Companies Act, 2013 – CMA Inter Law and Ethics Study Material

Companies Act, 2013 – CMA Inter Business Laws and Ethics Study Material is designed strictly as per the latest syllabus and exam pattern.

Companies Act, 2013 – CMA Inter Law and Ethics Study Material

Company Types, Promotion, Formation, And Related Procedures – CMA Inter Law and Ethics Study Material

Question 1.
Write short note on the following:
Revocation of licence (June 2017, 5 marks)
Answer:
Revocation of Licence
Section 8(6) provides that the Central Government, by order, revoke the licence granted to the company registered under this section:
if the company contravenes any of the requirements of this section; or
any of the conditions subject to which a license is issued; or
the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company.

The Central Government shall direct the company to convert its status and change its name to add the words ‘limited’ or ‘private limited’ to its name. No such order will not be passed without giving opportunity to the company of being heard.

A copy of such order shall be given to the Registrar. The Registrar shall, without prejudice to any action taken, on application, in the prescribed form register the company accordingly.

Question 2.
Write short flotes on out of the following terms:
Alteration of Share Capital (June 2018, 5 marks)
Answer:
Alteration of Share Capital:
A Limited Company having a Share Capital may, if so authorised by its articles, alter its memorandum by passing an ordinary resolution in its general meeting to:

increase its authorised share capital by such amount as it thinks expedient;
consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination.
sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived.
cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

All the above alterations do not require the confirmation by the Tribunal except that alteration relating to consolidation and division which results in changes in the voting percentage of shareholders shall not take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution should be filed with the Registrar within 30 days of the passing of the resolution along with an altered memorandum. [Section 64(1)]

The Registrar shall record the notice and make any alteration which may be necessary in the company’s memorandum or articles or both.

The cancellation of shares under section 61(1) of the Act shall not be deemed to be a reduction of share capital. Section 64 (1) provides that a notice is required to be given to the Registrar for alteration for share capital.

Question 3.
Write short notes on:
Small Companies (Dec 2018, 5 marks)
Answer:
Section 2(85) of the Companies Act, 2013 defines ‘small company’ as a company, other than a public company —

paid-up share capital of which does not exceed ₹ 4 crore or such higher amount as may be prescribed which shall not be more than ₹ 10 crore; and
turnover which is as per its last profit and loss account does not exceed ₹ 40 crores or such higher amount as may be prescribed which shall not be more than ₹ 100 crores.

This definition shall not apply to the following, companies –

A holding company or subsidiary company
A company registered under Section 8; or
A company or a body corporate governed by any special Act.

Question 4.
Write short notes on:
Red herring prospectus (June 2019, 5 marks)
Answer:
Red herring prospectus:
The Explanation to Section 32 defines the term ‘red herring prospectus’ as a prospectus which does not include complete particulars of the quantum or price of the securities included therein Section 32 provides that a company proposing to make an otter of securities may issue a red herring prospectus prior to the issue of a prospectus. The same shall be filed with the Registrar at least three day prior to the opening of the subscription list and the offer. It shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

At the time of closing of the offer, the prospectus stating the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other detail as are not included in the red herring prospectus shall be filed with the Registrar and the SEBI.

Question 5.
Write Short Notes on Revocation of license under Section 8(6) of Companies Act. (Dec 2021, 3 marks)
Answer:
Revocation of License (Section 8(6) of Companies Act, 2013):
Provides that the Central Government may, by order, revoke the license granted to the company registered under this section –

If the company contravenes any of the requirements of this section; or
Any of the conditions subject to which a license is issued; or
The affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.

The Central Government shall direct the company to convert its status and change its name to add the words “Limited” or “Private Limited” to its name. No such order will not be passed without giving opportunity to the company of being heard. A copy of such order shall be given to the Registrar. The Registrar shall, without prejudice to any action taken, on application, in the prescribed form, register the company accordingly.

Question 6.
Write short note on the following terms:
Trust Deed as per Companies Act, 2013 (Dec 2022, 5 marks)

Descriptive Questions

Question 7.
A chemical manufacturing company distributed twenty lakhs to scientific institutions for furtherance of scientific education and research. Referring to the provisions of The Companies Act, 2013, decide whether the said distribution of money was ‘ultra vires’ the company. (Dec 2013, 2 marks)
Answer:
The doctrine of Ultra Vires:
Ultra means beyond and Vires mean powers. Ultra Vires means beyond powers. Any action of the company is Ultra Vires it such action is not authorised in the MOA.

