must appoint an auditor or auditors at each annual general meeting to holdofficefromtheconclusionofthatannualgeneralmeetinguntiltheconclusionofthenextannualgeneralmeeting,and must, within 7 days of the appointment, give intimation thereof to the auditors so appointed. As per Section 224(1A), every auditor so appointed must, within 30 days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing in Form No. 23B that he has accepted the appointment or refused it.

It is, however, necessary for every company, before making an appointment or reappointment at any general meeting ofanauditororauditors,toobtainfromtheauditororauditorsproposedtobeappointedacertificatetotheeffectthattheappointmentorre-appointment,ifmade,willbeinaccordancewiththelimitsonthenumberofauditsspecifiedin Sub-section (1B) of Section 224.

Ceiling on appointment as auditorSub-section (1B) of Section 224 provides that no company or its Board of directors shall appoint or reappoint any person who is in full-time employment elsewhere, or if he is at the date of such appointment or re-appointment holdingappointmentasanauditorofspecifiednumberofcompaniesi.e.20companies,outofwhichnotmorethan10 shall be companies each of which has a paid-up share capital of Rs. 25 lakhs or more.

Whereafirmisappointedauditor,theceilingof20willbeperpartnerwhoisnotinfulltimeemploymentelsewhere.Whereanypartnerofafirmofauditorsisalsoapartnerinanyotherfirmorfirmsofauditors,theoverallceilinginrelationtosuchpartnerwillalsobe20companies.Itisalsoprovidedthatwhereanypartneroffirmofauditorsisalsoholdingoffice,inhisindividualcapacity,astheauditorofoneormorecompanies,thenumberofcompanieswhichmaybetakenintoaccountinhiscaseshallnotexceedthespecifiednumberinaggregate.Whilecalculatingthespecifiedlimit,branchauditsofIndiancompaniesandtheauditofIndianbusinessaccountsofforeigncompaniesare to be excluded.

It is provided that the provisions of Sub-section (1B) of Section 224 shall not apply, on and after the commencement of the Companies (Amendment) Act, 2000, to a private company. Thus, private companies shall also be excluded in reckoning the aforesaid number of companies which an auditor can audit.

Right and Powers of AuditorsThe various rights and powers enjoyed by the auditors under the Companies Act, 1956 are as follows:

Right to access to books, accounts and vouchers: The auditor of a company shall have right of access, at all •times,tothebooks,accountsandvouchersofthecompany,whetherkeptattheheadofficeofthecompanyorelsewhere [Section 227(1)].The auditor shall also have access to books of account containing cost data which, under Section 209(1)(d), the Central Government requires from certain classes of companies to include in its accounts, in respect of utilisation of material, labour or other terms or costs.

The term vouchers includes, in addition to vouchers of sales, purchases, receipts and payments, all documents, correspondence, agreements, etc. which may in any way serve to vouch for the accuracy of the books and accounts.Theterm‘books’includesthefinancial,statutoryandstatisticalbooks.Theymusthavefreeaccessto the information which is necessary material for their report. The court will grant to an auditor an injunction for enforcing this right only when there has been a general meeting decision to appoint him or to continue his appointment. The right of access to books can be enforced by mandatory injunction but not where litigation is pending between the company and the auditor. Where the auditors were refused access to the books in a case of their alleged negligence, the court refused to make an order for access to be given but directed that the members of the company should meet for that purpose.

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Righttoobtaininformationandexplanation:Theauditorshallbeentitledtorequirefromtheofficersofthe•company such information and explanation as he thinks necessary for the performance of his duties as auditor [Section 227(1)]. The Articles of a company cannot preclude the auditor team from availing himself of all informationwhichismaterialtoenablehimtomakehisreportandfromfulfillinghisstatutorydutiestotheshareholders. In case the information is not supplied to the auditor, he can report the same to the members.Righttosigntheauditreport:Onlythepersonappointedasauditorofthecompany,orwhereafirmissoappointed,•onlyapartnerinthefirmpractisinginIndia,maysigntheauditor‘sreport,orsignorauthenticateanyotherdocument of the company required by the law to be signed or authenticated by the auditor (Section 229).Right to receive notice of and attend General Meeting: The auditors have the right to attend any general meeting •and to receive any notice and other communications relating thereto which members are entitled to receive and to be heard at any general meeting on any part of the business which concerns them as auditors [Section 231].Righttovisitbranchofficeandrightofaccesstobooks:Wheretheaccountsofanybranchofficeareaudited•by a person other than the company‘s auditor, the company‘s auditor:

shallbeentitledtovisitthebranchoffice,ifhedeemsitnecessarytodosofortheperformanceofhisduties �as auditorshall have a right of access at all times to the books and accounts and vouchers of the company maintained �atthebranchoffice

InthecaseofabankingcompanyhavingabranchofficeoutsideIndia,itshallbesufficientiftheauditorisallowed access to such copies of, and extracts from, the books and accounts of the branch as has been transmitted totheprincipalofficeofthecompanyinIndia.[Section228(2)]Right to receive remuneration: The auditor shall have the right to receive remuneration for auditing the accounts •of the company [Section 224(8)].The right of an auditor cannot be limited or abridged either by the Articles or by any resolution of the •members.

4.6 Cost AuditSection 209(1)(d) provides that a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, should keep proper books of account showing such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account.

InpursuanceoftheprovisionsofSection209(1)(d)oftheAct,theCentralGovernmenthasnotifiedCostAccountingRecordsRulesforanumberofspecifiedindustrieswithaviewtoensuringthattherecordssomaintainedhighlighttheareaofinefficienciesorhighcosts.TheserulesprescribethemannerinwhichtheCostAccountingRecordsshould be maintained and also specify the particulars, which should be entered in the books of account.

When a company is required to include in its books of account the aforesaid particulars, Section 233B empowers the Central Government to direct, whenever it is necessary to do so, that an audit of cost accounts of the company shouldbeconductedinsuchmannerasmaybyspecifiedintheorderbyaCostAccountantwithinthemeaningoftheCostandWorksAccountantsAct,1959.However,ifintheopinionoftheCentralGovernment,sufficientnumberofqualifiedCostAccountantsarenotavailable,thatGovernmentmaybynotificationintheOfficialGazettedirectthatforaspecifiedperiod,aCharteredAccountantpossessingtheprescribedqualificationsmaybeappointedtoaudit the cost accounts of the company.

The auditor under this section will be appointed by the Board of directors of the company in accordance with the provisions of Sub-section (1B) of Section 224 and with the previous approval for the Central Government, and not by the company in general meeting. Provided before the appointment of any auditor is made by the Board, a writtencertificateshallbeobtainedbytheBoardfromtheauditorproposedtobesoappointedtotheeffectthatthe appointment, if made, will be in accordance with the provisions of Sub-section (1B) of Section 224. An auditor ofthecompanyorapersondisqualifiedfrombeingappointedasanauditorofacompanycannotbeappointedascostauditor.Furtherifthecostauditor,afterhisappointmentassuchsuffersfromanyofthedisqualifications,hemustceasetoactascostauditor.ThedisqualificationsarethesameasprescribedinSection226(3)foracompanyauditor, already dealt with earlier in the study.

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Since the cost auditor is required to comment on the scope of and performance of internal audit as per the provisions of Cost Audit (Report) Rules, 2011, it may not lead to proper and dispassionate discharge of the duties of the cost auditor if he was also the internal auditor of the company for the same period for which he is conducting the cost audit. Therefore, the cost auditor should not be also the internal auditor of a company for the period for which he is conducting the cost audit.

AnauditorcanbeprecededunderSection543asanofficeronlyifheisformallyappointed.Thus,heisnotanOfficerifheisappointedadhocforalimitedpurpose,bythedirectorsforaprivateaudit.Heis,ontheotherhanda servant of the company or shareholders and must examine the affairs of the company on their behalf at the end of the year and report to them what he has.

The cost audit conducted under Section 233B shall be in addition to an audit of the company conducted by auditor appointed under Section 224. The cost auditor shall have the same powers and duties as the company auditor, but he will make his report to the Central Government, forwarding a copy thereof to the company, within 180 days from the endofthecompany‘sfinancialyeartowhichthecostauditreportrelates.Thecompany,shallwithin30daysfromthe date of receipt of a copy of the report, furnish the Central Government with full information and explanations oneveryreservationorqualificationcontainedinsuchreport.TheCentralGovernmentmay,afterconsideringthereport and information and explanations furnished by the company, take such action on the report as it may consider necessary.TheCentralGovernmentmaydirectthecompanytocirculatetoitsmembersthewholeoraspecifiedportion of the report with the notice of next annual general meeting. Failure to comply with the provisions of this sectionhasbeenmadepunishablewithfineuptoRs.5,000sofarasthecompanyisconcerned,andeveryofficerof the company who is in default shall be liable to be punished with imprisonment for a term which may extend 3 years,orwithfineuptoRs.50,000orwithboth.

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SummarySection209of theCompaniesAct requireseverycompany tokeepat its registeredofficeproperbooksof•account.The books of account should be kept on accrual basis and according to double entry system of accounting.•Thebooksofaccountshouldnotsuppressanytransactionnorshouldtheycontainanyfictitioustransaction.•BalanceSheetmeansastatementdrawnupattheendofeachtradingorfinancialperiod,settingforththevarious•assets and liabilities of a concern at a particular date.A balance sheet is a pictorial representation of the trading position of a company.•Thebalancesheetisashareholdersquickguidetoascertainthefinancialpositionofthecompany.•Profitandlossaccountistheaccountbywhichthedirectorsdisclosetotheshareholdersofthecompanythe•result of the actual working of the company.Bymakingthepublicationoftheannualprofitandlossaccountcompulsory,thelawhasrecogniseditsimportance•for the purpose of assessing the value of a company‘s business.Audit is an examination of accounting records undertaken with a view to establishing the correctness or otherwise •ofthetransactionsreflectedtherein.Themainobjectofauditistoensurethatthestatementofaccountsoftherelevantfinancialyeartrulyandfairly•reflectthestateofaffairsofthecompany.An audit of accounts is conducted with two-fold purpose: detection and prevention of errors; and detection and •prevention of fraud.Appointmentofafirmasauditorsshallbemadeinthenameofthefirmwhereastheappointmentofaproprietary•concern as auditor shall be made in the name of the individual.A Statutory auditor of a subsidiary company is a director of its holding company.•The term vouchers includes, in addition to vouchers of sales, purchases, receipts and payments, all documents, •correspondence, agreements, etc. which may in any way serve to vouch for the accuracy of the books and accounts.The right of access to books can be enforced by mandatory injunction but not where litigation is pending between •the company and the auditor.Anauditorofthecompanyorapersondisqualifiedfrombeingappointedasanauditorofacompanycannot•be appointed as cost auditor. TheCentralGovernmentmaydirectthecompanytocirculatetoitsmembersthewholeoraspecifiedportion•of the report with the notice of next annual general meeting.

ReferencesCompany Law• [Pdf] Available at: <http://www.icsi.in/Study%20Material%20Executive/CL.pdf> [Accessed 25 June 2013].Introduction to Auditing• [Pdf] Available at: <http://www.mu.ac.in/myweb_test/study%20TYBCom%20Accountancy%20Auditing-II.pdf> [Accessed 4 July 2013].Ittelson, T. R., 2009. • Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Career Pr Inc.Warren, C. S., Reeve, J. M. and Duchac, J., 2011. • Accounting. 24th ed., Cengage Learning.1 Auditing ABCs• [Video online] Available at: <http://www.youtube.com/watch?v=8OhFbRvMaTc&list=PL18B87C18021B855A> [Accessed 4 July 2013].Audit-Introduction To Auditing• [Video online] Available at: <http://www.youtube.com/watch?v=2O2LNmvhlrc> [Accessed 4 July 2013].

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Recommended ReadingIndia, 1989.• Introduction to Indian government accounts and audit . PraksaGsanaNiyantraka, BhsarataSaraksara.Ratliff, R. L., and Reding, K. F., 2002. • Introduction to Auditing: Logic, Principles, and Techniques. The Institute of Internal Auditors.Guy, D. M., Carmichael, D. R., and Whittington, O. R., 2001. • Audit Sampling: An Introduction. 5th ed., Wiley

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Self AssessmentSection _____________________ of the Companies Act, 1956 contains the provisions for maintenance of 1. proper books of accounts.

209a. 541b. 210c. 328d.

The _________________ should not suppress any transaction nor should they contain any fictitious 2. transaction.

shareholdersa. companies actb. books of accountc. stock takingsd.

Which of the following statements is false?3. The books of account should not be kept on accrual basis and according to double entry system of a. accounting.Therequirementofmaintenanceofproperbooksofaccountshasbeenfurtheramplifiedthroughtheprovisionsb. of Section 541 of the Companies Act.For building of annual accounts the maintenance of proper books of account is necessary.c. The shareholders offer capital to the company for running the business.d.

_______________meansastatementdrawnupattheendofeachtradingorfinancialperiod,settingforththe4. various assets, and liabilities of a concern at a particular date.

Profitaccounta. Loss accountb. Books of accountsc. Balance Sheetd.

____________________ account is the account by which the directors disclose to the shareholders of the 5. company the result of the actual working of the company.

Profitandlossa. Auditb. Balancec. Annuald.

__________________ is an examination of accounting records undertaken with a view to establishing the 6. correctnessorotherwiseofthetransactionsreflectedtherein.

Annual accountsa. Balance sheetb. Auditc. Auditord.

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Which of the following involves the perfect scrutiny of the books of account of a company with reference to 7. documents?

Annual accountsa. Balance sheetb. Auditc. Auditord.

Themainobjectofauditistoensurethatthestatementof________________oftherelevantfinancialyear8. trulyandfairlyreflectthestateofaffairsofthecompany.

audita. businessb. balance sheetc. accountsd.

A ____________________ of a subsidiary company is a director of its holding company.9. Auditora. Statutory auditorb. Appointmentc. Memberd.

Which of the following is not a category for the appointment of an auditor?10. Second auditora. First auditorb. Subsequent auditorc. Filling of casual vacancyd.

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Chapter V

Dividend

Aim

The aim of this chapter is to:

definethetermdividend•

elucidate the types of dividend•

explaintheascertainmentofprofitsanddividends•

Objectives

The objectives of this chapter are to:

explain the term depreciation•

explicate the payment of dividend•

elucidate the declaration of dividend•

Learning outcome

At the end of this chapter, you will be able to:

understand investor education and protection fund•

identify the payment of interest out of capital•

recognisetheneedforcompliancecertificate•

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5.1 IntroductionDividend is the return on the share capital subscribed for and paid to a company by its shareholders. The term dividendisdefinedunderSection2(14A)oftheCompaniesAct,1956(theAct)as,‘dividendincludesanyinterimdividend.’

Orelse,thetermdividendcanbedefinedasthesumpayable,asinterestonloanorasprofitofacompany,tothelenders of an insolvent’s estate or an individual’s share of it. In commercial term, however, dividend is the share of thecompany’sprofitdistributedamongthemembers.

5.2 Types of DividendThe various types of dividend are as follow:Final dividendFinal dividend is recommended by the Board of directors. In its report to the shareholders, as per the requirements ofSection217oftheCompaniesAct,thisisconnectedtothebalancesheetfortherelevantfinancialyear.Itisdeclared by the shareholders at the annual general meeting. Usually articles of association of companies provide that the shareholders cannot increase the rate or amount of dividend than the one recommended by the Board. The shareholders may, however, declare the payment of dividend on equity shares at a rate lower than the one recommended by the directors in their report.

ItisthediscretionoftheBoardofdirectorstorecommendornottorecommendthedeclarationoffinaldividend,which has to be exercised in good faith in the interest of the company. The shareholders have no power to declare finaldividendintheabsenceofarecommendationoftheBoardofdirectorsinthisregard.

Interim dividendSection2(14A)defines‘Dividend’toincludeinterimdividend.TheCompanies(Amendment)Act,2000hasamendedSection 205 to make provisions for interim dividend. The Board of directors may declare interim dividend. The interim dividend is paid between two annual general meetings of the company.

Acompanycannormallyestimateitsprofitsforthecurrentfinancialyearonafairlyreasonablebasisandinthateventitcanallocatetothereservestheprescribedpercentageofprofitsonthebasisofitsestimatedprofits.Asameasure of precaution, the company may allocate to the reserves a higher amount than the actual amount based on theprescribedpercentageofitsestimatedprofits.

Further, it should also provide for depreciation in full. It should transfer to the reserves an amount based on estimated profitsaftertheendofthefinancialyearsandbeforethefinalisationoftheamountsforthefinancialyearandthereafterdecide to pay an interim dividend to its shareholders. Prior to the coming into force of the Companies (Amendment) Act,2000,theActdidnotcontainspecificprovisionsforpaymentofinterimdividend.However,ifthearticlesofassociation of company authorised payment of interim dividend as per regulation 86 of the Table A of Schedule I,thentheBoardofdirectorsofsuchcompanycoulddeclareaninterimdividendwhereitsprofitswarrantedsuchpayment. A mere resolution for declaration of an interim dividend did not create any liability and could be rescinded at any time before actual payment. This was so even if the cash to cover the proposed dividend had been placed intoaseparateaccount.Thedistinctionbetweeninterimandfinaldividendwasthat,unlikeinterimdividend,afinaldividend once declared by the company in general meeting was a debt and created an enforceable obligation.

With the enactment of the Companies (Amendment) Act, 2000, this position has changed. Interim dividend stands onthesamefootingasthatofthefinaldividend.Bothinterimandfinaldividendwhendeclaredbecomesdebtandare payable within 30 days of declaration.

Dividend on preference sharesA Preference share carries a preferential right as to dividend in accordance with the term of issue and the articles of association,subjecttotheaccessibilitytothedistributableprofits.Thepreferentialrighttoadividendcouldeitherbeafixedamountoranamountcalculatedatafixedrate.Itmaybecumulativeornon-cumulative.Preferencesharescancarrydividendofafixedamount,beforeanydividendispaidontheequityshares.Iftherearetwoormore

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classes of preference shares then the shareholders of the class which has importance are similarly entitled to their preferential dividend before any dividend is paid in respect of the other class. But these rights in respect of dividends are subject to three conditions. Firstly, preference shares are part of the company’s share capital, consequently, preferencedividendscanbepaidonlyifthecompanyhasearnedsufficientprofits.Secondly,adividendbecomespayable to the shareholders only when it is declared in the manner laid down in the Act and by the company’s articles. Thirdly, there should have been a formal declaration. Preference shareholders are not entitled to treat the preferencedividendasadebtandsueforitspaymentinthefirstinstance.However,ifthearticlesspecifythatthecompany’sprofitshallbeapplied,bywayofpaymentofthepreferencedividend,thepreferenceshareholdercansue for it even though it has not been declared.

Dividend on equity sharesDividend on equity shares are to be paid in accordance with the rights of the respective classes of shares. Equity shareholders are entitled to be paid dividend on their shares only after all dividends on preference shares have been paid to date. Although, the equity shareholder stands second in preference to the shareholders, he enjoys a privilege ofahigherdividendasthepreferencedividendisfixedandcannotbeincreased,however,largethecompany’sprofitsmaybe,unlessthepreferencesharescarrytherighttoparticipateinsurplusprofits.Therefore,exceptintheabovementionedsituation,thewholeoftheresidualprofitsofthecompanyafterpayingthepreferencedividendmay be paid out as dividend to the equity shareholders either immediately or in later years.

5.3 Ascertainment of Divisible Profits and DividendsDivisibleprofitsmeantheprofitswhichthelawallowsthecompanytodistributetotheshareholdersbywayofdividend.AccordingtoPalmer’sCompanyLaw,theterms„divisibleprofits‟and„profitsinthelegalsense‟aresynonymous.Theprofitsofabusinessmeanthenetproceedsoftheconcernafterdeductingthenecessaryoutgo-ingswithoutwhichthoseproceedscouldnotbeearned.Profitsavailablefordividendhasbeenheldtomeantheprofitswhichthedirectorsconsidershouldbedistributedaftermakingprovisionfordepreciationorpastlosses,for reserves or for other purposes.

A proposal for declaration of dividend involves various considerations like the annual working of the company, future prospects of the company’s business, building up of adequate reserves for future expansion etc. Simply because thecompany’saccountsdiscloseprofitsinanyyear,itdoesnotfollowthatdeclarationofdividendisamust.Theconceptofadivisibleprofitisundefinedandisahighlyrelativeterm.Thequantumofprofit,therateofdividendpreviouslymaintained,taxliabilities,employees‟claimonbonusandsimilarotherfactorsthatarelikelytoclaimashareintheprofitshavetobecarefullyscrutinised.

Herethequestionthatarisesisastohowprofitsarecalculatedforthispurpose.UnderSection205(1)oftheActdividend can be paid by a company -

outoftheprofitsofthecompanyforthatyearafterprovidingfordepreciationunderSection205(2);and/ora. outoftheprofitsofthecompanyforthepreviousfinancialyearoryearsarrivedatafterprovidingfordepreciationb. under Section 205(2) and remaining undistributed; orout of moneys provided by the Central or State Government for the payment of dividend pursuant to a guarantee c. given by the Government.

Excepttheabove,onecannotgetanyguidancefromtheActastohowtheprofitsaretobecalculatedforthepurposeofpaymentofdividend.However,underSection211(2)everyprofitandlossaccountofacompanyshouldgiveatrueandfairviewoftheprofitorlossofthecompanyforthefinancialyearandshall,subject,asaforesaid,complywith the requirements of Part II of Schedule VI, so far as they are applicable thereto. However, it is not compulsory to provide depreciation under Part II of Schedule VI. But, it has been mentioned in Section 205 that depreciation shouldbeprovidedbeforedividendisdeclaredoutofprofits.ItshouldbenotedthattheActprovidesfordetailedguidelinesforcomputationofprofitsforthepurposeofmanagerialremuneration,paymentofdonationstocharitableand other purposes not connected with the business of the company in Sections 349 and 350 of the Act.

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5.3.1 DepreciationUnder Section 205(2) depreciation should be provided in any one of the following ways before arriving at the distributableprofits,vis:

totheextentspecifiedinSection350;ora. inrespectofeachitemofdepreciableasset,forsuchanamountasisarrivedatbydividingninety-fivepercentb. oftheoriginalcostthereoftothecompanybythespecifiedperiodinrespectofsuchasset;oron any other basis as approved by the Central Government which has the effect of writing off by way of c. depreciationninety-fivepercentoftheoriginalcosttothecompanyofeachsuchdepreciableassetontheexpiryofthespecifiedperiod;orin respect of any other depreciable asset where no rate of depreciation has been provided in this Act or any rules d. made thereunder, on such basis as is approved by the Central Government.