The MOA defines and confines the powers of the company and company can operate only within the scope of the authority given to it by its MQA and Company’s Act, 2013.

Any action beyond the scope of MOA or Company’s Act, 2013 is Ultra Vires of the company.

It is also clear that the company can not ratify such action or make such action valid, even if every member assents to it.

Whatever was ultra vires the company will remain ultra vires. Any action which is ultra vires but intra vires to the company can be ratified by the company. If any act is ultra vires to the directors the body of shareholders can ratify it.

The term ultra vires means beyond powers. Here, in the given case, a chemical manufacturing company distributed ₹ 20 lakhs to scientific institutions for furtherance (means continuance, persistence, maintenance) of scientific education and research. It is not ultra vires since it is conductive to the continued growth of the company as chemical manufacturers.

Similar view was found in the case of Evans v. Brunner Mond & Company, (1921) Ch 359. Here, a company was incorporated for carrying on business of manufacturing chemicals. The objects clause in the memorandum of the company authorized the company to do gall such business and things as may be incidental or conductive to the attainment of the above objects or any of them by a resolution the directors were authorized to distribute £1,00,000 out of surplus reserve account to such universities in U.K.

as they might select for the furtherance of scientific research and education. The resolution was challenged on the ground that it was beyond the objects clause of the memorandum and therefore it was ultra vires the power of the company.

The directors proved that the company had great difficulty in finding trained men and the purpose of the resolution was to encourage scientific training of more men to enable the company to recruit staff and continue its progress.

The Tribunal held that the expenditure authorized by the resolution was necessary for the continued progress of the company as chemical manufacturers and thus the resolution was incidental or conductive to the attainment of the main object of the company and consequently it was not ultra vires.

“Acts incidental or ancillary” are those acts, which have a reasonable proximate connection with the objects stated in the objects clause of the memorandum.

Question 8.
Explain provisions of the Companies Act, 2013 regarding documents containing offers of securities for sale to be deemed prospectus. (Dec 2014, 5 marks)
Answer:
Document Containing offer of Securities br Sale to be Deemed Prospectus:
Section 25(1) of Companies Act, 2013 states that when a company allows or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public:
(a) any document by which the offer for sale to the public is made shall, for all purposes be deemed to be a prospectus issued by the company; and

(b) all enactments and rules of law as to the contents of prospectus and as to liability in respect of misstatements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in sub-sections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for – subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of misstatements contained in the document or otherwise in respect thereof.

Section 25(2) states that unless the contrary is proved, it shall be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown: that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot: or that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it.

As per Section 25(3); Section 26 as applied by this section shall have effect as if:

(i) It required a prospectus to state in addition to the matters required by that section to be stated in a prospectus

the net amount of the consideration received or to be received by the company in respect of the securities to which the offer relates; and
the time and place at which the contract where under the said securities have been or are to be allotted may be inspected;

(ii) the persons making the offer were persons named in a prospectus as directors of a company.

Question 9.
Answer the question:
A company wants to buy back its own shares in the current financial year. State the defaults which make the company ineligible to buy back its own shares as outlined in the Companies Act, 2013. (June 2015, 4 marks)
Answer:
Prohibition for Buy-Back in Certain Circumstances [Section 70]
1. No company shall directly or indirectly purchase its own shares or other specified securities:

through any subsidiary company including its own subsidiary companies;
through any investment company or group of investment companies; or
if a default is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

Provided that the buy-back is not prohibited if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

2. No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of Sections 92, 123, 127, and 129.

Question 10.
Answer the questions:
(a) (i) Can a non-profit organization be registered as a company under the Companies Act, 2013? If so, what procedure does it have to adopt? (June 2016, 7 marks)
(ii) ABC Limited decides to buy back its own shares. Advise the Company’s Board of Directors about the sources of which the company can buy back its own shares. (June 2016, 4 marks)
(b) (ii) Define the term ‘Small Company’ as contained in the Companies Act, 2013. (June 2016, 5 marks)
Answer:
(a) (i) Registration of a non-profit organization as a company:
1. Where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company:

has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
intends to apply its profits, if any, or other income in promoting its objects; and
intends to prohibit the payment of any dividend to its members, the Central Government may, by license issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”, and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

2. The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies.

3. A firm may be a member of the company registered under this section.

4. A company registered under this section shall not alter the provisions of its memorandum or articles except vith the previous approval of the Central Government. A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed.