Section 350 of the Companies Act, 1956 [as amended vide Companies (Amendment) Act, 2000] provides that the amount of depreciation to be deducted is the amount of depreciation on assets as shown by the books of the companyattheendofthefinancialyearattheratesspecifiedinScheduleXIV.ScheduleXIVprescribetheratesof depreciation of various assets, both written down under value method and straight line method, for single shift, double shift and triple shift basis.

5.3.2 Dividend in Absence or Inadequacy of ProfitsIncaseofabsenceorinadequacyofprofits,dividendcanbedeclaredunderSection205A(3)oftheActoutoftheaccumulatedprofitsearnedbythecompanyinthepreviousyearsandtransferredbyittoreserves.Suchdeclarationshould be in accordance with the rules prescribed in this regard by the Government. If such a declaration does not conform to the rules, the declaration of dividend will require the previous approval of the Central Government. In exercise of its powers under this sub-section, the Central Government has framed rules known as Companies (Declaration of Dividend Out of Reserves) Rules, 1975.

Under these rules dividend can be declared from amounts drawn from reserves (i.e., free reserves only and not from anyspecificreserves)incaseofabsenceorinadequacyofprofitsinanyyearsubjecttothefollowingconditions:

The rate of dividend declared shall not exceed the average of the rates of dividend declared by it during the •immediatelyprecedinglastfiveyearsor10%ofthepaid-upcapital.Thetotalamounttobedrawnfromthecollectedprofitsearnedinpreviousyearsandtransferredtothereserves•shall not exceed an amount equal to one-tenth of the sum of its paid-up capital and free reserves and the amount sodrawnshallfirstbeutilisedtosetoffthelossesincurredinthefinancialyearbeforeanydividendinrespectof preference or equity shares is declared.The balance of reserves after this kind of drawal shall not fall below 15% of the paid-up share capital.•

5.4 Declaration of DividendA dividend when declared becomes a debt and a shareholder is entitled to sue for recovery of the same after expiry of the period of 30 days prescribed under Section 207, in Re Severn and Wye & Severn Bridge Rly. Co. (1896) 1, Ch 559.

TheActdoesnotspecificallyprovidewhoshalldeclarefinaldividend.ButunderSection173(1),thedeclarationof a dividend has been shown as ordinary business at an annual general meeting of a company. Similarly there is a reference to dividend in Section 217 where under directors are required to mention in their report to the shareholders the amount, if any, which they recommend by way of dividend. Therefore, it could be assumed that the intention ofthelegislatureistoempowertheannualgeneralmeetingtodeclarefinaldividend.InRaghunandanNeotiav.Swadeshi Cloth Dealers Ltd. (1964) 34 Company Case 570 (Cal.) the Calcutta High Court held that the cumulative effect of all the provisions of the Act is that the declaration of dividends should be made at the annual general meetings. In Kantilal v. CIT, (1956) 26 Company Case 357 (Bom.), the Bombay High Court has held that it is well established and the law is quite clear that a dividend can only be declared by the shareholders of the company. Articles of companies usually contain provisions with regard to declaration of dividends. These will be on the

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pattern of Regulations 85-94 of Table “A” of Schedule I to the Act. It would be seen that under Regulation 85 the power to declare a dividend vests with the general meeting, but it has no power to declare a dividend exceeding the amount recommended by the Board.

But if a dividend is so declared at the general meeting, the company cannot announce a further dividend for the same year (Circular No. 2 issued by the Department of Company Affairs dated 25.10.75). There can be no declaration of dividend for past years in respect of which the amounts have already been closed at previously held annual general meeting. Under Section 205(1A) of the Act, the Board of directors is authorised to declare interim dividend. Hence, if articles does not provide otherwise, Board may declare interim dividend.

5.5 Payment of DividendsUnder Section 207 of the Companies Act, 1956, dividend has to be distributed within 30 days of the declaration. Posting of dividend warrants within 30 days will be deemed to be payment irrespective of the fact whether the warrant has been encashed or not under regulation 91 of Table A of Schedule I to the Act. In the case of joint holders the warranthastobesenttotheregisteredaddressofthefirstnamedjointholderortosuchpersonandtosuchaddressas the joint holders may in writing direct. However, as per proviso to the Section 207 in the following circumstances dividend need not be paid within 30 days vis.:

Where dividend could not be paid by reason of the operation of any law e.g. in the case of non-residents, dividend i. need not be paid within 30 days if permission for remittance where required has not been received therefore from the Reserve Bank of India within 30 days;Where a shareholder has given directions to the company regarding the payment of dividend and these directions ii. cannot be complied with;Where there is a dispute regarding the right to receive dividend;iii. Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; iv. orWhere, for any other reason, the failure to pay the dividend or to post the warrant was not due to any default v. on the part of the company.

Any failure to comply with the requirements of Section 207 renders each director of the company, who is knowingly a party to the default, liable for punishment with simple imprisonment for a term which may extend to three years andheshallalsobe liable toafineofone thousandrupeesforeverydayduringwhichsuchdefaultcontinuesand the company shall be liable to pay simple interest at the rate of 18% p.a. during the period for which default continues.

As per Section 55A, non-payment of dividend shall, in case of listed public companies and in case of those public companies which intend to get their securities listed on any recognised Stock Exchange in India be administered by the SEBI. The obligation to post the dividend warrant and the failure to satisfy that obligation would occur at the placewheretheobligationhastobeperformedandthatplacewouldbetheregisteredofficeofthecompanyandnot the address at which the warrant has to be posted. Hence, jurisdiction to punish an offence under Section 207 isoftheCourtattheplacewheretheregisteredofficeofthecompanyissituated.

Under Section 205A, if a dividend declared by a company has not been paid or claimed within 30 days of the declaration, the same shall within 7 days thereafter i.e. (7 days after the expiry of 30 days from the date of declaration, have to be transferred to a special account to be opened by the company in that behalf in any scheduled bank to be called “Unpaid Dividend Account of……………. Company Limited/Company (Private) Limited”. Subsequently dividend claims will be met from this account. According to Section 205A(5), if any amount remains unpaid or unclaimed for a period of seven years from the date of such transfer, the amount so remaining unpaid/unclaimed together with any interest credited thereto should be transferred to the “Investor Education and Protection Fund”.

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The company had deposited the unpaid dividend into the special dividend account, unless the petitioners had got information about non-encashment, the question of transferring the said amount to an unpaid dividend account would not arise, because that amount was already in that account. The foregoing provisions shall equally apply to payment of interim dividend. Under Section 205(3) dividend has to be paid in cash. Dividend can be distributed in cash or by issue of a cheque or warrant.

In Krebs Bio-chemicals Ltd. & Ors.vs. ROC, the company transferred dividend to a special dividend account and also Post dividend warrants to the shareholders within the stipulated 42 days (now 30 days) from the date of the declaration of dividend. The Registrar of companies carried out an inspection of the company on 29.09.1997 and concluded that the company had failed to transfer the unpaid dividend to the special account within the time stipulated under Section 205A(1) of the Act. The ROC initiated prosecution proceedings against the company and itsdirectorsandfiledacomplainton15.4.1998.Thecompanyanditsdirectorschallengedtheprosecutionbeforethe High Court contending that it had deposited the entire dividend amount in a separate dividend account and dispatched the dividend warrants within stipulated time and that the complaint of ROC was barred by limitation also (which is 6 months as per Section 468(2)).

5.6 Establishment of Investor Education and Protection FundThe provisions of Section 205C inserted with effect from 31.10.1998 are as follows:The Central Government shall establish a fund to be called the Investor Education and Protection Fund (hereafter referred to as the “Fund”) [Sub-section (1)].As per sub-section (2), there shall be credited to the Fund the following amounts, namely:

amounts in the unpaid dividend accounts of companies;a. the application moneys received by companies for allotment of any securities and due for refund;b. matured deposits with companies;c. matured debentures with companies;d. the interest accrued on the account referred to in clauses (a) to (d);e. grants and donations given to the Fund by the Central Government, State Government, companies or any other f. institutions for the purposes of the Fund; andthe interest or other income received out of the investments made from the Fund.g.

However, no such amounts as mentioned in (a) to (d) above shall form part of the Fund unless such amounts have remained unclaimed and unpaid for a period of seven years from the date they became due for payment. The explanationtoSub-section(2)ofSection205CclarifiesthatnoclaimsshalllieagainsttheFundorthecompanyin respect of individual amounts which were unclaimed and unpaid for a period of seven years from the dates that theyfirstbecamedueforpaymentandnopaymentshallbemadeinrespectofanysuchclaims.TheFundshallbeused for promotion of investor awareness and protection of the interests of investors in accordance with such rules as may be prescribed [Sub-section (3)].

TheCentralGovernmentshall,bynotificationintheOfficialGazette,detailsanauthorityorcommittee,withthesemembers as the Central Government may assign, to administer the Fund, and maintain separate account and other relevant records in relation to the Fund in such form as may be prescribed in consultation with the Comptroller and Auditor-General of India [Sub-section (4)].It shall be competent for the authority or committee appointed under Sub-section (4) to spend moneys out of the Fund for carrying out the objects for which the Fund has been established [Sub-section (5)].

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5.7 Payment of Interest Out of CapitalThenormalruleoflawisthatdividendcanbepaidonlyoutofprofitsandmustnotbepaidoutofcapital.Anexemption to the rule is contained in Section 208 which, in effect, provides that where shares are issued to raise moneytodefraythecostofworksorbuildingorofplantorprojectwhichcannotbemadeprofitableforalongperiod of time, the company may pay interest on the amount of the capital paid-up in respect of such shares and may charge the same to capital as part of the cost of works, buildings or project or plant provided the following conditionsaresatisfied:

Authority and sanction of the central government: The payment should be authorised by the articles. In the •alternative, a special resolution is passed and prior sanction of the Central Government is obtained. Prior sanction of the Central Government is necessary even when the articles authorise such payment. Before sanctioning any such payment, the Central Government is empowered to appoint a person to inquire into and report to the Central Government on the circumstances of the case. It may even require the company to give security for payment of the costs of the inquiry.Time period: The payment of interest will be made only for such period as may be determined by the Central •Government and that period shall in no case extend beyond the close of the half-year next after the half-year during which the work or building has been actually completed or the plant provided.Rate of interest: The rate of interest shall, in no case, exceed four per cent per annum or such other rate as the •CentralGovernmentmaynotifyintheOfficialGazette.Charge to capital: The payment of interest shall not operate as a reduction of the amount paid up on the shares •in respect of which it is paid.

5.7.1 Payment of Dividend Out of Capital ProfitsTheterm“capitalprofits”maybedefinedtomeanthoseprofitswhichariseotherwisethaninthenormalcourseofthebusinessandearnedoutofcapitaltransactions.Theusualsourcesofcapitalprofitsare:

Profitsonsaleoffixedassets.•Profitsonrevaluationoffixedassets.•Premium on issue of shares/debentures/bonds/redemption of debentures.•Profitsonreissueofforfeitedshares.•Capital redemption reserve account.•Profitpriortoincorporationi.e.,profitswhichaccruestoacompanytillthedateofincorporation.•

TheCompaniesActdoesnotmentionspecificallywhethercapitalprofitsi.e.profitswhicharisewhereacompanysellspartofitsfixedassetsatapricehigherthantheoriginalcostofsuchasset,canbedistributedasdividend.However, in the two important cases of Lubbock vs. British Bank of South America (1892) 2 Ch. 198 and Foster vs.TheNewTrinidadLakeAsphaltCo.Ltd.(1901)1Ch.208thecourtshaveheldthatcapitalprofitscannotbeconsidered as available for distribution as dividend unless:(a) The articles of association authorise such a distribution.(b) The surplus is realised and remains after a valuation of the whole of the assets and liabilities.

5.8 Board’s Report and DisclosureThe Board of Directors of a company must strive to maximise wealth while adhering to good corporate governance principlesandpractices.TheefficacyoftheBoardofDirectorsisnotdeterminedsimplybygaugingwhetheritfulfils its legalrequirementsbut,moreimportantly,byitsphilosophyandthemanner inwhichit translates theunderstandingofitsresponsibilitiesforthebenefitofthestakeholdersofthecompany.

TheBoard’sReportisawidespreaddocumentcircumscribingbothfinancialandnon-financialinformation,servingto inform the stakeholders about the performance and prospects of the company, relevant changes in management, capitalstructure,majorpolicies,recommendationsastothedistributionofprofits,futureprogrammesofexpansion,modernisationanddiversification,capitalisationofreserves,furtherissueofcapital,etc.

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ThematterstobeincludedintheBoard‘sReporthavebeenspecifiedinSection217oftheCompaniesAct,1956.Apart from this, Sections 212, 219, 220, 222, 292A and 383A of the Companies Act, 1956 also contain provisions in relation to the Board‘s Report. The Board’s Report of companies whose shares are listed on a stock exchange must includeadditionalinformationasspecifiedintheListingAgreement.Further,theReserveBankofIndiaAct,1934,the Securities and Exchange Board of India Act, 1992 and the regulations, rules, directions, guidelines, circulars, etc. issued thereunder, necessitate certain additional disclosures to be made in the Board’s Report.

5.9 Disclosures Pursuant to Employee Stock Option and Employees Stock Purchase SchemesSEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 provide that the Board shall disclose, either in the Board‘s Report or in an annexure to the Board‘s Report, various details with regard to ESOS.

Apart from the foregoing provisions of 217 of the Companies Act, 1956, Reserve Bank of India has on 31.1.1998 issued certain directions to be complied with by all non-banking companies receiving deposits, with regard to their report to be attached to every balance sheet to be placed before the shareholders at every annual general meeting. The Board’s report of such a company shall include the following particulars or information, as follows:

the sum total of accounts of public deposit of the company which have not been claimed by the depositors or i. not paid by the company after the date on which the deposits became due for repayment

the sum total amounts due under such accounts remaining unclaimed or unpaid beyond the dates referred to in ii. clause (i) aforesaid

The above mentioned RBI directions further lay down that the said particulars shall be furnished with reference to the positionasonthelastdayofthefinancialyeartowhichthereportrelates,andiftheamountsremainingundisbursed,asreferredinsub-clause(ii)aboveoftheprecedingclause,exceedintheaggregatethesumofRupeesfivelakhs,there shall also be included in the report a statement on the steps taken or proposed to be taken by the Board of directors for the payment of the amounts due to the depositors and remaining unclaimed or undisbursed.

5.9.1 Approval of the Board’s ReportThe Board‘s Report should be considered, approved and signed at a meeting of the Board, convened in accordance with the provisions of the Act and not by means of a resolution passed by circulation.

As specimen of the Board resolution for approval of the Board‘s Report is as follows:RESOLVED that, pursuant to Section 217 and subject to the Auditor‘s Report under Section 227(2) of the •CompaniesAct,1956,beingwithoutanyreservationordisqualificationoradverseremark, thedraftof theBoard’s Report for the year ended………, 2007, as laid on the table, be and is hereby approved and that the said Report be signed by the Chairman on behalf of the Board and that the Secretary of the company be directed to issue the same to the members of the company together with the printed copies of the audited accounts, and the Auditor’s Report.A specimen of the Board’s resolution for approval of the Board’s Report containing response to Auditors’ commentsandqualificationsisasfollows:RESOLVED that, pursuant to Section 217 of the Companies Act, 1956 the draft of the Board’s Report for the •yearended……..,2007ascirculatedearlierandasmodifiedbyincorporatingtheinformationandexplanationgivenbytheBoardoneveryreservation,qualificationordifficultremarkcontainedintheAuditor’sReportunder Section 217, and as laid on the table, be and is hereby approved and that the Board‘s Report be signed by the Chairman on behalf of the Board and that the Secretary of the company be directed to issue the same to the members of the company together with the printed copies of the audited accounts, and reports.

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5.9.2 Signing and Dating of the Board’s ReportSection 217(4) provides that the Board‘s Report and any addendum thereto should be signed by the Chairman of the Board if he is authorised in that behalf by the Board and, where he is not so authorised, by not less than two directors of the company, one of whom shall be a managing director, where there is one. The Board’s Report may bear the same dates as that of the auditor‘s report but it could be dated later than the date of auditors‘ report if, in the caseofanyreservation,qualificationoradverseremarkcontainedintheauditors‘report,theBoardhasrespondedwith its comments and given full information and explanations in its report.

Default by a director, or by any other person who has been charged by the Board with the duty of seeing that the provisions of this section are complied with and fails to take all reasonable steps to comply with the provisions of the section or if a chairman signs the Board’s report without being authorised so to do will render himself liable for eachoffencetobepunishablewithimprisonmentupto6monthsorwithfineuptoRs.20,000orwithboth.Thepunishment of imprisonment can be ordered only if the offence was committed wilfully.

In T.P.G Nambiar v. ROC (1998) 92 Comp. Case 564 (Kar), it was held that just because statement under Section 217 furnished to Registrar of Companies was not properly numbered or it was in a blue sheet etc., that by itself cannot not be an offence to proceed against directors. Besides, in any procedures against a person in respect of an offence under Sub-section (1) of Section 217, it shall be a defence to prove that a competent and reliable person was chargedwith the duty of seeing that the provisions of that sub-section were complied with and that person was in a position to discharge that duty.

5.9.3 Filing of the Board’s ReportSection220providesthatafterthebalancesheetandtheprofitandlossaccounthavebeenlaidbeforethecompa-nyatanannualgeneralmeeting,acopyofthebalancesheetandtheprofitandlossaccountalongwithalldocu-mentsrequiredtobeannexedorattachedtheretoshouldbefiledwiththeRegistrarofCompanieswithin30days,along with the prescribed fees. The Board’s Report has to be attached to the balance sheet.

The Ministry of Corporate Affairs (MCA) vide its General Circular No. 37/2011 dated 07.06.2011 has mandated thefollowingclassofcompaniestofilebalancesheetandProfitandLossAccountalongwithDirector’sandAuditor’s Report in XBRL form only from the year 2010-11:

All listed companies and their Indian subsidiaries•All companies with paid capital of Rs. 5 Crore and above•All companies with turnover of Rs.100 Crore or above•

However banking Companies, insurance companies, power companies and Non Banking Financial Companies (NBFCs) are exempted, till further orders.Non-bankingfinancial company accepting/holding public depositsshoulddelivertoRBIanauditedbalancesheetasonthelastdayofeachfinancialyearandanauditedprofitandloss account in respect of that year as adopted by the company in general meeting together with a copy of the report of the Board laid before the company in such meeting in terms of Section 217(1), within 15 days of such meeting as also a copy of the report and the notes on accounts furnished by its auditor.

5.10 Compliance Certificate under Section 383AThe Companies (Amendment) Act, 2000 has inserted a new proviso in sub-section (1) of Section 383A of the Companies Act, 1956. As per this proviso every company not required to employ a whole-time secretary under Sub-section(1)andhavingapaid-upsharecapitaloftenlakhrupeesormoreshallfilewiththeRegistraracertificatefrom a secretary in whole-time practice in such form and within such time and subject to such conditions as may be prescribed,astowhetherthecompanyhasadheredtoallprovisionsoftheActandacopyofsuchcertificateshallbe attached with Board‘s report referred to in Section 217. Accordingly, every company not required to employ a whole-timesecretaryandhavingapaid-upsharecapitalofrupeestenlakhsormorebutlessthanrupeesfivecroresisrequiredtofilewiththeRegistrarofCompaniesaComplianceCertificatefromaSecretaryinWhole-timePracticeandalsoattachacopyofthatcertificatewithBoard‘sreport.TheDepartmentofCompanyAffairs(nowMCA)hasvideitsGeneralcircularNo.35/2003(No.17/47/2002-CLV)dated11thDecember,2003clarifiedthatcompany

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which is not required to employ a whole-time secretary but has nevertheless employed a whole-time company secretary,suchacompanyisnotrequiredtoobtaincompliancecertificatefromapractisingcompanysecretary.Inotherwords,nocompanyemployingafulltimeCompanySecretaryisrequiredtoalsoobtainacompliancecertificatefrom a Company Secretary in practice (PCS).

5.10.1 Need for Compliance CertificateThe successive Annual Reports on the Working and Administration of the Companies Act, 1956 reveal that a large numberofdocumentsarereturnedforrectificationofdefectsandalsoremainpendingforbeingtakenonrecord.WhilethisstateofaffairshasperhapsresultedfromtheconstraintsunderwhichtheofficesoftheROCsoperate,itcannotbedeniedthatincaseofdocumentsreturnedforrectification,alargenumberoferrorsoromissionsariseon account of misinterpretation or ignorance of the provisions of law.

Further, the Department of Company Affairs (now MCA) yearly institutes a large number of prosecutions against thecompaniesandtheirofficersindefaultforcontraventionofvariousprovisionsoftheCompaniesAct.Mostof the companies against which prosecutions are instituted are private limited companies or small public limited companieswhichdonothavethebenefitofexpertprofessionalservicesofqualifiedCompanySecretaries.Thus,itis well established fact that smaller companies fall prey to violations of the provisions of the Companies Act in the absenceofprofessionalsupportascomparedtocompanieswhichhaveemployedaqualifiedCompanySecretary.

ComplianceCertificateis,therefore,salutaryasitcreatesawarenessamongstthecompaniestocomplywiththeprovisions of the Companies Act and also provides a mechanism for self-regulation by companies. Compliance CertificatewillnotonlyactasaneffectivemechanismtoensurethatthelegalandproceduralrequirementsunderCompanies Act are duly complied with but also instill professional discipline in the working of the company besides buildingupthenecessaryconfidenceinthestateofaffairsof thecompany.Itwillrelievethecompanyanditsdirectors including the nominee directors from the consequences of unintended non-compliance of the provisions of the Companies Act. It will further curb the tendency on the part of the smaller companies to cut short the procedural requirements which primarily occur due to ignorance or lack of professional support. It will act as a pre-emptive check to monitor compliance with the requirements of the Companies Act and the Rules made thereunder.

TheCompanySecretaries,whileundertakingtheworkofissuingComplianceCertificatewillactasafriendandguide to the management of companies.

For the purpose of this proviso the relevant date for determining the paid-up share capital shall be date on which theBoard’sreportissigned.FurtherSub-rule(2)ofRule3providesthattheComplianceCertificateshallrelatetotheperiodpertainingtothefinancialyearofthecompany.So,everycompanytowhichthesectionisapplicableisrequiredtoattainaComplianceCertificatefromasecretaryinwhole-timepracticeforthefinancialyearinwhichthe Board’s report is signed.

Undere-filingsystemofMCA,companiesarerequiredtofileComplianceCertificateonlinewiththeRegistrarof Companies within 30 days from the date on which its Annual General Meeting is held, along with e-form 66. Provided that where the annual general meeting of such company for any year has not been held there shall be filedwithRegistrarsuchcertificatewithinthirtydaysfromthelatestdayonorbeforewhichthatmeetingshouldhave been held in accordance with the provisions ofthe Act. In case, AGM is held and adjourned the Compliance CertificateshouldbefiledwithROCwithin30daysfromthedateonwhichsuchadjournedmeetingisheldprovidedsuch statutory meeting was held within statutory limit.

Itmaybenotedthatfore-filingpurpose,ComplianceCertificateisrequiredtobeconvertedinPdffileandthenthesaidPdffileistobeattachedtoe-form66.TheComplianceCertificatemustbelaidbytheCompanyatitsAnnualGeneralMeeting(Sub-rule(4)ofRule3).Asagoodsecretarialpractice,thecertificateshouldbereadatthemeetingand also made available to the members for inspection. It is also necessary for the company to attach a copy of the ComplianceCertificatewiththeBoard’sreportwhileforwardingthesametomembersandothersunderSection219 of the Act.

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5.10.2 Penalty for False Compliance CertificateSection628dealswithpenaltyforfalsestatements.Accordingtothissection,ifinanyreturn,report,certificate,balance sheet, prospectus, statement or other document, required by or for the purpose of any of the provisions of the Act, any person makes a statement:

which is false in any material particular, knowing it to be false; or•which omits any material fact, knowing it to be material;•

He shall, except as otherwise expressly provided in the Act, be punishable with imprisonment for a term which may extendtotwoyearsandshallalsobeliabletofine.Inviewofthis,aPCSwillbeattractingthepenalprovisionsofSection 628, for any false statement in any material particular or omission of any material fact in the Compliance Certificate.

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SummaryDividend is the return on the share capital subscribed for and paid to a company by its shareholders.•Final dividend is recommended by the Board of directors.•The Companies (Amendment) Act, 2000 has amended Section 205 to make provisions for interim dividend.•Bothinterimandfinaldividendwhendeclaredbecomedebtandarepayablewithin30daysofdeclaration.•A Preference share carries a preferential right as to dividend in accordance with the term of issue and the articles •ofassociation,subjecttotheaccessibilitytothedistributableprofits.Preferencesharescancarrydividendofafixedamount,beforeanydividendispaidontheequityshares.•Equity shareholders are entitled to be paid dividend on their shares only after all dividends on preference shares •have been paid to date.Divisibleprofitmeanstheprofitswhichthelawallowsthecompanytodistributetotheshareholdersbyway•of dividend.Section 350 of the Companies Act, provides that the amount of depreciation to be deducted is the amount of •depreciationonassetsasshownbythebooksofthecompanyattheendofthefinancialyearattheratesspecifiedin Schedule XIV.The Board of Directors of a company must strive to maximise wealth while adhering to good corporate governance •principles and practices.TheComplianceCertificatemustbelaidbytheCompanyatitsAnnualGeneralMeeting.•SEBI Guidelines, 1999 provide that the Board shall disclose, either in the Board‘s Report or in an annexure to •the Board‘s Report, various details with regard to ESOS.Under Section 205(1A) of the Act, the Board of directors is authorised to declare interim dividend.•Incaseofabsenceorinadequacyofprofits,dividendcanbedeclaredunderSection205A(3)oftheActoutof•theaccumulatedprofitsearnedbythecompanyinthepreviousyearsandtransferredbyittoreserves.

ReferencesDividend • [Pdf] Available at: <http://www.investopedia.com/terms/d/dividend.asp> [Accessed 25 June 2013].Types of Dividends • [Pdf] Available at: <http://www.accountingtools.com/types-of-dividends> [Accessed 4 July 2013].Silva, L.C., Goergen, M. and Renneboog, L, 2004. • Dividend Policy and Corporate Governance. Oxford University Press, USA.Parrino, R., Kidwell, D. S. and Bates, T., 2011. • Fundamentals of Corporate Finance. 2nd ed.,Wiley.Are Dividends Trendy or Timeless? • [Video online] Available at: <http://www.youtube.com/watch?v=BmmyoBssqGY> [Accessed 4 July 2013].15minutes to learndividendpolicy for sfmcafinal• [Video online] Available at: <http://www.youtube.com/watch?v=5feCHWFmvEk> [Accessed 4 July 2013].

Recommended ReadingBaker, H.K.,2009.• Dividends and Dividend Policy. Wiley.Mark, K. M., and Donovan, M., 2013. • The Inclusion Dividend: Why Investing in Diversity & Inclusion Pays Off. Bibliomotion.Neal, G , N., 2012.• Dividend Investing: A Step By Step Guide to Get Rich: DRIP, DSPP, Folio, Motif, Betterment. CreateSpace Independent Publishing Platform.

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Self Assessment____________________ is the return on the share capital subscribed for and paid to a company by its 1. shareholders.

Sum payablea. Dividendb. Interestc. Loand.

Which of the following is not one of the types of dividend?2. First dividenda. Final dividendb. Dividend on equity sharesc. Dividend on reference sharesd.

A __________________ carries a preferential right as to dividend in accordance with the term of issue and the 3. articlesofassociation,subjecttotheaccessibilitytothedistributableprofits.

Final dividenda. Interim dividendb. Preference sharec. Dividend on equity sharesd.

_____________________meantheprofitswhichthelawallowsthecompanytodistributetotheshareholders4. by way of dividend.

Equity sharesa. Preference shareb. Preferential rightc. Divisibleprofitsd.

Which of the following statements is false?5. The balance of reserves after this kind of drawal shall not fall below 15% of the paid-up share capital.a. A dividend when declared becomes a debt and a shareholder is entitled to sue for recovery of the same after b. expiry of the period of 30 days prescribed under Section 207.Articles of companies do not contain provisions with regard to declaration of dividends.c. The company had deposited the unpaid dividend into the special dividend account, unless the petitioners d. had got information about non-encashment.

The normal rule of law is that dividend can be paid only out of _______________.6. profitsa. loansb. lossc. capitald.

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Whichofthefollowingisnotoneoftheconditionsthataresatisfiedwhenthecompanypayinterestonthe7. amount of the capital paid-up in respect of such shares?

Time perioda. Rate of interestb. Charge to capitalc. Loan periodd.

Whichofthefollowingisnotoneofthesourcesofcapitalprofits?8. Profitsonsaleoffixedassetsa. Profitsonrevaluationoffixedassetsb. Profitsonreissueofforfeitedshares.c. Capital redemption saving account.d.

__________________ certificate is salutary as it creates an awareness among companies to complywith9. provisions of the Companies Act.

Compliancea. Balanceb. Licencec. Annuald.

________________ deals with penalty for false statements.10. Section 628a. Section 383 Ab. Section 217c. Section 217 (4)d.

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Chapter VI

Registers and Returns

Aim

The aim of this chapter is to:

defineregisterofcharges•

elucidate the register of deposits•

explain the annual return documents•

Objectives

The objectives of this chapter are to:

explain statutory books •

explicate the maintenance of minutes book•

elucidate the dividend register•

Learning outcome

At the end of this chapter, you will be able to:

understand the register of director’s shareholdings•

identify the non-statutory registers•

recognise the register of nomination•

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6.1 IntroductionThe Companies Act, 1956 lays down that every company incorporated under this Act must maintain and keep at its registeredofficecertainbooks,registersandcopiesofcertainreturns,documentsetc.andtogivecertainnotices,filecertainreturns,forms,reports,documentsetc.withtheRegistrarofCompanieswithincertainspecifiedtimelimitsandwiththeprescribedfilingfees.ThesebooksareknownasStatutoryBooks.Someofthestatutoryregistersare required to be kept open by the company for inspection by directors, members, creditors of the company and by other persons. The company is also required to allow extracts to be taken from certain documents, registers, returns etc. and furnish copies of certain documents on demand by a member or by any other person on payment ofspecifiedfees.

6.2 Statutory Books ElaboratedEverycompany incorporatedunder theAct is required tokeepat its registeredoffice, interalia; the followingstatutory books and registers:

6.2.1 Register of Investments not held in Company’s NameSection 49 of the Act provides that the investments of a company must be held in its own name, except as allowed by Sub-sections (2), (3), (4) and (5) of the Section or any other law in force. It is stated that, if any shares or securities in which investments have been made by a company are not held by it in its own name, the company shall forthwith enter in a register maintained by it for the purpose:

the nature, value and such other particulars as may be necessary to fully identify the shares or securities in •questionthe bank or person in whose name or custody the shares or securities are held•

Theregistershouldbekeptattheregisteredofficeofthecompany.Thisregisterhastobekeptopenfortheinspectionof any member or debenture holder of the company during the business hours of the company, without paying any charge, during business hours, subject to such reasonable restrictions as the company may, by its articles or general meeting, compel, so that not less than two hours in each day are allowed for inspection. Only one person at a time should be allowed to inspect the register.

Ifdefaultismadeinthemaintenanceoftheregister,thecompanyandeachofficerofthecompanywhoisindefaultshallbepunishablewithfinewhichmayextendtofiftythousandrupees.Ifinspectionrequired(asmentionedabove)is refused, the Company Law Board may, by order, direct an instant inspection of the register.

Entries in the register is authenticated by the Secretary of the company or by any other person authorised by the Board for the purpose, by appending his signature to every entry. The register should be conserved permanently and should be kept in the custody of the secretary of the company or any other person authorised by the Board for the purpose.

6.2.2 Register of DepositsThe register of deposits states that:

As per Rule 7 of the Companies (Acceptance of Deposits) Rules, 1975, every company other than a banking •companyacceptingdepositshastokeepatitsregisteredofficeoneormoreregistersinwhichthereshallbeentered separately.The register of deposits is mandatory to be preserved in good order for a period of not less than eight calendar •yearsfromthefinancialyearinwhichthelatestentryismadeintheregister.Ifdefaultismade,thecompanyandeachofficerofthecompanyindefaultshallbepunishablewithfineupto•Rs.500/-eachandfurtherfineofRs.50/-perdayifdefaultcontinues.Register of deposits can be taken to be a part of books of accounts within the meaning of Section 209. Hence, •wheretheworkregardingfixeddepositsisentrustedtoaRegistrarbyacompany,itisadvisablefortheBoardtoapproveofkeepingthesaidRegisterwiththeRegistrarandfileacopyofthesaidresolutionwiththeROC.

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The register is not open for inspection. Entries in the register should be authentic, done by the secretary of the •company or by any other person authorised by the Board for the purpose, by appending his signature to every entry.The register should be preserved in the custody of the secretary of the company or any other person authorised •by the Board for the purpose.

6.2.3 Register of Securities Bought BackUnderSection77A(9)everycompanyisrequiredtokeepatitsregisteredofficeaRegisterofsecuritiesbought-back and enter there.

Entries in the register should be written in chronological order.•Ifcompanyfailstomaintainthisregisterthenthecompanyandeveryofficerofthecompanywhoisindefault•shallbepunishablewithimprisonmentforatermwhichmayextendtotwoyears,orwithfinewhichmayextendtofiftythousandrupees,orwithboth.The register is not open for examination.•Entries in the register is authenticated by the secretary of the company or by any other person authorised by the •Board for this purpose, by appending his signature to each entry.The register should be kept for a minimum period of 8 years from the date of completion of buy-back and •should be kept in the custody of the secretary of the company or any other person authorised by the Board for the purpose.

6.2.4 Register of ChargesUnderSection143(1),everycompanyisrequiredtokeepatitsregisteredofficeaRegisterofchargesandenterthereinallchargesspecificallyaffectingpropertyofthecompanyandallfloatingchargesontheundertakingorany property of the company.

Entries in the register shouldbewritten in chronological order of creationof the charge andmodification•thereof.Ifanyofficerofthecompanyknowinglydeletesorwilfullyauthorisesorpermitstheomissionofanyentryrequired•tobemadeaspersub-section(1),heispunishablewithfinewhichmayextendtofivethousandrupees.Entries in the register is authenticated by the secretary of the company or by any other person authorised by the •Board for the purpose, by appending his signature to each entry.Instrument creating a charge should be conserved for a period of 8 years from the date of satisfaction of charge •and should be kept in custody of the secretary of the company or any other person authorised by the Board for the purpose.The register should be preserved permanently in the custody of the secretary of the company or any other person •authorised by the Board for the purpose.

6.2.5 Register of MembersEvery company is required to maintain a register of members, which should indicate the following particulars:

Name, address and the occupation of the member;a. Date on which he was entered as a member;b. Date on which he ceased to be a member;c. Thedetailsofthesharesstandinginhisname,suchas,thenumberofthecertificate,distinctivenumberofthed. shares, etc.

In addition to the aforesaid particulars the register of members should also be in conformity with the format as prescribedunderRule7oftheCompanies(IssueofShareCertificates)Rules,1960.TheAppendixtotherulesprovidestheformatofregisterofmembers.InthecaseofJointshareholders,thefinepointsofeachjointholdershould be recorded in the register.

Separate register should be maintained for every class of equity and preference shares.•

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Apart from the previous information, this format provides for giving information about cash payable on shares, •cash paid on shares and full particulars of transfer of shares.Particularsofeverysharecertificateissuedinaccordancewithrule-4,sub-rule(1),shallbeenteredintheRegister•of Members maintained in the form set out in the appendix annexed to the above said rules of persons, to whom it has been issued, indicating the date of issue. Further, all entries in this register are required to be authenticated by the secretary or any other person so authorised by the Board of directors.A member can obtain on requisition, copies of register of members only on prescribed payment and a mere •requesttochairmanbyletterisinsufficient.The company is required to send the copy within ten days of receiving the requisition together with the charges •therefor.Thepenaltyfornotallowinginspectionofregisterornotsupplyingacopywouldinvolvefinewhichmayextendtofivehundredrupeesforeverydayduringwhichthedefaultcontinues.Theregisterofmemberscanbekeptataplaceotherthantheregisteredofficeofthecompanywithinthecity,townorvillageinwhichtheregisteredofficeissituatedif:

Such other place has been approved for this purpose, by a special resolution approved by the company in �general meeting; andThe Registrar has been given in advance a copy of the proposed resolution. After such a special resolution �ispassed,acopyofthesamehastobefiledwiththeRegistrarofCompaniesasrequiredunderSection192of the Companies Act, 1956.

Index of membersEvery company having more than 50 members must maintain an index of members, unless the register of members in itself constitutes an index. The index may be a card index or bound one. Any alterations made in the register of members must be recorded in the index within 14 days. The provisions of inspection and getting copies of the register of members as discussed above are applicable to index of members also.

6.2.6 Register of Debenture HoldersSection 152 (1) requires every company to maintain a register of debenture holders and enter therein the following particulars:(a) the name and address, and the occupations, if any, of each debenture holder;(b) the debentures held by each holder, distinguishing each debenture by its number, except where such deben-

tures are held with a depository and the amount paid or agreed to be considered as paid on those debentures;(c) the date on which each person was entered in the register as debenture holder; and(d) the date on which any person ceased to be a debenture holder.

In case of joint holding, the particulars of each joint holder should be kept in the register.•No notice of trust, express, implied or constructive, should be entered in the register of debenture holders.•The register along with index should be open for inspection during the business hours of the company, except for •when the register is closed under the clauses of the Act as has been mentioned above, subject to such reasonable restrictions as the company may impose by its articles or in general meeting so that not less than 2 hours in each working day of the company are allowed for inspection.Members, debenture holders and trustees of debenture holders can inspect the register and the index without •payment of any fee and any other person can inspect the register on payment of the requisite fee.Copies of the register can be asked by any person who inspects the register.•Entries in the register and index should be examined by the secretary of the company or by any other person •authorised by the Board for the purpose, by appending his signature to each entry.The register and index should be conserved for a period of 15 years from the date of redemption of debentures •and should be kept in the custody of the secretary of the company or any other person authorised by the Board for the purpose.Further,theprovisionsofSections111and111Ashallapplyinrelationtotherectificationoftheregisterof•debentureholdersastheyapplyinrelationtotherectificationoftheregisterofmembers.

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Index of debenture holdersAs in the case of a register of members, there must be kept an index of debenture holders where a company has more than 50 debenture holders. Similar provisions apply to it as to an index of members.

6.2.7 Register and Index of Beneficial OwnersSection 152A of the Companies Act, 1956 was inserted by the Depositories Act, 1996 w.e.f. 20.9.1995, providing thattheRegisterandIndexofBeneficialOwnersmaintainedbyadepositoryunderSection11oftheDepositoriesAct, 1996 shall be deemed to be a register of members and debenture holders, as the case may be, for the purposes of this Act. The amendment was considered necessary as securities held in depository mode are fungible.

Foreign register of members and debenture holders (Section 157-158)The foreign register of members or debenture holders’ resident outside India, if maintained, shall be deemed to be a part of the register of members or debenture holders of the company and should be maintained from the date of allotmentofsharesordebenturestoforeigners,inanofficelocatedintheforeigncountry.

Thecompanyshould,within30daysfromthedateoftheopeningofanyforeignregister,filewiththeRegistrarofCompaniesanoticeofthesituationoftheofficewheresuchregisteriskept.Intheeventofanychangeinthesituation,thecompanyshould,within30daysfromthedateofsuchchangeordiscontinuance,filenoticeofsuchchange or discontinuance with the Registrar of Companies [Section 157 (2)].

Ifaforeignregisteriskept,aduplicatethereofshouldbemaintainedattheregisteredofficeofthecompanyoratsuch other place where the register of members or debenture holders is kept.

The register should contain particulars in respect of each member or debenture holder in the same format as are containedintheregisterofmembersordebentureholderskeptattheregisteredofficeofthecompany.

A company should give not less than 7 days previous notice by advertisement in a vernacular newspaper circulating in the district, where the foreign register is kept, when it closes its foreign register of members or debenture holders.

The register should be open for examination during business hours, except when the register is closed under the provisions of the Act as aforesaid, subject to such restrictions as the company may impose by its articles or in general meeting so that not less than2 hours in each working day are allowed for inspection.

Members or debenture holders can examine the register without payment of any fee and any other person can •inspect the register on payment of the requisite fee.Copies of the register can be demanded by any person who inspects the register.•Thepersoninchargeoftheofficeintheforeigncountryshouldauthenticatetheentriesintheforeignregister,•by appending his signature to each entry.Theregistershouldbepreservedinthecustodyofthepersoninchargeoftheofficeintheforeigncountry.•The foreign register of members should be kept until discontinued.•The preservation of foreign register of members should be for a period of 15 years from the date of redemption •of debentures.

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6.2.8 Annual ReturnAnnualReturnisperhapsthemostimportantdocumentrequiredtobefiledbyeverycompanywiththeRegistrar.ApartfromtheBalanceSheetandProfit&LossAccount,thisistheonlydocumenttobecompulsorilyfiledwiththe Registrar every year. The importance of this document can best be highlighted by comparing it with some other documentsrequiredtobefiledundertheAct.

AnnualReturnandBalanceSheet:WhiletheProfit&LossAccountandBalanceSheetgiveninformationonthefinancialperformanceofacompany,itistheAnnualReturnwhichgivesgreaterinsightintothecompanyrelatingto the people behind a corporate entity – the Shareholders, who as a body, constitute its ownership, the Directors, who exercise control over the affairs of the company, the extent of dilution or concentration of ownership, the details of debenture holders, who have contributed to the loan funds, the extent of indebtedness, and last but not the least, the Company Secretary who is the conscience-keeper of the company.

Further, it contains more up-to-date information than that of the latter. Section 210 of the Act, requires that normally, theBalanceSheetandtheProfitandLossAccountshouldbeplacedbeforetheAnnualGeneralMeetingwithinsixmonthsofthefinancialyearending,andsection220providesthatcopiesofBalanceSheetandProfitandLossAccountshouldbefiledwithin30daysfromthedateonwhichthebalancesheetandtheprofitandlossaccountwere so laid (whether adopted or not) or where the annual general meeting has not been held, within 30 days of the latest date on or before which the annual general meeting should have been held. This means that the information contained in the Balance Sheet is at least half an year old by the time it is open for public inspection. On the other hand,theAnnualReturnismadeuptothedateoftheAnnualGeneralMeeting,andshouldbefiledwithin60daysfrom that date.

6.2.9 Minutes BooksEvery company must maintain minute’s books for recording the minutes of proceedings of all general meetings of the shareholders and of all proceedings of every meeting of its Board of directors or every committee of the Board (Section 193). The minutes must be entered in the minute’s book within 30 days of the meeting. The pages of a minute’s book must be consecutively numbered. Each page of the minute’s book must be initialled and the last page of the record of proceedings of each meeting in the minute’s books must be dated and signed:

in the case of minutes of Committee or Board meetings by the Chairman of the said meeting or of the next •meeting; andin the case of minutes of general meetings by the Chairman of the same meeting within 30 days of the meeting •and in the event of his death or inability of that chairman within that period, by any director so authorised by the Board for the purpose.

Theminute’sbooksshouldbekeptattheregisteredofficeofthecompany.Theseareprimarydocumentsandanevidenceoftheproceedingsrecordedthereinandwhentheminutesaredulysigned,presumptionsasspecifiedinSection 195 of the Act may be drawn until the contrary is proved.

6.2.10 Register of Postal BallotAs per section 192A, a listed public company shall, in the case of resolutions relating to such business as the central governmentmay,bynotification,declare tobeconductedonlybypostalballot,get such resolutionsapprovedby means of a postal ballot, except of transacting the business in general meeting of the company. In respect of resolutionsnotspecifiedbytheCentralgovernment,alistedcompanymayatitsdiscretiongettheresolutionpassedby postal ballot. Scrutiniser shall also maintain record for postal ballot which are received in defaced or mutilated form. In addition to above mentioned particulars the register of postal ballot should also be in conformity with the Companies (Passing of the Resolutions by Postal Ballot) Rules, 2011.