5. Where it is proved to the satisfaction of the Central Government that a limited company registered under this Act or under any previous company law has been formed with any of the objects specified in clause (a) of sub-section (1) and with the restrictions and prohibitions as mentioned respectively in clauses (b) and (c) of that sub-section, it may, by licence, allow the company to be registered under this section subject to such conditions as the Central Government deems fit and to change its name by omitting the word “Limited”, or as the case may be, the words “Private Limited from its name and thereupon the Registrar shall, on application, in the prescribed form, register such company under this section and all the provisions of this section shall apply to that company.

6. The Central Government may, by order, revoke the licence granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest, and without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word “Limited” or the words “Private Limited”, as the case may be, to its name and there upon the Registrar shall, without prejudice to any action that may be taken under sub-section (7), on application, in the prescribed form, register the company accordingly.

Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard.
Provided further that a copy of every such order shall be given to the Registrar.

7. Where a licence is revoked under sub-section (6), the Central Government may, by order, this satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section.

Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard.

8. Where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties, and obligations as may be specified in the order.

9. If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Rehabilitation and lnsolvericÿ Fund formed under Section 269.

10. A company registered under this section shall amalgamate only with another company registered under this section and having similar objects.

(ii) Sources:
According to Section 68(1) of the Companie Act, 2013, a company may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of:

its free reserves; or
the securities premium account; or
the proceeds of any shares or other specified securities.

However, no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Thus, the company must have at the time of buy-back, sufficient balance in any one or more of these accounts to accommodate the total value of the buy-back.

(b)
(ii) “Small company” means a company, other than a public company:

paid-up share capital of which does not exceed 4 crore rupees or such higher amount as may be prescribed which shall not be more than 10 crore rupees; or
turnover of which as per its last profit and loss account does not exceed 40 crore rupees or such higher amount as may be prescribed which shall not be more than 100 crore rupees.

Question 11.
Answer the questions:
(a) (iii) Explain Red Herring Prospectus under the Companies Act, 2013. (Dec 2016, 5 marks)
(b) (ii) State the procedure for shifting of a registered office of the company from one state to another state under the provisions of the Companies Act, 2013. (Dec 2016, 5 marks)
Answer:
(a) (iii) Red Herring Prospectus [Section 32 of the Companies Act, 2013]:
1. A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.

2. A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer.

3. A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

4. Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

(b)
(ii) Procedure for shifting the registered office from one state to another state (Section 13, of the Companies Act, 2013):
In order to shift the registered office from one state to another the following procedure will have to be followed:

Hold a Board Meeting for the purpose of calling a general meeting of the members of the company in which the shifting of the registered office from one state to another will have to be approved;
The general meeting of the members will have to pass a special resolution approving the change of address of the registered office from one state to another as required by Section 13 (1) of the Companies Act, 2013.
Make an application to the Central Government in INC no.23 form and manner as may be prescribed, for getting its approval under Section 13 (4) of the Companies Act, 2013.
Under Section 13(7) of the Companies Act, 2013, where an alteration of the Memorandum results in the transfer of the registered office of the company from one state to another, a certified copy of the order of the Central Government approving the alteration shall be filed by the company with the registrar of each of the states, within such time and in such manner as may be prescribed, and the registrars shall register the same. The registrar of the state where the registered office is being shifted to shall issue a fresh certificate of incorporation indicating the alteration.
The change in name will be effective only after the issue of the fresh certificate of incorporation by the Registrar of the state where the registered office is being shifted to.

Question 12.
(a) What are the conditions stipulated in the Companies Act, 2013 in formation of One Person Company? (June 2017, 5 marks)
(b) Discuss the procedure of alteration of memorandum of association as per the Companies Act, 2013. (June 2017, 10 marks)
Answer:
(a) Conditions.
The following are the conditions in formation of a OPC:
No person shall be eligible to incorporate more than a OPC or become nominee in more than such company;

Where a natural person, being a member of OPC in accordance with this rule becomes a member in another such company by virtue of his being a nominee in that OPC, such person shall meet the eligibility criteria within a period of 182 days;

No minor shall become member or nominee 0r OPC or can hold share with beneficial interest;

Such company cannot be incorporated or converted into Section 8 company;
Such company cannot carry out Non Banking Financial investment activities including investment activities in securities of anybody corporate;

No such company can convert voluntarily into any kind of company unless two years have expired from the date of incorporation of OPC, except threshold limit of paid-up share capital is increased beyond ₹ 50 lakh or its average annual turnover during the relevant period exceeds ₹ 2 crore rupees.