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6.2.11 Books of AccountSection 209 (1) of the Act states that every company shall maintain such books as will give a true and fair view in respect of:

all sums of money received and put further by the company and the matters in respect of which the receipts a. and expenditures takes place;all purchases and sales of goods by the company;b. all liabilities and assets of the company; andc. such particulars regarding utilisation of material or labour or other items of cost as may be prescribed by the d. Central Government in respect companies which are required to keep cost accounts.

These books must be preserved for a minimum period of 8 years immediately preceding the current year. The booksareopentoinspectionbydirectors.UnderSection209AtheRegistrarandofficersauthorisedbytheCentralGovernmentandsuchofficersoftheSEBIasmaybeauthorisedbyit,caninspectthebooksofaccountsandotherbooks and papers of a company kept under Section 209 of the Act. These books are normally kept at the registered officeofthecompany,buttheBoardofdirectorsmaydecidetokeepallbooksofaccountoranyofthemataplaceotherthantheregisteredofficeprovidedtheRegistrarisinformedinelectronicFormNo.23AAoftheCompanies(Central Government‘s) General Rules and Forms, 1956 within seven days of its decision.

Cost recordAswouldbeseenfromsub-para(d)aboveunder thehead―booksofaccount‖acompanyisrequiredtokeepsuch particulars regarding utilisation of material, labour or other items of cost as may be prescribed by the Central Government.TheCentralGovernment so farhasprescribed themaintenanceof such records in somenotifiedcompanies like cycles, refrigerators, caustic soda, vanaspati, bulk drugs, cotton textiles, milk food, fertilisers etc. For this purpose, separate Rules have been framed for each such industry. The cost records under Sub-section (1)(d) of Section 209 are governed by the same provision relating to maintenance, preservation, inspection and penalty, so on, as are applicable to books of account.

6.2.12 Register of Contracts (Section 301)Every company must keep the register to record the following particulars:

the date of the contract or arrangement in which directors are concerned;a. the names of the parties to such contracts or arrangements;b. the principal terms and conditions thereof;c. the date when the contract of this type was positioned before the Board of directors; andd. the names of the directors voting for or against the contract or arrangement or remaining neutral.e.

Entries relating to contract or arrangement requiring Board‘s approval must be made within seven days from the date on which the contract or arrangement is approved by the Board or in respect of any other contract or arrangement within7days(excludingpublicholidays)ofreceiptatRegisteredOfficeofthecompanyofparticularsofsuchothercontract or arrangement or within 30 days of the date of the contract or arrangement whichever is later.

This is the only register which requires to be signed by all the directors present at the Board meeting following the meeting in which the contracts are considered. After the Board meeting, the register must be completed by showing the names of the directors who have voted for and against the contracts. The names of the directors remaining neutral must also be stated.

This register isalso required tobemaintainedat the registeredofficeof thecompanyand it shallbeopen forinspection and extract and copies can be taken in the same manner by the members of the company as in the case ofregisterofmembers.Ifdefaultiscommittedinthemaintenanceofthisregister,thecompanyandeveryofficerindefaultshallbeliableforafineuptoRs.5000/-eachandforrefusalofinspectionetc.,fineuptoRs.500/-perday of refusal or default.

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Entries in the register should be examined by the secretary of the company or by any other person authorised by the Board for the purpose, by appending his signature to each entry. The register should be preserved and should be kept in the custody of the secretary of the company or by any other person authorised by the Board for the purpose.

6.2.13 Register of DirectorsAsperSection303oftheCompaniesAct,1956,everycompanymustkeepatitsregisteredoffice,aregisterofdirectors, managing director, Manager and Secretary. The necessary particulars regarding name, surname, father‘s/husband‘s name, nationality, business occupation, usual residential address, directorship, managerial position or officeofsecretaryinotherbodiescorporateanddateofbirthinthecaseofapubliccompany,shouldbeenteredintheregister.Besides,thenamesandspecificationsofdirectorsnominatedhavealsotobeincludedintheregister.Everycompany, is required to send electronically a return giving the particulars contained in the register to the Registrar. AnychangesinthemanagerialpersonnelshouldalsobeintimatedtotheRegistrar.Thetimeallowedforfilingthereturnsis30daysandsoisfornotificationofachangeinthemanagerialpersonnel.Theregistercanbeinspectedbymembers free of charge, and by outsiders on payment of a fee of Rs.1. However, there is no provision for supplying of copies or extracts from this register. Apart from this, the Registrar is also required to keep a register for entering particulars received in respect of directors. The register is also open to check on payment of prescribed fee. With the launch of MCA-21 project, users now have the facility for public inspection through electronic means.

The secretary of the company should authenticate the entries in the register or by any other person authorised •by the Board for the purpose, by appending his signature to each entry.The register should be conserved permanently and should be kept in the custody of the secretary of the company •or by any other person authorised by the Board for the purpose.Ifdefaultismadeinthepreservationofthisregister,thecompanyandeveryofficerindefaultshallbeliable•forafineupto`500/-foreverydayduringwhichthedefaultcontinues.

6.2.14 Register of Directors’ ShareholdingsThis register is to be maintained according to Section 307. Every company shall maintain a register showing, in respect of each director of the company, the number, description and amount of shares in, or debentures of the company or any other body corporate, being the company‘s subsidiary or holding company, or a subsidiary of the company‘s holding company, which are held by him or in trust for him, or of which he has any right to become the holder whether on payment or not [Section 307(1)].

The purpose of maintenance of this register must be understood. The directors of the company during the course of their duties come to know about the present and the future policy of the company and the way in which it is going anditintendstogo.Inordertopreventanymisuseofthepositionresultinginanydishonestfinancialgainbydealingin the shares of the company, and of its subsidiaries, it is mandatory that all transactions relating to the Directors‘ shareholdings must be reported to the company and the same must be entered in the register.

The register containing these particulars must be kept open for inspection by members and debenture holders for a period of 17 clear days - 14 days before the annual general meeting and 3 days after it (Saturdays, Sundays and Public Holidays) should be disregarded for the purpose of counting this period). The register will always be open to inspection by the Registrar or any person authorised by the Central Government. Further, the Registrar or the Central Government can call for a copy of this register or any part thereof. However, members are not given any such right of getting copies of this register or extracts thereof.

The most important part of the legal requirements in connection with this register is that the nature and extent of any interest or right in or over any shares or debentures recorded in respect of a director in the said register shall, if he so needs, it should be indicated in the register. These provisions are applicable to a manager as they apply to directors.

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Entries in the register is authenticated by the secretary of the company or by any other person authorised by the Board for the purpose, by appending his signature to every entry. The register should be maintained permanently and should be kept in the custody of the secretary of the company or by any other person authorised by the Board for the purpose.

Register of investment, loan made, guarantee given or security provided to other body corporateTheregistershallbepreservedattheregisteredofficeofthecompanyandshallbeopentoinspectionatsuchofficeand extracts may be taken there from and copies thereof may be required by any member of the company in the same manner as in the case of register of members.

Register of renewed and duplicate certificatesUndertheCompanies(IssueofShareCertificates)Rules,1960,companiesarerequiredtomaintaintheaforesaidregister.Theregistershouldbekeptattheregisteredofficeofthecompany.Theregisterisnotopenforinspection.All entries in this register are supposed to be authenticated by the secretary or any other person authorised by the Board of directors.

The register should be maintained permanently and should be kept in the custody of the secretary of the company or by any other person authorised by the Board for the purpose.

Register of records and documents destroyed [Section 163 and the Companies (Preservation and Disposal of Records) Rules, 1966]The register is not open for examination. All entries made in the register shall be authenticated by the secretary or such other person as may be authorised by the Board for the purpose. Contravention of any of these rules shall bepunishablewithfinewhichmayextendtofivehundredrupees.Theregistershouldbekeptpermanentlyandshould be kept in the custody of the secretary of the company or by any other person authorised by the Board for the purpose.

Register of sweat equity shares [Section 79A and the Unlisted Companies]Thecompanyshallkeeparegisterofsweatequitysharesissuedundersection79AintheformspecifiedinRule5of the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.

The register should be open for inspection during the business hours of the company, subject to such reasonable restrictions as the company may impose by its articles or in general meeting so that not less than 2 hours in each working day of the company are allowed for inspection. Members can inspect the register without payment of any fee. Copies of the register can be claimed by any person who inspects the register.

Entries in the register is authenticated by the secretary of the company or by any other person authorised by the Board for the purpose, by appending his signature to each entry.

6.3 Non-Statutory RegistersBesides the above mentioned statutory registers, which every company is obligatory to keep, there are quite a few registerswhicharerequiredtobemaintainedforthesmooth,orderlyandefficientfunctioningofthecompany.These registers have been established over a long period of time on the basis of experience as per requirements of companies. These registers are given below:

Directors’ attendance bookA company must possess proof or evidence of the fact that at a particular Board meeting, the directors who were present, absent and who had sought leave of absence from the Board because of their inability to attend a meeting.

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Shareholders’/Proxies’ Attendance RegisterFor keeping proper record of the members attending every general meeting of a company, a register referred to •as―shareholders’attendanceregisterismaintained.The secretarial staff present at the venue of each general meeting of the company, take the signatures of the •members/proxies coming for attending the meeting, before they enter the meeting hall.Theregistershouldbekeptattheregisteredofficeofthecompany.•The register of Shareholders/proxies attendance in relation to a particular meeting should be open for inspection •toeverymemberentitledtovoteatthatmeeting,duringtheperiodbeginning24hoursbeforethetimefixedforthe commencement of the meeting and ending with the conclusion of the meeting.No person is entitled to copies of the register or any portion thereof.•Either the secretary of the company or any other person authorised by the Board, should be authenticated for •the entries in the register, by appending his signature to each entry.The register should be maintained for a period of 8 years from the date of the meeting and should be kept in the •custody of the secretary of the company or by any other person authorised by the Board for the purpose.

Register of documents executed under common sealSection 34 (2) of the Act provides that from the date of incorporation of a company, the subscribers to its memorandum shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up, as is mentioned in the Act.

Register of share applications and allotmentThis register is usually prepared by the registrar to the public issue of a company, who feeds in their computers, each and every piece of information relating to all the applications for shares, which are received by the company in response to the prospectus issued by it, during the entire process of public issue.

This register, when complete, is placed before the Board of directors of a company at its meeting which is convened and held for allotment of shares. The Board considers all the particulars entered in the register along with the share applications and other relevant records, and passes a resolution for allotment of shares giving a reference of the register in the resolution.

Register of investors’ complaintsEvery company should maintain a register of investor‘s complaints and enter therein the particulars of complaints •received from depositors and holders of securities of the company.The register should enclose the following particulars in respect of each complaint received: date of receipt of •complaint; nature of complaint; name of the person lodging the complaint; deposit receipt number or folio number/clientIDnumber;dateofinterimreply,ifany;dateonwhichcomplaintwasfullysatisfied;timetakenfor resolving the complaint.Entries in the register should be made at once in chronological order of date of receipt of the complaint.•Theregistershouldbekeptattheregisteredofficeofthecompanyor,wherethecompanyhasappointeda•RegistrarandTransferAgent(RTA),attheofficeofRTA.

Register of share transfer/transmissionsEverytimesharetransfers/transmissionsarereceivedintheofficeofacompanyorintheofficeoftheShareTransferAgents/RegistrarofaCompanies,theirdetailsareenteredinthisregisterandonspecificintervals,thisisplacedbefore the Board or a Committee of the Board looking after the share transfer/ transmission work, which is pursued alongwiththesharetransfer/transmissionapplicationsandtherelevantsharecertificates.Whentheregistrationoftransfer/transmission of the shares is approved by the Board or the Committee or Share Transfer Agent or Company Secretary if authorised by the Board of Directors, the register is initialled by the chairman of the meeting and the last page of the register is signed with date by the chairman of the Board/Committee or the person authorised in this regard.

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Register of transfer/transmission of debenturesEvery company that allots debentures should maintain a register of debenture transfer/transmission and enter therein particulars of every debenture transferred/ transmitted. The register should enclose the following particulars: transfer serial number; date of lodgement of transfer application; total number of debentures; consideration; transferor‘s nameandfolionumber;numberofdebentures;certificatenumber(s),distinctivenumbers;transferee’snameandfolio number, address, occupation, father’s/husband’s name; date of Board/committee resolution approving transfer; newcertificatenumber,ifany;dateofdispatchofthecertificate.

Dividend registerWheneveracompanypaysdividend,interimorfinal,thisregisterisused.Detailsofeverydividendareentered•in the register. This register is to be maintained as a permanent record.Remarkscolumnforinitialsoftheauthenticatingofficerofthecompany.•Entries in the register should be written within 7 working days of the date of payment of dividend.•Theregistershouldbepreservedattheregisteredofficeofthecompany.•The register is not open for inspection.•Entries in the register is be authenticated by the secretary of the company or by any other person authorised by •the Board for the purpose, by appending his signature thereto.

Register of power of attorney/probate/letter of administration/death certificate/succession certificateThis register is meant to register certain legal representations viz.,•

power of attorney executed by a member of the company on a non-judicial stamp paper of the appropriate �value as is required in the State wherein the same is executed in favour of another person authorising him to deal with the company on his behalf;probate,whichisadulycertifiedcopyoftheWillofadeceasedmemberofthecompany,andissenttothe �company by the legatee of the Will, with a request that the company to proceed on the basis of the contents of the probate in respect of the shares held by the deceased member;letter of administration is a term broadly applied to denote the authorisation issued in favour of a person �appointed by an authority of law to take charge of and manage the estate of another person. In the case of a company, this estate is the shares registered in the name of a member of the company. The holder of a letter of administration requests the company to register his authority in respect of the shares held by the registered member of the company; anddeathcertificateisadocumentissuedbytheRegistrarofBirthsandDeathswhichcertifiesthetime,date �andplaceofdeathofaperson.Theheirsofadeceasedmemberobtainsuchacertificateinordertohavethe shares registered in the name of the deceased member transmitted in their names.

On receipt of the above-mentioned documents by the company, their particulars are entered in the register kept for the purpose. A registration number is allocated to each such document, which is communicated to the person from whom such a request has been received, so that if on the basis of the same document a share transfer/transmission is lodged with the company in future and the person who has lodged the same, quotes the registration number of the document allotted to it by the company, he need not send the original document to the company again and again.

Register of dividend mandatesSection 206(1)(a) of the Companies Act, 1956, lays down that no dividend shall be paid by a company in respect of any share therein, except, inter alia, to the registered holder of such share or to his order or to his bankers.

Pursuant to the above provision, a member of a company may write to the company and request that the dividends on the shares, which are registered in his name, be paid to a particular person, whose name, address, specimen signature and other required particulars be communicated to the company. This request by a shareholder is known as dividend mandate.

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As and when such dividend mandates are received by a company, their particulars are entered in the register of dividend mandates and at the time of mailing of the dividend warrants, this register is referred to and the dividend warrants of the requesting members are mailed to their mandates.

Register of bank A/c particularsIn order to avoid fraudulent encashment of dividend/interest warrants the Bank account particulars i.e. the Bank A/c No. (saving/current A/c), name of the bank, Branch address and folio No. are being obtained from the shareholders/debenture holders/depositors. These particulars are incorporated on the warrant in addition to the name of payee. Such practice discourages fraudulent practice of encashing warrants by other than payees. The company has to keep and maintain this register in addition to the Register of mandate. These particulars are desirable to be incorporated in case of payment is to be made to mandatee. In case of mandatee, the bank A/c particulars of the mandatee are to be collected and incorporated in the dividend/interest warrant.

Register of electronic clearing serviceFor better services to and protecting interest of corporate investors, the Reserve Bank of India has introduced a new method of payment of dividend/ interest through Electronic Clearing Service (ECS). Under this system, the payee can collect dividend/interest directly through his/her bank account rather than receiving them through post. His/her bank account is directly credited through ECS and an advice thereof would be issued by paying company after the transaction is effected. Initially this mechanism covers each of the transactions up to Rs. 1,00,000 and is presently availableatsixteenselectedcentres.Thebenefitsofthisschemeare:

Instant credit to the investors bank A/c at no extra cost•Exposure to delay in postal service avoided•No loss in transit of the instrument avoids issue of duplicate instrument•Prompt credit of dividend/interest is assured•No chance of false encashment of instrument•

A company which provides such facility to its investors shall have to keep and maintain a separate register for the investors who opts this ECS mechanism. Its columns are the same which are given for the Register of Bank A/c Particulars.

Register of fixed assetsUnder the Companies Auditors Report Order, 2003 (CARO) the Auditors have to include a statement in their report which inter alia specify whether the company is maintaining proper records to show full particulars including quantitativedetailsandsituationoffixedassets.Hence,thisregisterisastatutoryregister.Eachcompanyshouldkeepandmaintainthisregister.Maintenanceofsuchregistershallhelpthemanagementtofixaccountabilityanddetect misuse, misappropriation and fraud about the assets of the company.

Register of form no. 24AA from directorsUnder Section 299 of the Companies Act 1956, every director of a company has to give a general notice in Form No. 24AA prescribed under the Companies (Central Government’s) General Rules and Forms 1956, to the Board of DirectorsoftheCompanytotheeffectthatheisadirectororamemberofaspecifiedbodycorporateorisamemberofaspecifiedfirmandistoberegardedasconcernedorinterestedincontractsorarrangementswiththem.Thisform is to be given initially at the time of appointment and also it is required to be renewed every year. This notice expiresattheendofthefinancialyearinwhichitisgiven.Itistoberenewedeveryyearbeforeitexpires.

Register of nominationUnder Section 109A of the Companies Act 1956, every holder of shares in, or holder of debentures, of a company may, at any time, nominate in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of his death. Under Rules 4CCC and 5D of the Companies (Central Government’s) General Rules and Forms, 1956, Form No. 2B has been prescribed.

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In view of the above, every company should keep and maintain a Register of Nominees for each class of shares, and debentures separately. Simultaneously, the details of the nominee should be recorded in the respective folio of the Register of Members and Register of Debenture holders.

The register should contain the following particulars in respect of each inspection: date and time of inspection; •name and address of the person who inspected the registers and records; particulars of registers and records inspected; copies, if any, taken; fees, if any, received; and signature of the person who inspected the registers and records.Entries in the register should be made at once.•Theregistershouldbekeptattheregisteredofficeofthecompany.•The register is closed for inspection.•Either the secretary of the company or any other person authorised by the Board, should be authenticated for •the entries in the register, by appending his signature to each entry.The register of should be preserved for a period of 8 years and should be kept in the custody of the secretary of •the company or by any other person authorised by the Board for the purpose.

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SummarySome of the statutory registers are required to be kept open by the company for inspection by directors, members, •creditors of the company and by other persons.Section 49 of the Act provides that the investments of a company must be held in its own name.•Entries in the register is authenticated by the Secretary of the company or by any other person authorised by •the Board for the purpose, by appending his signature to every entry.Register of deposits can be taken to be a part of books of accounts within the meaning of Section 209.•Entriesintheregisterofchargesshouldbewritteninchronologicalorderofcreationofthechargeandmodification•thereof.In addition to the aforesaid particulars the register of members should also be in conformity with the format as •prescribed under Rule 7 of the Companies Rules, 1960.Separate register should be maintained for every class of equity and preference shares.•Any alterations made in the register of members must be recorded in the index within 14 days.•Members, debenture holders and trustees of debenture holders can inspect the register and the index without •payment of any fee and any other person can inspect the register on payment of the requisite fee.AnnualReturn is perhaps themost important document required to befiled by every companywith the•Registrar.Every company must maintain minute’s books for recording the minutes of proceedings of all general meetings •of the shareholders.Entries relating to contract or arrangement requiring Board‘s approval must be made within seven days from •the date on which the contract or arrangement is approved by the Board.The timeallowed forfiling the returns is30daysand so is fornotificationof a change in themanagerial•personnel.Entries in the register is authenticated by the secretary of the company or by any other person authorised by the •Board for the purpose, by appending his signature to every entry.UndertheCompanies(IssueofShareCertificates)Rules,1960,companiesarerequiredtomaintaintheaforesaid•register.A registration number is allocated to each such document, which is communicated to the person from whom •such a request has been received.

ReferencesCompany Law• [Pdf] Available at: <http://www.icsi.in/Study%20Material%20Executive/CL.pdf> [Accessed 25 June 2013].Statutory registers [Online] Available at: <http://www.companylawclub.co.uk/topics/statutory_registers.shtml> •[Accessed 25 June 2013].The Green Register• [Video online] Available at : <https://www.youtube.com/watch?v=NJGBPoy7ZZc> [Accessed 4 July 2013].Company secretary • [Video online] Available at :<https://www.youtube.com/watch?v=NZixR9ID4O0> [Accessed 4 July 2013].Ang, R., and Chng, V., 2013. • Value Investing in Growth Companies. Wiley.Mason, R., 2006. • The Company Secretary’s Desktop Guide. 3rd ed., Thorogood.

Recommended ReadingAshton, H., 2008. • The Company Secretary’s Handbook. 5th ed., Kogan Page Ltd.Hall, L., and Thom, G. M., 1999. • Company Secretarial Practice. 7th ed., Macdonald & Evans Ltd.Williams, H. M., 2001. • The Private Company Secretary’s Manual. 6th ed., Management Books 2000 Ltd.

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Self AssessmentWhich of the following is not one of the types of statutory books?1.

Register of deposita. Register of cash receiptb. Register of securitiesc. Register of chargesd.

Entries in the register is authenticated by the _________________ of the company or by any other person 2. authorised by the Board for this purpose, by appending his signature to each entry.

membera. directorb. boardc. secretaryd.

The register of securities should be kept for a minimum period of _____ years from the date of completion of 3. buy-back.

10a. 5b. 6c. 8d.

Which of the following statements is false?4. Every company having more than 50 members must maintain an index of members.a. Any alterations made in the register of members must be recorded in the index within 30 days.b. In case of joint holding, the particulars of each joint holder should be kept in the register.c. Copies of the register can be asked by any person who inspects the register.d.

Thetimeallowedforfilingthereturnsis_________daysandsoisfornotificationofachangeinthemanagerial5. personnel.

30a. 12b. 7c. 15d.

Which of the following statements is false?6. Every company that allots debentures should maintain a register of debenture transfer and enter therein a. particulars of every debenture transferred/ transmitted.Wheneveracompanypaysdividend,interimorfinal,registerofdebentureisused.b. DeathcertificateisadocumentissuedbytheRegistrarofBirthsandDeathswhichcertifiesthetime,datec. and place of death of a person.For better services to and protecting interest of corporate investors, the Reserve Bank of India has introduced d. a new method of payment of dividend/ interest through ECS.

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Under which of the following system the payee can collect dividend/interest directly through his/her bank 7. account rather than receiving them through post?

CAROa. ECSb. RTAc. MCAd.

WhichofthefollowingisnotoneofthebenefitsofECS?8. Instant credit to the investors bank A/c at no extra costa. Exposure to delay in postal service avoidedb. Prompt credit of dividend/interest is assuredc. Chance of false encashment of instrumentd.

Section _________ (2) of the Act provides that from the date of incorporation of a company, the subscribers to 9. its memorandum shall be a body corporate by the name contained in the memorandum.

5a. 34b. 307c. 303d.

Which of the following is the only register required to be signed by all the directors present at the Board 10. meeting?

Register of particulars of contractsa. Register of postal ballotb. Registerandindexofbeneficialownersc. Register of debenture holderd.

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Chapter VII

Producer Companies

Aim

The aim of this chapter is to:

definetheobjectsofproducercompany•

elucidate the formation of producer company•

explain articles of association•

Objectives

The objectives of this chapter are to:

explain voting rights of members•

explicate memorandum•

elucidate the conversion of inter-state co-operative societies to producer companies•

Learning outcome

At the end of this chapter, you will be able to:

understand the role of director•

identify the powers and functions of board•

recognise share capital •

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7.1 IntroductionTheCompanies(Amendment)Act,2002videNotificationNo.S.O.135(E)dated5.02.02hasinsertedPartIX-Ato the Companies Act, 1956 and introduced the concept of Producer Companies. Rural producers have been at a potential disadvantage given their generally limited assets, resources, education and access to advanced technology. In the present scenario, there is an emerging need of changing the terms of trade between urban and rural, labour andindustry,financeandcommerce.Therefore,ifcooperativeenterprisesweretocontinuetoserveruralproducers,they needed an alternative to the institutional form presently available under law. The Companies (Amendment) Act, 2002 was a step in this direction.

The newly inserted provision, by virtue of Companies (Amendment) Act, 2002 not only provides an opportunity to the cooperative sector to corporatise itself but also opens up new avenues for them. The conversion to producer companies will enable them to invite greater investments and modernise themselves. They can take advantage of theprovisionstoreinventthemselves,andfunctionmoreefficiently.Accordingly,itisspecifiedthataproducershall mean any person engaged in any activity connected with or relatable to any primary produce. The amendment also seeks to provide a comprehensive meaning to primary produce which shall encompass produce of farmers, arising from agriculture (including animal husbandry, horticulture, etc.) produce of persons engaged in handloom, handicraft, any product resulting from any of the above activities or from an ancillary activity and any activity which is intended to increase the production or quality of anything referred above.

The Amendment Act also includes the insertion of the provisions which enables the conversion of an existing co-operativesocietyintoacompanyasalsotheincorporationofaProducerCompany.Thispartcontainsspecificprovisions relating to incorporation, management, meetings, share capital etc. of Producer Companies.

7.2 Objects of Producer CompanyAProducercompanymeansabodycorporate,havingobjectsoractivitiesasspecifiedinSection581Bandregisteredas Producer Company. Hence, the objectives for which Producer Companies may be formed are laid down in Section 581B. These include inter alia, production, marketing, export of primary produce of members, processing, packaging of produce of its members; manufacture, sale of machinery etc. mainly to its members, generation and distribution of power, insurance of producers/primary produce, rendering technical/consultancy services, promoting mutual assistance,welfaremeasuresandanyotheractivityforthebenefitofmembers.

However, in terms of Section 581B of the Companies Act, 1956, the objects of the Producer Company shall relate to all or any of the following matters:

Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce a. oftheMembersorimportofgoodsorservicesfortheirbenefit;providedthattheProducerCompanymaycarryonanyoftheactivitiesspecifiedinthisclauseeitherbyitselforthroughotherinstitution;Processing including preserving, drying, distilling, brewing, venting canning and packaging of produce of its b. Members;Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members;c. Providing education on the mutual assistance principles to its Members and others;d. Rendering technical services, consultancy services, training, research and development and all other activities e. for the promotion of the interests of its Members;Generation, transmission and distribution of power, revitalisation of land and water resources, their use, f. conservation and communications relatable to primary produce;Insurance of producers or their primary produce;g. Promoting techniques of mutuality and mutual assistance;h. WelfaremeasuresorfacilitiesforthebenefitofMembersasmaybedecidedbytheBoard;i. Any other activity, ancillary or incidental to any of the activities referred to in Clauses (a) to (i) or other j. activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner

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Financingofprocurement,processing,marketingorotheractivitiesspecifiedinClauses(a)to(j)whichincludek. extendingofcreditfacilitiesoranyotherfinancialservicestoitsMembers.

Every Producer Company shall deal primarily with the produce of its active members for carrying out any of its specifiedobjects.Thismeans there isanobligationon theproducercompany todealprimarilywith theactivemembersinconductingitsactivities.TheexpressionactivememberhasbeendefinedinClause(a)ofSection581Atomeanamemberwhofulfilsthequantumandperiodofpatronageoftheproducercompanyasmayberequiredbythe articles of the producer company. The patronage means the use of services offered by the Producer Company to its members by participation in its business activities.

7.3 Formation of Producer Company and its RegistrationSection 581C of the Act provides that, any ten or more individuals, each of them being a producer or two or more producer institutions or a combination of ten or more individuals and producer institutions, desirous of forming aproducercompanymayformanincorporatedcompanyassuchhavingitsobjects,specifiedinSection581Basproducer company under this Act after complying with the requirements and the provisions of the Act in respect of registration. Producer institution means a Producer Company or any other institution having only producer or producers or Producer Company or Producer Companies as its member whether incorporated or not, having any of the objects referred to in Section 581B and which agrees to make use of the services of the Producer Company or Producer Companies as provided in its articles.

TheRegistraronbeingsatisfiedthatallrequirementsrelatingtoregistrationandincidentalmattershavebeencompliedwithshallregisterthememorandum,articlesandotherdocumentsandissueacertificateofincorporationwithin30days of the receipt of the documents for registration. On registration, the Producer Company shall be deemed to be a private company limited by shares without any limit on the number of members. The direct costs linked with the promotion and registration of the company may be reimbursed by the Producer Company.

7.3.1 Membership and Voting Rights of Members of Producer CompanySection 581D of the Act provides that unless the membership of the Producer Company consists of a Producer institution only, every member shall have a single vote irrespective of the number of shares held. In case, where the membership consists solely of Producer Institutions, the voting rights of such Producer institutions shall be determinedontheirpreviousyear’sparticipationinthebusinessofthecompany.However,duringthefirstyearofits regulation, the voting rights in a Producer Company shall be determined on the basis of shareholding by producer institutions. Where the membership of Producer Company consists of a combination of individuals and Producer Institutions, every member shall exercise a single vote. The Articles may however, authorise the Producer Company to restrict the voting rights to active members only. A person shall become a member of that Producer Company if hedonothaveanybusinessinterestwhichconflictswiththebusinessofProducerCompanyandifsubsequentlyamemberacquiresanybusinessinterestwhichisinconflictwiththebusinessoftheProducerCompany,heshallcease to be a member.

7.3.2 Benefits to MembersSection 581E states that, initially every member shall receive only such value of the produce or products pooled and supplied as is determined by the Board of Producer Company and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares. Every such member shall be entitled to receive a limited return and may be allotted bonus shares. Withheld price, for this purpose, means part of the price due and payable for goods supplied by any member to the Producer Company, and as withheld by the Producer Company for payment on a subsequent date.

Patronage bonus may be disbursed proportionately, if any, surplus remains after making provision for limited return and reserves. Patronage bonus refers to the payment by Producer Company out of its surplus income to the members in proportion to their respective patronage.

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The approval of Board of directors is necessary for disbursing withheld price whereas for disbursing the patronage bonus, either in cash or by way of allotment of equity shares or both, the approval of members at the general meeting is required.

7.4 Memorandum of Association and Articles of AssociationThe Memorandum of Association and the Articles of Association of the Producer Company, duly signed by the subscribers are required tobepresented to theRegistrarof the statewhere theCompany’s registeredoffice isproposed to be set up. The Memorandum and Articles shall contain the disclosures as provided under the provisions of Sections 581F and 581G respectively and are as under:

7.4.1 Contents of Memorandum of Producer CompanyIn terms of the provisions of Section 581F, the Memorandum of Association of every Producer Company shall state the following:

the name of the company with “Producer Company Limited” as the last words of the name of such Company;a. theStateinwhichtheregisteredofficeoftheProducerCompanyistosituate;b. themainobjectsoftheProducerCompanyshallbeoneormoreoftheobjectsspecifiedinSection581B;c. the names and addresses of the persons who have subscribed to the memorandum;d. the amount of share capital with which the Producer Company is to be registered and division thereof into e. sharesofafixedamount;thenames,addressesandoccupationsofthesubscribersbeingproducers,whoshallactasthefirstdirectorsinf. accordance with Sub-section (2) of Section 581J;that the liability of its members is limited;g. opposite to the subscriber’s name the number of shares each subscriber takesh. provided that no subscriber shall take less than one share;i. incasetheobjectsoftheProducerCompanyarenotconfinedtooneState,theStatestowhoseterritoriesthej. objects extend.

7.4.2 Contents of Articles of Association of Producer CompanyThe contents, as per Section 581G, of the Articles of a Producer Company shall contain Mutual Assistance Principles and other provisions, which are as under:

Mutual Assistance PrinciplesThe articles shall contain the following mutual assistance principles:

the membership shall be voluntary and available to all eligible persons who, can participate or avail of the a. facilities or services of the Producer Company, and are willing to accept the duties of membership;each Member shall, save as otherwise provided in Part IX of the Act, have only a single vote irrespective of b. the share holding;the Producer Company shall be administered by a Board consisting of persons elected or appointed as directors c. in the manner consistent with the provisions of this Part and the Board shall be accountable to the Members;save as provided in this Part, there shall be limited return on share capital;d. the surplus arising out of the operations of the Producer Company shall be distributed in an equitable manner e. by:

providing for the development of the business of the Producer Company;i. providing for common facilities; andii. distributing amongst the Members, as may be admissible in proportion to their respective participation in iii. the business;

f. provision shall be made for the education of Members, employees and others, on the principles of mutuality and techniques of mutual assistance;

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g. the Producer Company shall actively co-operate with other Producer Companies (and other organisations following similar principles) at local, national or international level so as to best serve the interest of their Members and the communities it purports to serve.

7.4.3 Other Provisions or Contents of Articles of Producer CompanyThe Articles shall also contain the following provisions, namely:

thequalificationsformembership,theconditionsforcontinuanceorcancellationofmembershipandthea. terms, conditions and procedure for transfer of shares;the manner of ascertaining the patronage and voting right based on patronage;b. subject to the provisions contained in Sub-section (1) of Section 581N, the manner of constitution of the c. Board, its powers and duties, the minimum and maximum number of directors, manner of election and appointmentofdirectorsandretirementbyrotation,qualificationsforbeingelectedorcontinuanceassuchandthetermsofofficeofthesaiddirectors,theirpowersandduties,conditionsforelectionorco-optionofdirectors,methodofremovalofdirectorsandthefillingupofvacanciesontheBoard,andthemannerandthe terms of appointment of the Chief Executive;theelectionoftheChairman,termofofficeofdirectorsandtheChairman,mannerofvotingatthegenerald. or special meetings of Members, procedure for voting by directors at meetings of the Board, powers of the Chairman and the circumstances under which the Chairman may exercise a casting vote;the circumstances under which, and the manner in which, the withheld price is to be determined and e. distributed;the manner of disbursement of patronage bonus in cash or by issue of equity shares, or both;f. the contribution to be shared and related matters referred to in Section 581Z(I)(2);g. the matters relating to issue of bonus shares out of general reserves as set out in Section 581ZJ;h. the basis and manner of allotment of equity shares of the Producer Company in lieu of the whole or part of i. the sale proceeds of produce or products supplied by the Members;the amount of reserves, sources from which funds may be raised, limitation on raising of funds, restriction j. on the use of such funds and the extent of debt that may be contracted and the conditions thereof;the credit, loans or advances which may be granted to a Member and the conditions for the grant of the k. same;the right of any Member to obtain information relating to general business of the company;l. the basis and manner of distribution and disposal of funds available after meeting liabilities in the event of m. dissolution or liquidation of the Producer Company;the authorisation for division, amalgamation, merger, creation of subsidiaries and the entering into joint n. ventures and other matters connected therewith;laying of the memorandum and articles of the Producer Company before a special general meeting to be o. held within ninety days of its registration;any other provision, which the Members may, by special resolution recommend to be included in articles.p.

Amendment to memorandum and articlesAmendment in the provisions/clauses of the Memorandum can be done by way of passing a Special Resolution as per Section 581H, whereas, the amendment in the Articles is required to be proposed by not less than two-third of the elected directors or by not less than one-third of the members and adopted by passing a Special Resolution in the general meeting under Section 581-I.

AcopyoftheamendedMemorandumorArticlesalongwithadulycertifiedcopyofSpecialResolutionthereofaretobefiledwiththeRegistrarofCompanieswithinthirtydaysfromthedateofitsadoptionatthegeneralmeeting.

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7.5 Conversion of Inter-State Co-Operative Societies to Producer CompaniesAnInter-StateCooperativeSocietymeansaMulti-StateCooperativeSocietyasdefinedinSection3(p)ofMulti-State Cooperative Societies Act, 2002 and includes any cooperative society registered under any other law in force and which has after its formation, extended any of its objects to more than one State.

Section581JprovidesthatanyInter-StateCooperativeSocietywhoseobjectsarenotconfinedtoonestatemaysubmit an application together with the prescribed documents to the Registrar for registration as Producer Company. TheRegistraronbeingsatisfied,thatalltherequirementsrelatingtoregistrationhavebeencompliedwith,shallwithin30daysofthereceiptofapplication,issueacertificateofincorporationandthewords“ProducerCompanyLimited” shall form part of its name to explain its identity.

Any Inter-State Cooperative Society willing to register itself as a Producer Company shall submit an application to ROC along with following enclosures and documents:

a copy of the Special Resolution passed with 2/3rd majority of the members;•a statement showing names, addresses and occupation of the directors and the chief executive;•a list of the members;•a statement which indicates that the Inter-State Cooperative Society is engaged in any one or more of the objects •specifiedinSection581-B;a declaration made by two or more directors certifying that the particulars given as per Para (1) to (4) above •are correct.

Upon registration as a producer company, the ROCs who register the company shall immediately intimate the Registrar with whom the Inter-State Cooperative Society was earlier registered, for appropriate deletion of the society from its register. The Inter-State Cooperative Society shall, upon registration stand transformed into a Producer Company, and shall be governed by the provisions of Part IX-A of the Companies Act, 1956.

7.6 Vesting of Undertaking in Producer CompanySection 581L provides that all properties, assets, movable or immovable, and all rights, debts, liabilities, interests, privileges and obligations of the Inter-State Cooperative Society shall vest in the Producer Company with effect from the transformation/registration date. Similarly all sums of money due to Inter-State Cooperative Society immediately before the transformation date shall be deemed to be the dues due to the Producer Company. Every organisation managed by the erstwhile cooperative society, shall henceforth, be managed by the so incorporated Producer Company.

Everyorganisationgettingfinancial,managerialortechnicalassistancefromtheInter-StateCooperativeSocietybefore the transformation date may continue to get such assistance by the Producer Company. Any pending suit, arbitration, appeal or other legal proceeding, of whatever nature, by or against, the Inter-State Cooperative Society on transformation date may be continued, prosecuted and enforced by or against the Producer Company.

Allfiscalandotherconcessions,licences,benefits,privilegesandexemptionsgrantedtotheInter-StateCo-operativeSociety in connection with its affairs and business of the Inter-State Cooperative Society under any law for the time being in force shall be deemed to have been granted from transformation date to the Producer Company. [Section 581M]

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7.7 Provisions of Inter-State Cooperative SocietyAs per Section 581N all directors in the Inter-State Cooperative Society before its incorporation as Producer Company, shallcontinuetobeinofficeforaperiodofoneyearfromthedateoftransformation.

Everyotherofficeroremployeeof sucha society (other thanadirector, chairmanormanagingdirector) shallcontinuetoholdofficeinthesoformedProducerCompanyforthesametenure,atthesameremuneration,termsand conditions as hewouldhaveheld in the Inter-StateCo-operativeSociety.Anyofficer or employeeof theearlier society opting not to remain in the employment of the newly formed Producer Company shall be deemed to haveresigned.Officersandemployeeswhohavebeensotransferredfromtheirservicesshallnotbeprovidedanycompensation. Similarly no compensation shall be provided to any director, chairman or managing director of the societyonaccountofprematureterminationoftheircontractwiththesociety.Retiredofficersandemployeesoftheco-operativesocietyshallcontinuetoreceivethesamebenefitsorrightsfromtheProducerCompany.

7.8 DirectorsSection581Oprovidesthat,everyProducerCompanyshallhaveminimumfiveandnotmorethanfifteendirectors.Provided that in the case of an Inter-State Cooperative Society as a Producer Company, such company may have morethanfifteendirectorsforaperiodofoneyearfromthedateofitsincorporationasaProducerCompany.

The subscribers of the Memorandum and Articles may designate or nominate therein, the Board of directors consisting ofnotlessthanfive,whoshallgoverntheaffairsofProducerCompanyuntildirectorsareelectedinaccordancewiththe provisions of Section 581P(2). However, such designation shall remain effective for a period of 90 days only.

The election of directors shall be conducted within a period of ninety days of registration of Producer Company. However, in the case of an Inter-State Cooperative Society, which is registered as a Producer Company, election ofdirectorsshouldbeconductedwithinaperiodofthreehundredandsixty-fivedays.Adirectorshallholdofficeassuchfornotlessthanoneyearbutnotexceedingfiveyearsandeverydirectorwhoretiresshallbeeligibleforre-appointment.ThetenureofsuchdirectorsshallnotexceedsuchperiodasmaybespecifiedintheArticles.

7.8.1 Vacation of Office by DirectorsTheofficeofdirectorofaProducerCompanyshallbecomevacantunderthefollowingcircumstancesashavebeenprovided in Section 581Q of the Act viz.:(a) if he is convicted by a court of any offence involving moral turpitude and sentenced in respect thereto with

imprisonment for not less than six months;(b) if the Producer Company, in which he is a director, has made a default in repayment of any advances or loans

taken from any company or institution or any other person and such default continues for ninety days;(c) if he has made a default in repayment of any advances or loans taken from the Producer Company in which he

is a director;(d) if the Producer Company, in which he is a director: (i)hasnotfiledtheannualaccountsandannualreturnforanycontinuousthreefinancialyearscommencing

on or after the 1st day of April, 2002; or (ii) has failed to, repay its deposit or withheld price or patronage bonus or interest thereon on due date, or

pay dividend and such failure continues for one year or more;(e)ifdefaultismadeinholdingelectionfortheofficeofdirector,intheProducercompanyinwhichheisadirector,

in accordance with the provisions of the Companies Act and its Articles;(f) if the annual general meeting or extraordinary general meeting of the Producer Company, in which he is a director,

is not called in accordance with the provisions of the Act except due to natural calamity or such other reasons.

Theaboveprovisionsofvacationoftheofficeofadirector,shallalso,applytothedirectorofthatProducerInstitution,which is a member of such Producer Company.

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7.8.2 Powers and Functions of BoardThe Board of directors of a Producer Company shall exercise all such powers and do all such acts and things, as a Producer Company is authorised so to do. [Section 581R(1)]

However, in terms of the provisions of Section 581R(2), the directors may exercise the following powers without prejudice to the generality of the foregoing powers:(a) determination of the dividend payable;(b) determination of the quantum of withheld price and recommend patronage to be approved at general meeting;(c) admission of new Members;(d)pursueandformulatetheorganisationalpolicy,objectives,establishspecificlong-termandannualobjectives,

andapprovecorporatestrategiesandfinancialplans;(e)appointmentofaChiefExecutiveandsuchotherofficersoftheProducerCompany,asmaybespecifiedinthe

Articles;(f)exercisesuperintendence,directionandcontroloverChiefExecutiveandotherofficersappointedbyit;(g) cause proper books of account to be maintained; prepare annual accounts to be placed before the annual general

meetingwiththeauditor’sreportandtherepliesonqualifications,ifany,madebytheauditors;(h) acquisition or disposal of property of the Producer Company in its ordinary course of business;(i) investment of the funds of the Producer Company in the ordinary course of its business;(j) sanction any loan or advance, in connection with the business activities of the Producer Company to any Member,

not being a director or his relative;(k) take such other measures or do such other acts as may be required in the discharge of its functions or exercise

of its powers.

All the above powers can be exercised only by means of a resolution passed by the Board at its meeting on behalf of the Producer Company.

Section 581S states that the following powers shall be exercised by the Board of directors on behalf of the company only by means of passing of resolutions at the annual general meeting of the company:(a) approval of budget and adoption of annual accounts;(b) approval of patronage bonus;(c) issue of bonus shares;(d) declaration of limited return and decision on the distribution of patronage;(e) specify the conditions and limits of loans that may be given by the Board to any director; and(f) approval of any transaction of the nature as is to be reserved in the Articles for approval by the Members.

7.8.3 Liability of DirectorsSection 581T, provides that anything done by the directors, whether by way of voting on a resolution or approving by any other means, anything, in contravention of the provisions of this Act or any other law for the time being in force, or its Articles, shall make them jointly and severally liable towards the Producer Company to make good the loss or damage suffered by such company.

Whereasaresultoftheabove,suchdirectorhasmadeanyprofit,theProducerCompanyshallhavetherighttorecoveranamountequaltosaidprofitsfromsuchdirector.Theliabilitysoimposedshallbeinadditiontoandnotin derogation of a liability imposed under this Act or any other law for the time being in force.