(b) Procedure of alteration of memorandum:
Section 13 of the Companies Act, 2013 provides the provisions that deal with the alteration of the memorandum. The provision says that:
1. Alteration by special resolution: Company may alter the provisions of its memorandum with the approval of the members by a special resolution.

2. Name Change of the company: Any change in the name of a company shall be effected only with the approval of Central Government in writing. However, no such approval shall be necessary where the change in the name of the company is only the deletion therefrom, or addition thereto, of the word “Private”, on the conversion of any one class of companies to another class. The change of name shall not be allowed to a company which has defaulted in filing its annual returns or financial statements or any document due for filing with the Registrar or which has defaulted in repayment of matured deposits or debentures or interest on deposits or debentures.

3. Entry in register of companies: On any change in the name of a company, the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name and the change in the name shall be complete and effective only on the issue of such a certificate.

4. Change in the registered office: The alteration of the memorandum relating to the place of the registered office from one State to another shall not have any effect unless it is approved by the Central Government on an application in such form and manner as may be prescribed.

5. Disposal of the application of change of place of the registered office: The Central Government shall dispose of the application of change of place of there registered office within a period of sixty days Before passing of order, Central Government may satisfy itself that:
The alteration has the consent of the creditors, debenture holders, and other persons concerned with the company, or
the sufficient provision has been made by the company either for the due discharge of all its debts and obligations, or
adequate security has been provided for such discharge.

6. Filing with Registrar: A company shall, in relation to any alteration of its memorandum, file with the Registrar:
the special resolution passed by the company under sub-section (1);
the approval of the Central Government under sub-section (2),
if the alteration involves any change in the name of the company.

7. Filing of the certified copy of the order with the registrar of the states: Where an alteration of the memorandum results in the transfer of the registered office of a company from one State to another, a certified copy of the order of the Central Government approving the alteration shall be filed by the company with the Registrar of each of the States within such time and in such manner as may be prescribed, who shall register the same.

8. Issue of fresh certificate of incorporation: The Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration.

Amendment made by Companies (Amendment) Act, 2017 in Section 12 of the Principal Act,-
In subsection (1), for the words ‘on and from the fifteenth day of its incorporation”, the words “within thirty days of its incorporation” shall be substituted; In sub-section (4), for the words ‘within fifteen days’, the words ‘within thirty days’ shall be substituted.

9. Change in the object of the company: A company, which has raised money from public through prospectus and still has any unutilized amount out of the honey so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution through postal ballot is passed by the company.

and:
The details, in respect to of such resolution, shall also be published ¡n the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change;

The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board.

10. Registrar to certify the registration on the alteration of the objects: The Registrar shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution.

11. AlteratIon to be registered: No alteration made under this section shall have any effect until it has been registered in accordance with the provisions of this section.

12. Only members have a right to participate in the divisible profits of the company: Any alteration of the memorandum, in the case of a company limited by guarantee and not having a share capital, intending to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void.

Question 13.
Discuss the procedure for conducting a poll in a meeting of a company. (Dec 2017, 9 marks)
Elucidate the circumstances in which a company cannot buy back its own shares as per the provisions of the Companies Act, 2013. (Dec 2017, 6 marks)
Answer:
Section 108 (5) provides that where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons, as he deems necessary, to scrutinize the poll process and votes given on the poll to report thereon to him. Section 108(6) provides that the Chairman of the meeting shall have power to regulate the manner in which the poll shall be taken.

Rule 21 provides that Chairman of a meeting shall, in the poll process, ensure that-
The Scrutinizers are provided with the Register of Members, specimen signatures of the Members, Attendance Register, and Register of proxies;
The Scrutinizers are provided with all documents received by the company;
The Scrutinizers shall arrange for polling papers and distribute them to the members and proxies present at the meeting;

In case of joint shareholders, the polling paper shall be given to the first named holder or in his absence to the joint holder attending the meeting as appearing in the chronological order in the folio

The polling shall be in Form No. MGT.12; .
The Scrutinizers shall keep a record of the polling papers received in response to poll by initializing it;

The Scrutinizers shall lock and seal and empty polling box in the presence of members and proxies;
The Scrutinizers shall open the polling box in the presence of two persons as witnesses after the voting process is over;

In case of ambiguity about the validity of a proxy, the Scrutinizer shall decide the validity in consultation with the Chairman;
The Scrutinizers shall ensure that it a member who has appointed in a proxy, has voted in person, the proxy’s vote shall be disregarded;

The Scrutinizers shall count the votes cast on poll and prepare a report thereon addressed to Chairman;
The Scrutinizer shall submit the report to the Chairman who shall counter-sign the same;
The Chairman shall declare the result of voting on poll. The result may either be announced by him or a person authorized by him in writing.

The Scrutinizers shall submit a report to the Chairman of the meeting in Form No. MGT-13. The report shall be signed by the scrutinizer(s) and the same shall be submitted by them to the Chairman within 7 days from the date of the poll is taken.

(b) Section 70 provides that no company shall directly or indirectly purchase its own shares or other specified securities-

Through any subsidiary company including its own subsidiary companies;
Through any investment company or group of investment companies; or

If a default is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividends to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company. The buyback is not prohibited if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

Question 14.
Discuss the procedure for conversion of private company into One personal company. (June 2018, 7 marks)
Answer:
Conversion of Private Company Into a OPC:
Rule 7 provides the procedure for conversion of private company into OPC. Rule 7(1) provides that a private company other than Section 8 company, having paid up share capital of ₹ 50 lakh or less and average annual turnover during the relevant period is ₹ 2 crores or less may convert itself into OPC by passing a special resolution in the general meeting.

Before passing such resolution the company shall obtain ‘No Objection Certificate’ in writing from the members and creditors. The OPC shall file copy of the resolution with the Registrar of Companies within 30 days from the date of passing such resolution in Form No. MGT-14.

The company shall file an application in Form No. INC-6 for its conversion into OPC along with fees. The following documents are to be attached:

the directors of the company shall give a declaration by way of affidavit duly sworn in confirming that all members and creditors of the company have given their consent for conversion, the paid-up share capital of the company is ₹ 50 lakhs or less or average annual turnover is less than ₹ 2 crores, as the case may be;

the list of members and creditors;
the latest Audited Financial Statement;
the copy of No objection letter of secured creditors.
On being satisfied and complied with the requirements the Registrar shall issue the certificate.

Question 15.
What are the procedures of sending notice through electronic mode under the Companies Act, 2013? ( June 2018, 8 marks)
Answer:
Company may give notice through electronic mode. For the purpose of this rule, the expression “electronic mode” shall mean any communication sent by a company through its authorized and secured computer programme which is capable of producing confirmation and keeping record of such communication addressed to the person entitled to receive such communication at the last electronic mail address provided by the member.

(2) A notice may be sent through e-mail as a text or as an attachment to e-mail or as a notification providing electronic link or Uniform Resource Locator for accessing such notice.

(3)

The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of the company or as provided by the depository: Provided that the company shall provide an advance opportunity at least once in a financial year, to the member to register his e-mail address and changes therein and such request may be made by only those members who have not got their email ID recorded or to update a fresh email Id and not from the members whose e-mail ids are already registered.
The subject line in e-mail shall state the name of the company, notice of the type of meeting, place and the date on which the meeting is scheduled.
If notice is sent in the form of a non-editable attachment to e-mail, such attachment shall be in the Portable Document Format or in a non-editable format together with a ‘link or instructions’ for recipient for downloading relevant version of the software.
When notice or notifications of availability of notice are sent by e-mail, the company should ensure that it uses a system which produces confirmation of the total number of recipients’ e-mail id and a record of each recipient to whom the notice has been sent and copy of such record and any notices of any failed transmissions and subsequent re-sending shall be retained by or on behalf of the company as “proof of sending”.
The company’s obligation shall be satisfied when it transmits the e-mail and the company shall not be held responsible for a failure in transmission beyond its control.
If a member entitled to receive notice fails to provide or update relevant e-mail address to the company, or to the depository participant as the case may be, the company shall not be in default for not delivering notice via e-mail.
The company may send e-mail through in-house facility or its registrar and transfer agent or authorise any third party agency providing bulk e-mail facility.
The notice made available on the electronic link or Uniform Resource Locator has to be readable, and the recipient should be able to obtain and retain copies and the company shall give the complete Uniform Resource Locator or address of the website and full details of how to access the document or information.
The notice of the general meeting of the company shall be simultaneously placed on the website of the company if any and on the website as may be notified by the Central Government.