7.8.4 Committee of DirectorsSection581UstatesthattheBoardmayconstitutesuchnumberofcommitteesasitmaydeemfitforthepurposesofassistingtheBoardinefficientdischargeofitsfunctions.However,theBoardofdirectorsshallnotdelegateanyof its powers or assign the powers of the Chief Executive, to any committee of directors.

ThecommitteeoftheBoardmay,withtheapprovaloftheBoard,co-optsuchnumberofpersons,asitdeemfit,asthe members of the committee. Provided that the Chief Executive appointed under Section 581W or a director of Producer Committee shall be a member of such committee. [Section 581U (2)]

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Every such committee shall function under general superintendence, direction and control of the Board as may be specified.Furtherthefeesandallowancestobepaidtothemembersofthecommitteeandthetenureofthecommitteeshall be such as may be determined by the Board. The minutes of every Committee meeting shall be placed before the next Board meeting.

7.9 Meetings of the Board and QuorumAs per Section 581V the Board meeting of a Producer Company shall be held at least once in every three months and at least four such meetings shall be held in every year. The Chief Executive shall give notice to every director for the time being in India, and at his usual address in India to every other director at least seven days prior to the date of meeting. However, a Board meeting may also be called at a shorter notice after recording reasons thereof in writing.

The quorum for the meeting shall be one-third of the total strength of directors, subject to a minimum of three.Unless otherwise provided in the Articles, such sitting fees and allowances may be paid to the directors attending the meetings, as decided by the members.

Chief executive and his functionsAs per Section 581W, a full time Chief Executive shall be appointed by the Board by whatever name called who, shallnotbeamemberofthecompany.Heshallbetheex-officiodirector,andshallnotretirebyrotation.Thequalifications,experienceand the termsandconditionsshallbesuchasmaybedeterminedby theBoard.Thechief executive, who shall be entrusted with substantial powers of the management, shall manage the affairs of the Producer Company but subject to the superintendence, direction and control of the Board and shall be accountable to the Board for the performance of the Producer Company.

The various functions that may be discharged by a chief executive may inter alia include managing the day to day affairs of the company, maintaining proper books of accounts, furnishing members with periodic information, assisting the Board with respect to legal and regulatory matters making appointments and discharge of such other functions as may be delegated by the Board.

Secretary of Producer CompanySection581XoftheActprovidesthateveryProducerCompanyhavinganaverageannualturnoverexceedingfivecrorerupeesineachofthreefinancialyearsshallappointamemberoftheInstituteofCompanySecretariesofIndiaas a whole-time Secretary of the company.

IfaProducerCompanyfailstoappointCompanySecretary,thecompanyandeveryofficerofthecompanywhoisindefault,shallbepunishablewithfinewhichmayextendtofivehundredrupeesforeverydayduringwhichthedefaultcontinues. However, in any proceedings against a person in respect of an offence for failure to appoint a Company Secretary, it shall be a defence to prove that all reasonable efforts were taken to comply with the provisions or that thefinancialpositionofthecompanywassuchthatitwasbeyonditscapacitytoappointawholetimesecretary.

Quorum of the general meetingSection 581Y of the Act provides that unless Articles of Association require a larger number, one-fourth of the total membership shall constitute the quorum at a general meeting.

Voting rightsSection 581Z states that except as provided in Section 581D(1) (regarding voting rights of individual members and Producer Institutions), and 581D(3) (regarding voting rights to active members), every member of the Producer Company shall have one vote irrespective of the number of shares hold by him. In the case of equality of votes, the Chairman or the person presiding over the meeting shall have a casting vote, except in the matter of election of the Chairman.

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7.9.1 Annual General Meetings [Section 581ZA]EveryProducerCompanyshallholditsfirstAnnualGeneralMeeting(AGM)withinaperiodofninetydaysfromthedateofitsincorporation.NotmorethanfifteenmonthsshallelapsebetweenthedateofoneAGM(theAGMheldafterthefirstAGM)andthatofthenextAGM.TheRegistrarmay,foranyspecialreason,permittheextensionoftimeforholdingofanAGM(notbeingthefirstAGM)byaperiodnotexceedingthreemonths.Noticeinwritingindicating date, time and place of the meeting shall be given at least fourteen days before the meeting and shall also be accompanied by the following documents which shall be sent to every member and auditor of the company:(a) agenda of the meeting;(b) minutes of the previous annual general meeting or extraordinary general meeting;(c)namesandqualificationsofcandidatesforelectionofdirectors;(d)auditedbalancesheet,profitandlossaccountandBoard’sreportofthecompanyinrespectofspecifieddisclosures

and its subsidiaries, if any;(e) draft resolution for appointment of auditors;(f) draft resolution for proposed amendment, if any, in memorandum or articles.

The Annual General Meeting shall be held during business hours, on a day not being a public holiday at the registeredofficeofthecompanyoratanyotherplacewithinthecity,townorvillagewheretheregisteredofficeofthe company is situated.

Unless the Articles provide for a larger number, the quorum of the general meeting shall be one-fourth of the total number of members. Within sixty days from the date of the annual general meeting, the company is required to filetheproceedingsofthemeeting,theauditedbalancesheet,theprofitandlossaccountandtheDirector’sreporttogetherwiththefilingfeeswiththeRegistrar.Ontherequisitionmadeinwritinganddulysignedbynotlessthanone-third of the members, the Board of directors shall call an EGM in accordance with the provisions of Section 169 and Section 186 of this Act. Where a Producer Company is formed by Producer Institutions then such Institutions shall be represented in the general body through the Chairman or the Chief Executive thereof who shall be competent to act on its behalf, except in case of default under Section 581Q(1).

7.10 Share CapitalAs per Section 581ZB of the Act, a Producer Company’s share capital shall consist of equity shares only and the shares held by members shall be in proportion to the patronage of that company. However, in terms of Section 581ZC, the Producers who are active members may, if so provided in the articles, have special rights and the Producer Company may issue appropriate instruments to them in respect of such special rights.

Transferability of shares and attendant rightsA member of the Producer Company may, transfer whole or part of his shares along with any special rights, to an active member at par value only but after obtaining the previous approval of the Board under Section 581ZD. Special rights for this purpose means any rights relating to supply of additional produce by the active member or any other rights relating to his produce conferred on him by the Board. Within three months from the date of his becoming a member, such person shall nominate his nominee, to whom the shares shall vest in the event of his death.

Surrender of sharesIftheBoardofaProducerCompanyissatisfiedthatanymemberhasceasedtobeaprimarymember,orhehasfailedtoretainhisqualifications,necessarytoenablehimtoremainthememberoftheProducerCompany,thenBoardmay direct him to surrender his shares to the company together with Special Rights, if any, attached therewith, at the value determined by the Board. Alternatively, the Board may direct the issuance of a notice to such member. [Section 581ZD(5)]

Books of accountEveryproducercompanyshallkeepatitsregisteredofficeproperbooksofaccountwithrespecttomattersspecifiedunderSection581ZEoftheAct.ThebalancesheetandprofitandlossaccountoftheProducerCompanyshallbeprepared in accordance with Section 211.

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ThemattersspecifiedunderSection581ZDareasunder:1. Sums of money received and expended.2. Sales and Purchase of goods.3. Instruments of liability executed by or on behalf of the company.4. Assets and liabilities.5. Utilisation of materials or labour or other items of cost.

As per Section 581ZF of the Act, every Producer Company shall have internal audit of its accounts at such intervals insuchmannerasmaybespecifiedinitsArticles,byacharteredaccountant.Section581ZHprovidesthataProducerCompany, by passing a special resolution, may make donation for promoting social and economic welfare and mutual assistanceprinciplesinafinancialyeartotheextentofthreepercentofthenetprofitofthecompanyintheprecedingfinancialyear.However,aProducerCompanyisstrictlyprohibitedfrommakingdonationforpoliticalpurposes.

7.11 General and Other ReservesInadditiontootherreserves,theProducerCompanyshallmaintaingeneralreserveineveryfinancialyearasstipulatedby Section 581ZI. The Department of Company Affairs has issued Producer Companies (General Reserve) Rules, 2003 vide F.No. 1/1/2003-CL.V dated 7.8.2003, which shall be applicable to the companies formed and registered under Section 581C of the Companies Act, 1956.

TheseRuleshavedefineda“co-operativesociety”tomeanasocietyregisteredordeemedtoberegisteredunderany law relating to co-operative societies for the time being in force in any State. A Producer Company shall make investments from and out of its general reserves in the following manner, maintained by it in terms of the provisions of Section 581ZI of the Act:(a)inapprovedsecurities,fixeddeposits,unitsandbondsissuedbytheCentralorStateGovernmentsorCooperative

Societies or scheduled bank, or(b) in a cooperative bank, State Cooperative Bank, Cooperative land development bank or Central cooperative

bank, or(c) with any other scheduled bank, or(d)inanyofthesecuritiesspecifiedinSection20oftheIndianTrustAct,1882,or(e) in the shares or securities of any other multi-state cooperative society or any cooperative society, or(f)intheshares,securitiesorassetsofapublicfinancialinstitutionsspecifiedunderSection4AoftheCompanies

Act, 1956.

Ministry ofCompanyAffairs has videNotificationNo.GSR146(E) dated 9.03.2006 amended theProcedureCompanies (General Reserves) Rules, 2003 to provide that investments may be made in any one or in combination of the above. A Producer company may, after

the recommendation of the Board, and•passing of a resolution in General Meeting,•

Issue bonus shares to its members in proportion to the shares held by them, on the date of the issuance of such shares, by capitalising the amounts from its general reserves. [Section 581ZJ]. The Board may, subject to provisions made intheArticlesofthecompany,providefinancialassistancetothemembers.However,anyloanoradvancetoanydirector or his relative shall be granted only after the approval of members by a resolution.

7.12 Investment in other Companies; Formation of Subsidiaries etc. [Section 581ZL]TheProducerCompanymayinvestitsgeneralreservesinapprovedsecurities,fixeddeposit,units;bondsissuedby the government or a cooperative or scheduled bank or in such other mode as may be prescribed. It may, for the promotion of its objectives also acquire shares of other Producer Companies. However, special resolution is required to be passed for acquisition of shares of any other Producer Company or entering into agreement for the formation of subsidiaries or joint venture.

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Investment in shares of any other company other than Producer Company cannot exceed thirty per cent of the aggregate of its paid-up capital and free reserves, except where a special resolution has been passed and the prior approval of the Central Government has been obtained. However, such investments should be in consistence with the objects of the Producer Company. For disposal of any investments, special resolution shall be passed. A register containingprescribedparticularsofallinvestmentshallbekeptintheregisteredofficeandshallbeopentothemembers of the company for inspection and taking extracts there from.

Section 581ZN provides comprehensive provisions for the schemes of amalgamation, merger or division etc. of Producer Company.

A Producer Company may, by a resolution passed at its general meeting:(a) transfer its assets and liabilities, wholly or partly, to any other ProduceCompany,foranyoftheobjectivesspecifiedinSection581BifotherProducerCompanysoagreesbypassingaresolution at its general meeting;(b) divide itself into two or more Producer Companies;

Also, two or more Producer Companies may, by a resolution passed at general or special meetings of its members, decide to:(a) amalgamate and form a new Producer Company; or(b) merge one Producer Company with another Producer Company.

The resolutions referred to above shall be passed by not less than two-thirds of its members present and voting. However, prior to such resolution a copy of proposed resolution shall be forwarded to all the members and creditors for their consent.

Section 581ZN(5) makes provisions to satisfy the claims of dissenting members and creditors of such amalgamating Producer Companies.

Striking off name of producer companySection 581ZP states that the Registrar can after making an inquiry strike off the name of a company where the company:(i) has failed to commence its business within one year of its registration;(ii) ceases to transact business;(iii) is no longer carrying on its objectives;(iv) is not following the mutual assistance principles.

The Registrar shall, before passing the order issue a show cause notice to the company with a copy to the directors and give a reasonable opportunity of being heard. Any member of the Producer Company aggrieved by an order may appeal to CLB within sixty days of passing an order.

Re-conversion of Producer Company to inter-state cooperative societyAny Producer Company may make an application, after a resolution has been passed in the general meeting by not less than two-third of its members present and voting or on request by its creditors representing three-fourth of its value of creditors, to the High Court for its re-conversion to Inter-State Cooperative Society, and follow the procedure as laid down in Section 581ZS of the Act.

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SummaryAProducercompanymeansabodycorporate,havingobjectsoractivitiesasspecifiedinSection581Band•registered as Producer Company.The patronage means the use of services offered by the Producer Company to its members by participation in •its business activities.Producer institution means a Producer Company or any other institution having only producer or Producer •Company as its member whether incorporated or not, having any of the objects referred to in Section 581B.On registration, the Producer Company shall be deemed to be a private company limited by shares without any •limit on the number of members.Withheld price means part of the price due and payable for goods supplied by any member to the Producer •Company, and as withheld by the Producer Company for payment on a subsequent date.Patronage bonus refers to the payment by Producer Company out of its surplus income to the members in •proportion to their respective patronage.The approval of Board of directors is necessary for disbursing withheld price.•The Memorandum of Association and the Articles of Association of the Producer Company, duly signed by the •subscribersarerequiredtobepresentedtotheRegistrarofthestatewheretheCompany’sregisteredofficeisproposed to be set up.Section581UstatesthattheBoardmayconstitutesuchnumberofcommitteesasitmaydeemfitforthepurposes•ofassistingtheBoardinefficientdischargeofitsfunctions.Section 581Y of the Act provides that unless Articles of Association require a larger number, one-fourth of the •total membership shall constitute the quorum at a general meeting.Issue bonus shares to its members in proportion to the shares held by them, on the date of the issuance of such •shares, by capitalising the amounts from its general reserves.Section 581ZP states that the Registrar can after making an inquiry strike off the name of a company.•Investment in shares of any other company other than Producer Company cannot exceed thirty per cent of the •aggregate of its paid-up capital and free reserves.Aregistercontainingprescribedparticularsofallinvestmentshallbekeptintheregisteredoffice.•

References

Company Law• [Pdf] Available at: <http://www.icsi.in/Study%20Material%20Executive/CL.pdf> [Accessed 25 June 2013].As per the Companies Act, what is a producer company?• [Online] Available at: <https://www.vakilsearch.com/law/company-law/companies-act/producer-company> [Accessed 25 June 2013].Producer Companies• [Video online] Available at: <http://www.youtube.com/watch?v=9n82LPZYXEo> [Accessed 4 July 2013].Directors & Their Duties• [Video online] Available at: <http://www.youtube.com/watch?v=i25cz2rXiJc> [Accessed 4 July 2013].Singh, A., 1991. • Company law. 10th ed., Eastern Book Co.Ghosh, K, M., 1962. • Private companies and the Companies Act, 1956. Eastern Law House.

Recommended ReadingRamaiya, A., 1984. • Guide to the Companies Act. 10th ed., Wadhwa Sales Corp.Rustomji, K. J., 1991. • Company law. 3rd ed., The University Book Agency.Bahl, J. C., 1967. • Secretarial practice in India. 8th ed., N. M. Tripathi.

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Self AssessmentA_______________meansabodycorporate,havingobjectsoractivitiesasspecifiedinSection581B.1.

corporationa. marketingb. productionc. producer companyd.

Which of the following statements is false?2. Every Producer Company shall deal primarily with the produce of its active members for carrying out any a. ofitsspecifiedobjects.The Amendment Act also includes the insertion of the provisions which enables the conversion of an existing b. co-operative society into a company as also the incorporation of a Producer CompanyIn the present scenario, there is an emerging need of changing the terms of trade between urban and rural, c. labourandindustry,financeandcommerce.The newly inserted provision, by virtue of Companies (Amendment) Act, 2002 do not provide an opportunity d. to the co-operative sector to corporatise itself.

________________ refers to the payment by Producer Company out of its surplus income to the members in 3. proportion to their respective patronage.

Patronage bonusa. Cash receiptb. Membership paymentc. Business interestd.

Amendment in the provisions/clauses of the Memorandum can be done by way of passing a Special Resolution 4. as per ___________.

Section 3a. Section 581Hb. Section 581Zc. Section 581Nd.

Which of the following also mean a multi-state co-operative society?5. Inter state co- operative societya. International co-operative societyb. ROCc. Producer Companyd.

Section 581-O provides that, every Producer Company shall have minimum __________ directors.6. fifteena. twob. fivec. sevend.

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__________statesthattheBoardmayconstitutesuchnumberofcommitteesasitmaydeemfitforthepurposes7. ofassistingtheBoardinefficientdischargeofitsfunctions.

Section 581Ua. Section 581Hb. Section 581Zc. Section 581Nd.

________________ of the Act provides that unless Articles of Association require a larger number, one-fourth 8. of the total membership shall constitute the quorum at a general meeting.

Section 581Na. Section 581Hb. Section 581Yc. Section 581Zd.

EveryProducerCompanyshallholditsfirstAnnualGeneralMeeting(AGM)withinaperiodof_____________9. days from the date of its incorporation.

thirtya. thirtyfiveb. sixtyc. ninetyd.

Which of the following is not one of the documents which shall be sent to every member and auditor before 10. the meeting?

Agenda of the meetinga. Minutes of the previous annual general meetingb. Namesandqualificationsofcandidatesforelectionofdirectorsc. Agenda of next meeting and dated.

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Chapter VIII

Limited Liability Partnerships

Aim

The aim of this chapter is to:

definethetermLLP•

elucidate the salient features of LLP•

explain LLP and partnership•

Objectives

The objectives of this chapter are to:

explain the incorporation of LLP•

explicate the roles and responsibilities of designated partners•

elucidate the LLP agreement•

Learning outcome

At the end of this chapter, you will be able to:

understand the Foreign Limited Liability Partnership•

identify the difference between LLP and company•

recognise the difference between LLP and Partnership•

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8.1 IntroductionLimited Liability Partnership (LLP) is an incorporated partnership formed and registered under the Limited Liability Partnership Act 2008 with limited liability and perpetual succession. The Act came into force, for most part, on 31st March2009followedbyitsRuleson1stApril2009andtheregistrationofthefirstLLPon2ndApril2009.

The arrival of the much-desired and long-awaited LLP on the Indian business and professional scene marks yet another significantstepinourdecade-oldjourneytowardsglobalisationoftheIndianEconomy.Italsomarksthezenithofthe efforts of several expert committees which recommended its introduction starting with the Bhatt Committee of 1972, Naik Committee of 1992, Abid Hussain Committee of 1997, Gupta Committee of 2001, Naresh Chandra Committee of 2003 and the J.J. Irani Committee of 2005.

Thisnewformoflegalentityisviewedasanalternativecorporatebusinessvehiclethatprovidesthebenefitsoflimitedliabilitybutallowsitspartnerstheflexibilityoforganisingtheirinternalstructureasapartnershipbasedona mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises that give servicesofanykindorengagedinscientificandtechnicaldisciplines,toformcommerciallyproficientvehiclessuitedtotheirrequirements.Dependingontheflexibilityinitsstructureandoperation,theLLPwouldalsobeanappropriate vehicle for small and medium enterprises and for investment by venture capitalists. The total no. of registered LLP in India as on date April 3, 2012 is 8651.

8.2 Salient Features of LLPThe salient features of the LLP Act 2008 are as follows:

The LLP is a body corporate and a legal entity separate from its partners. Any two or more persons, associated •forcarryingonalawfulbusinesswithaviewtoprofit,maybysubscribingtheirnamestoanincorporationdocumentandfilingthesamewiththeRegistrar,formaLLP.TheLLPhasaperpetualsuccession.The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed •by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation.Therewouldbeflexibilitytodevisetheagreementaspertheirchoice.Intheabsenceofsuchkindof agreement, the mutual rights and duties shall be governed by the provisions of the proposed legislation;A LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being •limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorised acts of other partners or their misconduct;Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, •of whom at least one shall be resident in India.ALLPshallmaintainannualaccountsreflectingtrueandfairviewofitsstateofaffairs.Astatementofaccounts•andsolvencyshallbefiledbyeveryLLPwiththeRegistrareveryyear.TheaccountsofLLPsshallalsobeaudited, subject to any class of LLPs being exempted from this requirement by the Central Government;The Central Government has power to investigate the affairs of an LLP, if required, by appointment of competent •inspector for the purpose;TheIndianPartnershipAct,1932shallnotbeapplicabletoLLPs.Apartnershipfirm,aprivatecompanyand•an unlisted public company may convert themselves to LLP in accordance with provisions of the proposed legislation;The Central Government has made rules for carrying out the provisions of the LLP Act.•

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8.2.1 LLP and PartnershipThe principle points of difference between a company and a partnership are as follows:

LLP is a separate legal entity and therefore, can be sued or it can sue others without involving the partners. A •partnershipfirmisnotdistinctfromtheseveralpersonswhocomposeit.The partners of a LLP would have limited liability i.e. they would not be liable beyond the money contributed •bythem.Whereas,partnersofafirmwouldhaveunlimitedliability.The retirement or death of a partner would not dissolve the LLP. On the other hand, the death or retirement of •apartnerwoulddissolvethepartnershipfirm.Inapartnership,thepropertyofthefirmisthepropertyoftheindividualscomprisingit.InaLLP,itbelongsto•the LLP and not to the individuals comprising it.Whereas a partnership can be formed orally or by a deed of agreement whether registered or not, LLP is formed •by an incorporation document and an LLP agreement, thus, giving it a legality.Whereas an unregistered or registered partnership cannot have more than 20 partners, LLP can have more than •that number since no upper limit has been laid down by the Act.A LLP has perpetual succession, i.e., the insolvency of a shareholder or all of them do not affect the life of the •LLP,whereasthedeathorinsolvencyofapartnerdissolvesthefirm,unlessotherwiseprovided.Whereasanindividualpartnerwouldnotbeabletoconductbusinesstransactionwiththepartnershipfirmof•which he is a partner, a partner of LLP in his separate capacity as a legal person can do business with the LLP since the LLP is a separate legal entity by itself.