Question 16.
(a) What are the features of companies registered under section 8 of the Companies Act, 2013? (Dec 2018, 7 marks)
(b) Discuss the provisions of the Companies Act, 2013 regarding issue of bonus shares. (Dec 2018, 8 marks)
Answer:
(a) According to Section 8 of Companies Act 2013, Provides that these companies intend to promote art, commerce, sports, safety, science, research, healthcare, social welfare, religion, protection of the environment, etc.

The following are the features of companies registered under Section 8 of the Companies Act, 2013;

has its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object
intends to apply its profit, if any, or other income in promoting its objects; and
intends to prohibit the payment of any dividend to its members
the company registered under this Section shall enjoy all the privileges and be subject to all the obligations of the limited company
a firm may be a member of the company registered under this section
a company registered under this Section shall not alter the provisions of its memorandum and articles except with the previous approval of the Central Government
a company registered under this section may convert itself into a company of any other kind only after complying with such conditions as may be prescribed.

(b) According to Section 63 of the Companies Act, 2013 states for the issue of bonus shares. Section 63(1) states that a company issues fully paid-up bonus shares to its members out of its

free reserves;
the securities premium account; or
the capital redemption reserve account
No bonus shares shall be made by capitalizing reserves created by revaluation of assets. Section 63(2) provides that not company shall capitalize its profits or reserves for the purpose of issuing fully paid up shares unless –
it is authorized by its articles
it has, on the recommendation of the Board, been authorized in the general meeting of the company
it has no defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it
it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity, and bonus the partly paid-up shares, it any outstanding on the date of allotment are made fully paid up
it complies with such conditions as may be prescribed

Section 63(3) provides that the bonus shares shall not be issued in lieu of dividends.
Rule 14 states that the company which once announced the decision of the Board recommending a Bonus issue shall not subsequently withdraw the same.

Question 17.
(a) What is meant by Lifting of Corporate Veil? In which circumstances the corporate veil can be lifted by court? (June 2019, 8 marks)
(b) State the procedure for shifting of a registered office of the company from one state to another state under the provisions of the Companies Act, 2013. (7 marks)
Answer:
(a) The separate personality or a company is a statutory privilege and 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 break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing 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.

In the following circumstances, different courts found it necessary to lift the corporate veil and punish the actual persons who did wrong or unlawful acts under the name of the company:
1. Protection of Revenue: The Court may ignore the Separate Legal Entity status of a Company, where it is used for tax invasion or circumventing tax obligations.

2. Determination of enemy character of the Company: Company being an artificial person cannot be enemy or friend. But during war, it may become necessary to lift the corporate veil and see the persons behind ¡t to determine whether they are friends or enemy.

This is due to the reason that though a company enjoys Separate Legal Entity but its affairs are run by individuals.

3. Prevention of fraud: Where a Company is used for committing frauds or improper conduct, the Court may lift the corporate veil and look at the realities of the situation.

4. Protection of public policy: The Court shall lift the Corporate Veil without any hesitation to protect the public policy and prevent transactions opposed to public policy.

5. Company mere sham or cloak: Where the Company is a mere sham and was really a ploy used for committing illegalities and to defraud people, the Court shall lift the Corporate Veil.

6. Where a Company acts as an agent of Its shareholders: If there is an arrangement between the shareholders and a Company to the effect that the Company will act as agent of shareholders for the purpose of carrying on the business, the business is essentially of that of the shareholders and will have unlimited liability.

7. Avoidance of Welfare Legislation: Where a Company tries to avoid its legal obligations, the corporate veil shall be lifted to look at the real picture.

8. To punish for contempt of Court: Company being an artificial person cannot disobey the orders of the Court. Therefore, the persons at fault should be identified.

(b) A company is required to adopt the following procedures to shift its registered office from one state to another;

The company shall pass special resolution.
Alteration in memorandum must be made for any of the “specified purposes’’ given u/s 16.
An application for alteration shall be made by the company to Central Governments (13) (7) of Companies Act, 2013. Also, notice shall be served on ROC who shall have a right to state his objections and suggestions.
As per Rule 30 of the Companies (Incorporation) Rules, 2014, the application for seeking approval for alteration of the memorandum with regard to the change of place of the registered office from one State to another shall be filed with the Central Government in Form INC – 23 and shall be accompanied by the following documents:

a copy of the memorandum and articles of association;
a copy of the notice convening the general meeting along with relevant Explanatory Statement;
a copy of the special resolution sanctioning the alteration by the members of the company;
a copy of the minutes of the general meeting at which the resolution authorizing such alteration was passed, giving details of the number of votes cast in favour or against the resolution;
an affidavit verifying the application;
the list of creditors and debenture holders entitled to object to the application;
an affidavit verifying the list of creditors;
the document relating to payment of application fee;
a copy of board resolution or Power of Attorney or the executed Vakalatnama, as the case may be.