8.2.2 Distinction Between LLP and CompanyThe principle points of difference between a company and a LLP are as follows:

In case of LLP, the need for classifying the object clauses into main, ancillary and other objects as well as framing •the Share Capital clause in the Memorandum for incorporating a Company is reduced into a simple procedure offillingoftheprescribedinformationintheIncorporationdocumentandstatementinFormNo.2.In case of LLP, a limited liability partnership agreement (LLPA) is prepared which is a variant of the articles •of association of a company.Whereas the memorandum of a Company is required to name the State in which it is required to be incorporated, •there is no such obligation in the case of LLP. Consequently, the detail procedure involved in changing the registeredofficefromthestateofIncorporationtoanotherstateisnotrequiredtobefollowedincaseofaLLP.In the LLP Act, there is no such stipulation for meeting of partners either periodically or compulsory at the year •end as stipulated for directors and shareholders meetings in the Companies Act.There is no difference between management of the company and the ownership as is observed in a company •since all the partners, unlike all the directors, can take part in the day to day affairs of the LLP.In case of a company no individual director can conduct the business of the company but in an LLP, each partner •has the authority to do so unless expressly prohibited by the partnership terms.Whereas, the Companies Act contemplates regulating the remuneration payable to directors, there are no •corresponding provisions in the LLP Act for remuneration payable to designated partners. The same could be as per the LLP Agreement.In the case of LLP, unlike in the case of companies, there are no restrictions on the borrowing powers.•The LLP can choose to keep the accounts on cash basis whereas under the Companies Act, accrual method is •compulsory.Audit of a company is compulsory. Conversely, the audit of LLP is not compulsory if the capital contributed •does not exceed Rs. 25 lakh or if the turnover does not exceed Rs. 40 lakhs.Cost audit as contemplated in section 233B of the Companies Act, 1956 has not been prescribed for LLPs.•

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The appointment of Company Secretaries as is required under section 383A of the Companies Act, 1956 is not •providedintheLLPAct.However,theannualreturnofaLLPinform11istobecertifiedastrueandcorrectby a Company Secretary in practice.

8.3 Incorporation of Limited Liability PartnershipAccording to Section 11 (1) of the Limited Liability Partnership Act, 2008, for a limited liability partnership 1. to be incorporated:

twoormorepersonsassociatedforcarryingonalawfulbusinesswithaviewtoprofitshallsubscribetheira. names to an incorporation document;theincorporationdocumentshallbefiledinsuchmannerandwithsuchfees,asmaybeprescribedwithb. theRegistraroftheStateinwhichtheregisteredofficeofthelimitedliabilitypartnershipistobesituated;andastatementintheprescribedformshallbefiledalongwiththeincorporationdocument,madebyeitheranc. advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all the requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto.

The incorporation document shall:2. be in form 2 as per rule 11;a. state the name of the limited liability partnership;b. state the proposed business of the limited liability partnership;c. statetheaddressoftheregisteredofficeofthelimitedliabilitypartnership;d. state the name and address of each of the persons who are to be partners of the limited liability partnership e. on incorporation;state the name and address of the persons who are to be designated partners of the limited liability partnership f. on incorporation;contain such other information concerning the proposed limited liability partnership as may be g. prescribed.

If a person makes a statement under clause (c) of Sub-Section (1) which he:3. knows to be false; ora. does not believe to be true, shall be punishable with imprisonment for a term which may extend to two years b. andwithfinewhichshallnotbelessthantenthousandrupeesbutwhichmayextendtofivelakhrupees.

Subject to prior compliance with the requirements of section 11(1) of the Act, section 12(1) mandates the Registrar toregistertheincorporationdocumentandissueacertificateofincorporationwithin14days.Thecertificateofincorporationshallbeconclusiveevidencethatthelimitedliabilitypartnershipisincorporatedbythenamespecifiedin the incorporation document.

Registered office of LLPEverylimitedliabilitypartnershipshallhavearegisteredofficetowhichallcommunicationsandnoticesmaybeaddressed and where they shall be received. [(Section 13(1)]

Rule 17 (1) of the Limited Liability Partnership Rules, 2009 provides that the limited liability partnership may changeitsregisteredofficefromoneplacetoanotherbyfollowingtheprocedureaslaiddowninthelimitedliabilitypartnership agreement. Where the limited liability partnership agreement does not provide for such procedure, consentofallpartnersshallberequiredforchangingtheplaceofregisteredofficeoflimitedliabilitypartnershiptoanotherplace;providedthatwherethechangeinplaceofregisteredofficeisfromoneStatetoanotherState,thelimited liability partnership having secured creditors shall also obtain consent of such secured creditors.

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Name of LLPAccording to section 15(1), every limited liability partnership shall have either the words ‘limited liability partnership’ or the acronym- LLP as the last words of its name. Section 15 (2) prohibits registration of a LLP with a name that is either undesirable in the opinion of the Central Government or that is identical with or that which too nearly resemblestothenameofanyexistingpartnershipfirmoraLLPorabodycorporateoratrademarkregisteredorpending registration under the Trade Marks Act, 1999.

Rule 18 (1) of the LLP Rules, 2009 provides that the name of the limited liability partnership shall not be one prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950. Further, Rule 20 (1) provides that the limited liability partnership may change its name by following the procedure as laid down in the limited liability partnership agreement. Where the limited liability partnership agreement does not provide such procedure, consent of all partners shall be required for changing the name of the limited liability partnership.

8.4 Partners and Designated PartnersThere are no shareholders in a Limited Liability Partnership but partners. As already, any individual or body corporate may be a partner in a limited liability partnership.

Section 5 provides that any individual or body corporate may be a partner in limited liability partnership. However, an individual shall not be capable of becoming a partner of a limited liability partnership, if:

hehasbeenfoundtobeofunsoundmindbyaCourtofcompetentjurisdictionandthefindingisinforce;a. he is an undercharged insolvent; orb. he has applied to be adjudicated as an insolvent and his application is pending.c.

Section 7 provides that every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. Provided that in case of a limited liability partnership in which all the partners are body corporates, at least two partners shall nominate their respective individuals who are to act as “designated partners” and one of the nominees shall be a resident of India.

EverydesignatedpartnerofalimitedliabilitypartnershipshallobtainaDesignatedPartnerIdentificationNumber(PIN) from the Central Government and the provisions of Sections 266A to 266G (both inclusive) of the Companies Act, 1956 shall applymutatismutandis for the said purpose.TheCentralGovernment, videNotificationNo.GSR506(E)dated5th July, 2011, notifiedLimitedLiabilityPartnership (amendment)Rules, 2011whereby ithas integrated theDirector‘s IdentificationNumber (DIN) issuedunderCompaniesAct,1956withDesignatedPartnershipIdentificationNumber(DPIN)issuedunderLimitedLiabilityPartnership(LLP)Act,2008witheffectfrom 9.7.2011.

Pursuant to aforesaid notificationWith effect from 9.7.2011, no fresh DPIN will be issued. Any person, who desires to become a designated partner inaLimitedLiabilityPartnership,hastoobtainDINbyfilinge-formDIN-1.IfapersonhasbeenallottedDIN,the said DIN shall also be used as DPIN for all purposes under Limited Liability Partnership Act, 2008. If a person has been allotted DPIN, the said DPIN will also be used as DIN for all the purposes under Companies Act, 1956. If a person has been allotted both DIN and DPIN, his DPIN will stand cancelled and his DIN will be used as DIN as well as DPIN for all purposes under Limited Liability Partnership Act, 2008 and Companies Act, 1956. Every designated partner, shall intimate his consent to become a designated partner to the limited liability partnership and DPIN, in Form 9 and the LLP shall intimate such DPIN to Registrar in Form 4. Every designated partner, who has been allotted DPIN under the old rules, shall in the event of any change in particulars of as stated in erstwhile Form 7 or DIN-I, as the case may be, shall intimate such change(s) to the Central Government within 30 days of such change(s)inFormDIN-4underCompanies(DirectorIdentificationNumber)Rules,2006.Theconcerneddesignatedpartnershallfill-intherelevantchangestothelimitedliabilitypartnership(s)onwhichheisadesignatedpartnerwithin 30 days of such changes. The Form 7 and 10 shall stand deleted.

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According to Section 8, a designated partner shall be:answerable for all acts, matters and things as are required to be done by the limited liability partnership in a. respectofcomplianceoftheprovisionsofthisActincludingfilingofanydocument,return,statementandthelikereportpursuanttotheprovisionsofthisActandasmaybespecifiedinthelimitedliabilitypartnershipagreement; and liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.b.

Rule 9 of the Limited Liability Partnership Rules, 2009 provides that a person cannot be appointed as a designated partner if he:

hasatanytimewithintheprecedingfiveyearsbeenadjudgedinsolvent;ora. suspends,orhasatanytimewithintheprecedingfiveyearssuspendedpaymenttohiscreditorsandhasnotatb. anytimewithintheprecedingfiveyearsmade,acompositionwiththem;has been convicted by a Court for any offence involving moral turpitude and sentenced in respect thereof to c. imprisonment for not less than six months; orhas been convicted by a Court for an offence involving section 30 of the Act. d.

(Section 30 deals with punishment for carrying out acts by the LLP or its partners with intent to defraud its creditors or for a fraudulent purpose).

8.5 Roles and Responsibilities of Designated PartnersAmongst the Designated Partners, atleast one must be an Indian Resident which means that a non-resident partner couldalsobeappointedasDesignatedPartner.ThevariousobligationslaiddownintheLLPActhastobefulfilledsolelybytheDesignatedPartnersbyfilingtherequiredinformationthroughtherelevantformsprescribedbytheLimited Partnership Rules, 2009.

ThedesignatedpartnerwouldberesponsibleforfilingthefollowinginformationintheprescribedFormsmentionedagainst each:

Incorporation document and statement in Form No. 2 (under Rule 2).•Information with regard to Limited Partnership Agreement and changes, if any, made therein in Form 3 (under •Rule 21).Notice of Appointment of Partners/designated partner and changes among them, intimation of DPIN by LLP •to Registrar and consent of Partner to become partner/Designated Partner in Form No. 4 [under Rules 8, 10(8), 22(2) and 22(3)].Notice of change of name of LLP in Form No. 5 [under Rule 20(2)].•Intimation of particulars of name or address of a partner/change in such particulars by a Partner to the Limited •Liability Partnership in form 6 [under Rule 22(1)]Statement of Account & Solvency in Form 8 (under Rule 24).•Consent to act as Designated Partners in Form No. 9 [under Rule 7 and 10(8)].•Intimation of changes in particulars of Designated Partners in form DIN-4•Annual Return of Limited Liability Partnership in Form 11 [under Rule 25(1)].•For intimating other address for service of documents in Form 12 [under rule 16(3)].•Application to the Registrar for striking off name in form 24 [under Rule 37(1)(b)].•ApplicationforcompoundingofanofficeundertheActinForm31[underRule41(1)].•

The Designated Partner, unless otherwise expressly provided in the Act, shall be:Responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of 1. complianceoftheprovisionsoftheActincludingfilingofanydocument,return,statementandthelikereportpursuanttotheprovisionsoftheActandasmaybespecifiedintheLimitedliabilitypartnershipagreement,Liable to all penalties imposed on the LLP for the contravention of the provisions of the Act and in the LLP 2. agreement.

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In conformity with the duty designated above, a designated partner of an LLP is also required to sign the following:

Annual Accounts of the LLP (section 34)•Annual Return of the LLP (section 35)•Form 3 – Information with regard to Limited Partnership Agreement and changes, if any, made therein.•Form 4 – Notice of Appointment of Partners/designated partner and changes among them, intimation of DPIN •by the LLP to the Registrar and consent of partner to become a partner/designated partner.Form 5 – Notice of change of name.•Form 8 – Statement of Account and Solvency.•Form 11 – Annual Return of LLP.•Form 12 – Intimating other address for service of documents.•Form 18 – Application and statement for conversion of a private limited company/unlimited public company •into LLP.

Moreover, it would be seen from what has been stated above that as per the Act the designated partner would be liable to all penalties imposed on the LLP for the contravention of the provisions of the Act and as such the designated partnerwouldberequiredtopayallthemonetaryfinesimposedontheLLP.ThereisnoprovisionintheActprovidingfor the reimbursement of such monetary penalties to him by the LLP. Further in the following instances apart from the LLP, the designated partner would also be imposed monetary penalties under the Act:

For non-compliance with the directions of the Central Government for change of name under Section 17 of •the Act,Fornon-maintenanceofbooksofaccounts,non-filingofaccounts,dulyauditedwheresuchanauditismandatory•under Section 34 of the Act,Fornon-filingoftheannualreturnoftheLLPwiththeRegistrarunderSection35oftheAct.•

All partners, not just the designated partners, are agents of the LLP, but not of other partners. As such, all partners owe the duties of an agent to the LLP. The LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such act and to provide that an obligation of LLP, whether arising out of contract or otherwise will solely be the obligation of LLP. It is also provided that liabilities of LLP are to be met from the property of LLP. Further, the LLP shall be liable for a wrongful act or omission by a partner in the course of the business of the LLP or with its authority. The obligation of a LLP shall not affect the personal liability of a partner for his own wrongful act or omission but a partner shall not be personally liable for wrongful act or omission of any other partner. No partner is personally liable directly or indirectly for an obligation of LLP solely by reason of his being a partner of the LLP.

8.6 LLP AgreementNo provision has been made for directors or a board structure on the lines of Company Law. The LLP agreement determines the mutual rights and duties of the partners and their rights and duties in relation to limited liability partnership.ThisLLPagreementisrequiredtobefiledwiththeRegistrar.

It has been provided under Section 23 – Save as otherwise provided by this Act, the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners, shall be governed by the limited liability partnership agreement between the partners, or between the limited liability partnership and its partners.

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LimitedliabilitypartnershipagreementshouldbefiledwiththeRegistrarwithin30daysofincorporationinform3.A person becomes a Partner by virtue of LLP agreement. This means that the LLP agreement is a must and it serves as a basic document and to a certain extent, takes the place of MOA and AOA applicable in the case of a company registeredundertheCompaniesAct,1956.AnychangeintheLLPagreementisalsorequiredtobenotifiedtotheRegistrar of Companies. The importance of the said document lies in the fact that it is a public document and it is open to public inspection being on the records of the Registrar.

In the lack of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and the partners shall be determined by the provisions relating to that matter as are set out in the First Schedule.

LLPsareeminentlysuitedtotheprofessionalslikeCompanySecretariesandothers.Theywillgetthebenefitoflimitedliabilityandinsulatethemfromthirdpartyclaimsagainstprofessionalnegligenceordeficiency.Acrosssection of the professionals may come together under the banner of LLP to carry on the professional work in their respectivefieldofspecialisation,withtherespectivestatutesaccordingsanctionforsuchadispensation.Suchanarrangementwillbringtheprofessionalscloserandthiswillbenefitthecorporateandotherclients,astheymaybeable to get solutions to their problems under one roof. This will also create a strong organisation of professionals and acts as a bulwark against keen competition expected to happen from the professionals abroad, with the opening oflegalfieldundertheWTOdispensation.

The advantages of a LLP include:Separate legal entity: A limited liability partnership is a body corporate formed and incorporated under this Act •and is a legal entity separate from that of its partners.Perpetual succession: A limited liability partnership shall have perpetual succession. In other words, partners •may come and partners may go but a LLP will go on till the winding up of its affairs.Limited liability: Reduced risk to personal wealth from the creditors’ claims.•Internalflexibility:Allowsforparticipationinmanagementandmaintenanceofethosofpartnership.•

The disadvantages include:Lackofprivacy:DisclosureoffinancialinformationrequiredunderSection34.•Requirement of a LLP agreement: A LLP agreement is a necessity so as to avoid the application of default •provisions (First Schedule) and to provide for matters not covered in the default provisions.Legal uncertainty: This being a newly introduced concept in the corporate world, it is yet to prove itself as a •commercial entity.

As per Rule 23(1) of the LLP Rules, 2009, the contribution of each partner shall be accounted for and disclosed in the Accounts of the LLP along with nature of contribution and amount. Further, Rule 23 (2) provides that the contributionofapartnerconsistingoftangible,movable,immovableorintangiblepropertyorotherbenefitsbroughtor contribution by way of an agreement or contract for services shall be valued by a practicing Chartered Accountant or by a practicing Cost Accountant or by approved valuer from the panel maintained by the Central Government.

8.7 Statement of Account and Solvency (Rule 24 of LLP Rules)Rule 24 of LLP rulers states that:

Everylimitedliabilitypartnershipshallkeepbooksofaccountswhicharesufficienttoshowandexplainthe1. limited liability partnership‘s transactions and are such as to: —

disclosewithreasonableaccuracy,atanytime,thefinancialpositionofthelimitedliabilitypartnershipata. that time; andenable the designated partners to ensure that any Statement of Account and Solvency prepared under this b. rule complies with the requirements of the Act. [Rule 24(1)]

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The books of account shall contain:2. particulars of all sums of money received and expended by the limited liability partnership and the matters a. in respect of which the receipt and expenditure takes place;a record of the assets and liabilities of the limited liability partnership;b. statementsofcostofgoodspurchased, inventories,work-in-progress,finishedgoodsandcostofgoodsc. sold; andany other particulars which the partners may decide. [Rule 24(2)]d.

The books of account which a limited liability partnership is required to keep shall be preserved for eight years 3. from the date on which they are made. [Rule 24(3)]EverylimitedliabilitypartnershipshallfiletheStatementofAccountandSolvencyinForm8withtheRegistrar,4. withinaperiodofthirtydaysfromtheendofsixmonthsofthefinancialyeartowhichtheStatementofAccountand Solvency relates. [Rule 24(4)]A limited liability partnership‘s Statement of Account and Solvency shall be signed on behalf of the limited 5. liability partnership by its designated partners. [Rule 24(6)]

8.7.1 Audit of Limited Liability Partnership (Rule 24 of LLP Rules)The accounts of every limited liability partnership shall be audited in accordance with these rules:

Providedthatalimitedliabilitypartnershipwhoseturnoverdoesnotexceed,inanyfinancialyear,fortylakh•rupeesorwhosecontributiondoesnotexceedtwenty-fivelakhrupeesshallnotberequiredtogetitsaccountsaudited.Provided further that if partners of such limited liability partnership decide to get the accounts of such LLP •audited, the accounts shall be audited in accordance with these rules.Provided also that where the partners of such LLP do not decide for audit of the accounts of the LLP, such LLP •shall include in the Statement of Account and Solvency a statement by the partners to the effect that the partners acknowledge their responsibilities for complying with the requirements of the Act and the Rules with respect topreparationofbooksofaccountandacertificateintheformspecifiedinForm8.[Rule24(8)]Apersonshallnotbequalifiedforappointmentasanauditorofalimitedliabilitypartnershipunlessheisa•Chartered Accountant in practice. [Rule 24(9)]AnauditororauditorsofalimitedliabilitypartnershipshallbeappointedforeachfinancialyearoftheLLPfor•auditing its accounts. [Rule 24(10)]

8.7.2 Filing of Annual Return (Rule 25 Of LLP Rules)Forthepurposesofsubsection(1)ofsection35,everylimitedliabilitypartnershipshallfileanannualreturn1. with the Registrar in Form 11.TheannualreturnofanLLPhavingturnoveruptoRs.fivecrorerupeesduringthecorrespondingfinancialyear2. orcontributionuptoRs.fiftylakhrupeesshallbeaccompaniedwithacertificatefromadesignatedpartner,otherthan the signatory to the annual return, to the effect that annual return contains true and correct information. In allothercases,theannualreturnshallbeaccompaniedwithacertificatefromaCompanySecretaryinpracticetotheeffectthathehasverifiedtheparticularsfromthebooksandrecordsofthelimitedliabilitypartnershipand found them to be true and correct.

8.7.3 Electronic Filing of DocumentsRule36(1)ofLLPRulesprovidesthateveryformorapplicationordocumentordeclarationrequiredtobefiledordeliveredundertheActandrulesmadethereunder,shallbefiledincomputerreadableelectronicform,inportabledocument format (Pdf) to the Registrar through the portal maintained by the Ministry of Corporate Affairs(MCA) on its website www.mca.gov.in or through any other website approved by the Central Government and authenticated by a partner or designated partner of the limited liability partnership for such purpose by the use of a valid digital signature.MCAhaslaunchedaseparateportalwww.llp.gov.inforfillingofform/application/documentetcrequiredunder the Act and rules made there under.

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Everydesignatedpartner,partnerorpersonspecifiedintheActforauthenticationofe-form,documentsorapplicationetc.,whicharerequiredtobefiledordeliveredundertheActorrulesmadethereunder,shallobtainadigitalsignaturecertificatefromtheCertifyingAuthorityforthepurposeofsuchauthenticationandsuchcertificateshallnotbevalidunlessitisofclassIIorClassIIIspecificationundertheInformationTechnologyAct,2000.

8.8 Investigation of the Affairs of Limited Liability Partnership (Section 43)Section 43 states that:

The Central Government shall appoint one or more competent persons as inspectors to investigate the affairs 1. of a limited liability partnership and to report thereon in such manner as it may direct if—

theTribunal,eithersuomotuoronanapplicationreceivedfromnotlessthanone-fifthofthetotalnumberofa. partners of limited liability partnership, by order declares that the affairs of the limited liability partnership ought to be investigated; orany Court, by order, declares that the affairs of limited liability partnership ought to be investigated.b.

The Central Government may appoint one or more competent persons as inspectors to investigate the affairs of 2. a limited liability partnership and to report on them in such manner as it may direct.The appointment of inspectors pursuant to sub-section (2) may be made—3.

ifnotlessthanone-fifthofthetotalnumberofpartnersofthelimitedliabilitypartnershipmakeanapplicationa. along with supporting evidence and security amount as may be prescribed; orif the limited liability partnership makes an application that the affairs of the limited liability partnership b. ought to be investigated; orif, in the opinion of the Central Government, there are circumstances suggesting—c.

that the business of the limited liability partnership is being or has been conducted with an intent to i. defraud its creditors, partners or any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive or unfairly prejudicial to some or any of its partners, or that the limited liability partnership was formed for any fraudulent or unlawful purpose; orthat the affairs of the limited liability partnership are not being conducted in accordance with the ii. provisions of this Act; orthat, on receipt of a report of the Registrar or any other investigating or regulatory agency, there are iii. sufficientreasonsthattheaffairsofthelimitedliabilitypartnershipoughttobeinvestigated.

8.9 Foreign Limited Liability PartnershipAs per rule 34(1) of the LLP Rules, a foreign limited liability partnership shall, within thirty days of establishing a placeofbusinessinIndia,filewiththeRegistrarinForm27:

acopyofthecertificateofincorporationorregistrationandotherinstrument(s)constitutingordefiningthea. constitution of the limited liability partnership;thefulladdressof theregisteredorprincipalofficeof the limited liabilitypartnership in thecountryof itsb. incorporation;thefulladdressoftheofficeofthelimitedliabilitypartnershipinIndiawhichistobedeemedasitsprincipalc. place of business in India; andlist of partners and designated partners, if any, and the names and addresses of two or more persons resident in d. India, authorised to accept on behalf of the limited liability partnership, service of process and any notices or other documents required to be served on the limited liability partnership.

The winding up of a limited liability partnership may be either voluntary or by the Tribunal. Limited liability partnership, so wound up may be dissolved. (Section 63) Circumstances in which limited liability partnership may be wound up by Tribunal (Section 64)

A limited liability partnership may be wound up by the Tribunal:if the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;a. if, for a period of more than six months, the number of partners of the limited liability partnership is reduced b. below two;

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if the limited liability partnership is unable to pay its debts;c. if the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the d. security of the State or public order;ifthelimitedliabilitypartnershiphasmadeadefaultinfilingwiththeRegistrartheStatementofAccountande. Solvencyorannualreturnforanyfiveconsecutivefinancialyears;orif the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.f.

8.10 Comparison of LLP with Private Limited CompanyA comparison of a LLP with a Private Limited Company reveals that such companies have:

Limited Liability: Similar to LLP.•Internalflexibility:TheCompanyLawrequiresaformalboardstructureanddecisionmakingatvalidlyconstituted•meetings, passing of resolutions and maintenance of minutes of meetings.Privacy: Similar to LLP.•Requirement of a LLP agreement: The Memorandum and Articles of Association are the default standard •provisions doing away with the need for a separate agreement similar to a LLP agreement.Legal uncertainty: Private Limited companies have long been in existence and being tried and tested vehicles •of business entities, there is no legal uncertainty which is not true in case of a LLP.

The LLP structure seems most suited for partnership concerns set up by professionals such as company secretaries inpracticeandothers,byofferingthemthebenefitsoflimitedliabilityononehandandtheflexibilityininternalmanagement that is akin to partnerships on the other. Venture capitalists might also be attracted to the LLP structure owing to the ability of the partners to participate in management without the risk of losing limited liability, the absence of capital maintenance rules and the likely advantageous tax position. The laws of U.S.A., U.K., Singapore and Australia permit formation of LLPs.

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SummaryLimited Liability Partnership (LLP) is an incorporated partnership formed and registered under the Limited •Liability Partnership Act 2008.The LLP is a body corporate and a legal entity separate from its partners.•Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, •of whom at least one shall be resident in India.Everydesignatedpartner of a limited liability partnership shall obtain aDesignatedPartner Identification•Number (PIN).Any person, who desires to become a designated partner in a Limited Liability Partnership, has to obtain DIN •byfilinge-formDIN-1.If a person has been allotted DIN, the said DIN shall also be used as DPIN for all purposes under Limited •Liability Partnership Act, 2008.Amongst the Designated Partners, atleast one must be an Indian Resident which means that a non-resident •partner could also be appointed as Designated Partner.The obligation of a LLP shall not affect the personal liability of a partner for his own wrongful act or omission •but a partner shall not be personally liable for wrongful act or omission of any other partner.The LLP agreement determines the mutual rights and duties of the partners and their rights and duties in relation •to limited liability partnership.A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity •separate from that of its partners.The Central Government shall appoint one or more competent persons as inspectors to investigate the affairs •of a limited liability partnership and to report thereon.The Company Law requires a formal board structure and decision making at validly constituted meetings, •passing of resolutions and maintenance of minutes of meetings.The LLP structure seems most suited for partnership concerns set up by professionals such as company secretaries •in practice and others.AnauditororauditorsofalimitedliabilitypartnershipshallbeappointedforeachfinancialyearoftheLLP•for auditing its accounts.A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity •separate from that of its partners.LimitedliabilitypartnershipagreementshouldbefiledwiththeRegistrarwithin30daysofincorporationin•form 3.The LLP form would enable entrepreneurs, professionals and enterprises who give services of any kind or engaged •inscientificandtechnicaldisciplines,toformcommerciallyproficientvehiclessuitedtotheirrequirements.

ReferencesAmerican Bar Association, 2005. • Prototype Limited Liability Partnership Agreement. American Bar Association.Armour, D., 2001. • Limited Liability Partnership. Butterworths Tolley Ltd.LLP Agreement• [Online] Available at: <http://www.ourprofessionalteam.com/index.php?option=com_content&view=article&id=165&catid=119&Itemid=37> [Accessed 4 July 2013].LLP Agreement• [Online] Available at: <http://www.llponline.in/llp_agreement.php> [Accessed 4 July 2013].Understanding LLP - Limited liability partnership for India• [Video online] Available at: <http://www.youtube.com/watch?v=yubSTvqUiHY> [Accessed 4 July2013].Limited liability partnership• [Video online] Available at: <http://www.youtube.com/watch?v=IF8VqUUZb7o> [Accessed 4 July 2013].

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Recommended ReadingMezzullo, L.A., 2012. • An Estate Planner’s Guide to Family Business Entities. 3rd ed., American Bar Association.Hazen, T. L. and Markham, J. W., 2013. • Corporations, Other Limited Liability Entities and Partnerships. West.Garrett Sutton, G. and Geddes, C., 2009. • How to Use Limited Liability Companies & Limited Partnerships.2nd ed., Success DNA, Inc.

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Self AssessmentThe ___________ form would enable entrepreneurs, professionals and enterprises who give services of any 1. kindorengagedinscientificandtechnicaldisciplines.

Registrara. Accountb. LLPc. Partnership formd.

Which of the following statements is false?2. The LLP is a body corporate and a legal entity separate from its partners.a. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, b. of whom at least one shall be resident in India.ALLPshallmaintainannualaccountsreflectingtrueandfairviewofitsstateofaffairs.c. The Central Government has no power to investigate the affairs of an LLP by appointment of competent d. inspector for the purpose.

In case of LLP, a _______________ is prepared which is a variant of the articles of association of a company.3. Partnershipa. LLPAb. Companyc. Actd.

Which of the following statements is false?4. There is no provision in the Act providing for the reimbursement of such monetary penalties to him by the a. LLP.Amongst the Designated Partners, atleast one must be an Indian Resident which means that a non-resident b. partner could also be appointed as Designated Partner.Section 30 deals with punishment for carrying out acts by the LLP or its partners with intent to defraud its c. creditors or for a fraudulent purposeIf a person has been allotted DIN, the said DIN shall not be used as DPIN for all purposes under Limited d. Liability Partnership Act, 2008.

The ______________ agreement determines the mutual rights and duties of the partners and their rights and 5. duties in relation to limited liability partnership.

partnershipa. LLPb. membersc. MOAd.

Which of the following is one of the disadvantages of LLP?6. Lack of privacya. Limited Liabilityb. Perpetual Successionc. Separate legal entityd.

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Which of the following is one of the advantages of LLP?7. Legal uncertaintya. Requirement of a LLP agreementb. Internalflexibilityc. Lack of privacyd.

A foreign limited liability partnership shall, within _______ days of establishing a place of business in India, 8. filewiththeRegistrarinForm27.

twoa. fiveb. fifteenc. thirtyd.

The __________________ requires a formal board structure and decision making at validly constituted meetings, 9. passing of resolutions and maintenance of minutes of meetings.

LLPa. MOAb. AOAc. Company Lawd.

Which of the following statements is false?10. The LLP structure seems most suited for partnership concerns set up by professionals.a. The laws of U.S.A., U.K., Singapore and Australia do not permit formation of LLPs.b. Rule 36(1) of LLP Rules provides that every form or application or document or declaration required to be c. filledordeliveredundertheActandrules.AnauditororauditorsofalimitedliabilitypartnershipshallbeappointedforeachfinancialyearoftheLLPd. for auditing its accounts.

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Case Study I

Good Foods

Good Foods Sdn Bhd (the company) was incorporated in 2000. The company’s sole object clause provides that the principal activity of the company is catering. Nelly and Rosman, who are chefs by profession, are the directors and together they hold 85% of the shares in the company the remaining 15% of the shares being held by eight other shareholders.

The company has been doing extremely well since it was incorporated. Nelly Rosman is keen to expand the business of the company. They are planning to set up a culinary school and have been advised that the company will have to amend its object clause before it can successfully embark into the new venture.

They facilitate the new venture the company will need to acquire a new building. Nelly and Rosman do not wish to convert the company into a public company for this purpose. Instead, they have borrowed RM 2,000,000 from Ocean Bank. As security for the loan they have charged a piece of land owned by the company to Ocean Bank.

Nelly and Rosman also purpose to pass a resolution to issue additional shares to existing shareholders, where they will be required to double their shareholdings in the company. Nelly and Rosman also propose that the name of the company be changed from Good Foods Sdn Bhd to Heavenly Foods Sdn Bhd. Nelly and Rosman have called for an extra ordinary general meeting to pass the following resolutions namely:

To amend the object clause to include the business of running culinary school•To issue additional shares by requiring all shareholders to double their shareholdings in the company and•To change the name of the company from Good Foods Sdn Bhd•

Chitra is one of the shareholders in the company. She is against all the above proposed changes and will vote against the resolution at the meeting. Chitra is also of the view that the loan from Ocean Bank is null and void because there is no provision in the company’s memorandum of association allowing the loan.

(Source: Case_Study_Corporate_Law, [Online] Available at: <http://scdlpgdbagroup.blogspot.in/2010/07/casestudycorporatelaw.html> [Accessed 20 June 2013]).

QuestionsCan Chitra successfully block the passing of each of the three proposed resolutions?1. AnswerMinorityshareholderswithqualifiedminoritymayinitiateactionagainstdecisionsofthemajorityinacourtoflaw.Accordingtosection399oftheact,aqualifiedminorityconsistsofatleastonehundredshareholdersor one tenth of the total number of shareholders, whichever is less, or any shareholder holding one tenth of the issued share capital of the company fully paid up. Moreover, minority shareholders who hold more than 25% of the shares will have the ability to obstruct special resolutions, seek intervention of the CLT and therefore, impede the functioning of the company at some level.

Is Chitra correct in her argument that the above loan from Ocean Bank is null and void and has no effect?2. AnswerIf the majority of the shareholders (75%) were not informed prior to the borrowing of 2,000,000 Chitra can claim that the loan from Ocean Bank is void and has no effect.

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Why was the meeting called by Nelly and Rosman?3. AnswerNelly and Rosman general meeting to pass the following resolutions namely:

To amend the object clause to include the business of running culinary school;•To issue additional shares by requiring all shareholders to double their shareholdings in the company; and•To change the name of the company from Good Foods Sdn Bhd.•

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Case Study II

JVG Scandal

JVG’s troubles started in June 1997, after the Securities and Exchange Board of India (SEBI) asked JVG Finance to refund the Rs 45 crore it had raised from a public issue in March 1997. A day after the issue had opened; RBI issued a show-cause notice asking why JVG Finance should not be barred from accepting deposits as the group companies had already exceeded their deposit limits. By the time RBI conditionally cleared the issue after assurances from Sharma, the 70-day stipulated period for listing the shares had passed. Because of the time-lapse, SEBI intervened and ordered the refund of the public’s money according to the allotment rules. Sharma refused to refund the money to the investors and appealed against the order to the Finance ministry. He admitted that JVG had exceeded its limits while accepting deposits but claimed that since December 1996 (much before the RBI ban) it had stopped accepting deposits on its own and had even given RBI an undertaking. RBI did not accept the argument and barred the group from accepting any more public deposits.

In September 1997, post-dated cheques issued for principal as well as interest on JVG’s deposits bounced. Investors then complained to the civil courts, consumer courts, Company Law Board and criminal courts under the Negotiable Instruments Act upon which legal proceedings were initiated against the group. The government received a large numberofcomplaintsonnon-repaymentofdepositsonmaturitybytheJVGgroup.OnacomplaintfiledbytheRBI,theDelhiHighCourtorderedthewindingupofthecompany.ThecourtalsoappointedanofficialliquidatorandsaidthattheRBIdidnotconsidertherevivalschemefiledbythecompanyviable.TheRBIalsofiledcriminalprosecution petitions in the Metropolitan Magistrates’ Courts in New Delhi.

RBI alleged that the company had accepted deposits worth Rs 88.82 crore which was 756.68% of its net owned fund. This was much higher than the permissible limit of 25%2. Similarly, JVG Leasing had received deposits worth Rs 19.28 crore which was 147.58% of its net owned fund. The RBI complaint also said that the deposit forms issued by the JVG Group did not contain any information regarding premature withdrawals, which was necessary as per RBI provisions. The companies had not provided any information about the rate of interest to the investors on the receipts issued to them. Further, the companies failed to submit their audited balance sheets for the period ending March 31, 1994 and 1995 15 days after their annual general meeting (AGM) and did not inform the RBI about the changes in the composition of the board of directors.

RBI’s petition also stated that the company had not maintained liquid assets as required by section 45IB of the RBI Act, 1934. RBI further contended that JVG Securities accepted public deposits through JVG Leasing Ltd. and had illegally credited it to the account of JVG Finance Ltd. Thus, JVG Securities facilitated collection of further deposits by JVG Finance Ltd., a company which had already accepted public deposits beyond the permissible limit in spite of the warning from RBI not to accept any further deposits. A total of 31 bank accounts of the JVG group of companies were seized and an amount of Rs.5 lakh lying in these accounts was frozen. Land and property, including 238 acres in Gurgaon, Rewari and Faridabad, in the name of JVG group of companies were attached. Nine company vehicles were taken into police possession and a number of properties located in Bombay and Delhi (held bythecompany)wereidentifiedandtheincome-taxauthoritiesinDelhiandBombaywereinformed.Meanwhile,JVG,fearingawithdrawalrushonitsdeposits,askedallitsdepositorstosendtheircertificatestotheDelhiofficefor scrutiny and also issued notices in the dailies assuring investors that all deposits which had matured would be redeemed immediately.

Sharma revealed that all genuine matured amounts had been repaid and only Rs 30 crore was to be paid to depositors of JVG Finance by January 1998 and another Rs 100 crore to JVG Leasing depositors between July 1998 and June 1999. He also admitted that it was impossible for him to repay all his depositors, including those whose deposits had notmatured.Sharma’sallegationthathisagentshadissuedfakecertificatestodepositorsformorethanRs100crorewasseenasaploytowashhishandsofftheresponsibilitytopaythem.Analystsremarkedthatifthecertificateswere issued by agents who were handpicked by Sharma himself, he could not disown them. There was suspicion as to the dubious nature of the investments Sharma had made with the money, which had not yielded the returns he had expected. As a result, he serviced the interest on the old deposits out of fresh deposits.

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Afterhewasbarredfromraisingfreshfunds,hetriedtogetridofthedepositorsbydubbingtheircertificatesfake.However, Sharma claimed that his investments fetched him the expected returns. He also refuted allegations that most of his investments were in the JVG Group. He said that he had invested in automobiles, plant and machinery and other equipment through hire purchase and lease schemes, and only a minor amount was in group companies. Sharmacommentedthatthedepositorswithfakecertificateswouldanywayusetheirownresourcestorecovertheirmoney.Theyweresuretoapprehendtheagentsforissuingfakecertificates.Hesaid,“Weareresponsibleonlyforthe proper investor who is listed with us.”

Sharma was well-known in the industry circles for shooting his mouth off. His grand comments and claims were frequently splashed in business dailies and magazines. In fact, Sharma claimed that it was only the attention he drew to himself by making grandiose announcements that led to his downfall.

In May 1998, The Economic Offence Wing of Chandigarh police lodged an FIR against Sharma under Section 420 of the Indian Penal Code. However, Sharma failed to appear in the court despite repeated warrants. He then moved the Mumbai High Court for transferring of all criminal cases registered in various states against the JVG group to the Central Bureau of Investigation (CBI) for further investigation. In June, the court transferred only the cases registered in Maharashtra to the CBI. The next day, Sharma moved an application for anticipatory bail in the high court, upon which he was granted interim bail till July 6. The Mumbai High Court granted four weeks bail to Sharma and directed him to appear in the appropriate court in Delhi. Sharma did not appear before any court in Delhi and went underground.

Followingthis,a teamofofficersfromtheEconomicOffencesWingof thecrimebranchwassent toMumbaiinNovember.TheteamarrestedSharmaataflatinBandra,asuburbinnorthwestMumbai.InJune1999,after16 months in jail, Sharma was granted bail on a personal bond of Rs 1 lakh and a surety of a similar amount and was directed not to leave the country without the court’s permission and not to tamper with evidence. Sharma had sought bail on health grounds claiming that he was suffering from hypertension, angina and chest pain. The JVG companies were delisted and barred permanently from indulging in NBFC activities in the future. However, JVG’s demise and Sharma’s stint in jail would perhaps never replace the dreams and hopes of the investors whose hard-earned money had vanished forever.

(Source: JVG Scandal [Online] Available at: <http://www.icmrindia.org/free%20resources/casestudies/jvg-scandal-3.ht> [Accessed 20 June 2013]).

QuestionsAnalyse the rise and fall of V.K.Sharma and the JVG group of companies. What were the major reasons for the 1. failure of the group? Give reasons to support your answer.CommentontheroleofregulatoryagenciesintheJVGscamandanalyzehowfarthefinancialandregulatory2. system contributed to the scam.What were RBI allegations on JVG?3.

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Case Study III

Case Study on Corporate Governance: Satyam Scam

Satyam Computers Services Limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest company in India’s IT industry, offering a variety of IT services to many types of businesses. Its networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr. RamalingamconfessedandnotifiedSEBIofhavingfalsifiedtheaccount.

Raju confessed that Satyam’s balance sheet of 30 September 2008 contained:InflatedfiguresforcashandbankbalancesofRs5,040crores(US$1.04billion)[asagainstRs5,361crores•(US$1.1billion)reflectedinthebooks].AnaccruedinterestofRs.376crores(US$77.46million)whichwasnon-existent.•AnunderstatedliabilityofRs.1,230crores(US$253.38million)onaccountoffundswhichwerearrangedby•himself. Anoverstateddebtors’positionofRs.490crores(US$100.94million)[asagainstRs.2,651crores(US$546.11•million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenues contained the following statements:“Whatstartedasamarginalgapbetweenactualoperatingprofitandtheonereflectedinthebooksofaccountscontinued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly[annualisedrevenuerunrateofRs11,276crores(US$2.32billion)intheSeptemberquarterof2008andofficialreservesofRs8,392crores(US$1.73billion)].Asthepromotersheldasmallpercentageofequity,the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisitiondealwasthelastattempttofillthefictitiousassetswithrealones.Itwaslikeridingatiger,notknowinghow to get off without being eaten.”

The scandalThe scandal all came to light with a successful effort on the part of investor’s to prevent an attempt by the minority shareholdingpromoterstousethefirm’scashreservestobuytwocompaniesownedbythemi.e.MaytasPropertiesand Maytas Infra. As a result, this aborted an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of company’s stock following with a shocking confession by Raju, The truth was its promoters had decided toinflatetherevenueandprofitfiguresofSatyamtherebymanipulatingtheirbalancesheetconsistingnon-existentassets, cash reserves and liabilities.

The probable reasonsDerivinghighstockvalueswouldallowthepromoterstoenjoybenefitsallowingthemtobuyrealwealthoutsidethecompanyandtherebygivingthemopportunitytoderivemoneytoacquirelargestakesinotherfirmsonanotherhand. There could be the reason as to why Raju’s family build its shareholding and shed it when required.

After the scandal, on 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. On 5th February 2009, the six-member board appointed by the GovernmentofIndianamedA.S.MurthyasthenewCEOofthefirmwithimmediateeffect.Theboardconsistedof:

Banker Deepak Parekh•IT expert Kiran Karnik•Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation•Tarun Das, Chief mentor of the Confederation of Indian Industry•T N Manoharan, former President of the Institute of Chartered Accountants of India•

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QuestionsWhen was Satyam Computer founded?1. Analyse all the various terms of Company law from the above case and explain.2. Explain the breach of contract with the above case an example.3.

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Guy, D. M., Carmichael, D. R., and Whittington, O. R., 2001. • Audit Sampling: An Introduction, 5th ed. Wiley.Hall, L., and Thom, G. M., 1999. • Company Secretarial Practice, 7th ed., Macdonald & Evans Ltd.Hazen, T. L., and Markham, J. W., 2013. • Corporations, Other Limited Liability Entities and Partnerships. West.India, 1989. • Introduction to Indian government accounts and audit. PraksaGsana Niyantraka, Bhsarata Saraksara.Karmann, A., 2008. • Financial Structure and Stability. Physica.Kaplan, M., and Donovan, M, 2013. • The Inclusion Dividend : Why Investing in Diversity & Inclusion Pays Off. Bibliomotion.Mezzullo, L. A., 2012. • An Estate Planner’s Guide to Family Business Entities, 3rd ed. American Bar Association.Gupta, N., 2012. • Dividend Investing: A Step By Step Guide to Get Rich: DRIP, DSPP, Folio, Motif, Betterment. CreateSpace Independent Publishing Platform.Ramaiya, A., 1984. • Guide to the Companies Act, 10th ed., Authorised agents, Wadhwa Sales Corp.Ratliff, R. L., and Reding, K. F., 2002. • Introduction to Auditing: Logic, Principles, and Techniques. The Institute of Internal Auditors.Rustomji, K. J., 1991. • Company law. 3rd ed. The University Book Agency.Singh, A., 2006. • Introduction to Company Law, 6th ed. Eastern Book Co.Williams, H. M., 2001. • The Private Company Secretary’s Manual, 6th ed., Management Books 2000 Ltd.

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Self Assessment Answers

Chapter Ic1. a2. c3. d4. a5. c6. a7. a8. b9. a10.

Chapter IIa1. c2. a3. c4. d5. d6. a7. b8. b9. a10.

Chapter IIIa1. b2. d3. d4. d5. b6. c7. a8. d9. a10.

Chapter IVa1. c2. a3. d4. a5. c6. c7. d8. b9. a10.

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Chapter Vb1. a2. c3. d4. c5. a6. d7. d8. a9. a10.

Chapter VIb1. d2. d3. b4. a5. b6. b7. d8. b9. a10.

Chapter VIId1. d2. a3. b4. a5. c6. a7. c8. d9. d10.

Chapter VIIIc1. d2. b3. d4. b5. a6. c7. d8. d9. b10.