5. CG may dispense with the consent of a creditor in appropriate cases. Moreover, CG may confirm the alteration in terms as it thinks fit.
6. Company is required to file with registrar of each state: order of CG; and
A copy of a memorandum, as altered, within 3 months plus 3 months (maximum) extended by CG.
7. The Registrar of the new state shall register the charge and give a certificate of registration of office.

Question 18.
Sweat equity shares are issued to directors or employees at a discount or for consideration other than cash. Discuss under the provisions of the Companies Act, 2013. (Dec 2019, 8 marks)
Answer:
According to Section 2(88) defines the expression ‘sweat equity shares’ as such equity shares as are issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their, know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

For this purpose the term ‘employee’ means

a permanent employee of the company who has been working in India or outside India; or.
a director of the company, whether a whole-time director or not; or
an employee or a director as defined above of a subsidiary, in India or outside India, or of holding company of the company.

Section 54 provides that a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled:

the issue is authorized by a special resolution passed by the company;
the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares are issued in accordance with the regulations made by SEBI in this behalf. If they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

Note:
Rule 8(1) provides that a company other than a listed company shall not issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing know-how or making available rights in the nature of intellectual property rights or value additions unless the issue is authorized by a special resolution passed by the company in general meeting.

Question 19.
What are the benefits of One Person Company? (Dec 2021, 6 marks)
Answer:
Benefits of One One-Person Company
1. The meaning of One Person Company is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company, which means they will get credit, bank loans and access to market, limited liability, and legal protection available to companies.

2. Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a company. ut now the concept of One Person Company would provide tremendous opportunities for small businessmen and traders, including those working in areas like handloom, handicrafts, and pottery.

Prior they were working as artisans and weavers on their own, so they did not have a legal entity of a company. But now the OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business structure.

3. Further, the amount of compliance by a one-person company, is much lesser in terms of filing returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one-person company will have direct access to the market and the wholesale retailers.

Question 20.
What is the procedure for issue of renewed share certificate under Companies Act, 2013? (Dec 2021, 6 marks)
Answer:
Issue of renewed share certificate
As per Rule 6 states that the certificate of any share(s) shall not be issued either in exchange for those which are sub-divided or consolidated or in replacement of those which are defaced, mutilated, torn or old, decrepit, worn out or where the pages on the reverse for recording transfers have been duly utilized unless the certificate in lieu of which it is issued is surrendered to the company. The company may charge such fees as the Board thinks fit, not exceeding 50/ per certificate issued on splitting or consolidation of share certificate(s) or in replacement of share certificate(s) that are defaced, mutilated, tom or old, decrepit or worn out.

In such cases it shall be stated on the face of the share that it is “Issued in lieu of Share Certificate No. Subdivided/replaced/on consolidation” and also that no fee shall be payable pursuant to scheme of arrangement sanctioned by the High Court or Central Government.

A company may replace all the existing certificates by new certificates upon subdivision or consolidation of shares or merger or demerger or any reconstitution without requiring old certificates to be surrendered. The details of such nature are to be entered in the Register maintained for this purpose.

Question 21.
(a) Discuss the relevant provisions of the Companies Act, 2013 relating to issue of bonus shares. (Dec 2022, 9 marks)
(b) What action may be taken by the Central Government on revocation of licence of Section 8 of the Companies Act, 2013? (Dec 2022, 6 marks)

Practical Questions

Question 22.
A Company was incorporated on 6 October 2013. The certificate of incorporation of the company was issued by the Registrar on 25th October 2013. The company on 10th October 2013 entered into a contract, which created its contractual liability. The company denies from the said liability on the ground that company is not bound by the contract entered into prior to issuing of certificate of incorporation. Decide, under the provisions of The Companies Act, 2013, whether the company can be exempted from the said contractual liability. (2013 – Dec,3 marks)
Answer:
Upon the registration of the documents as required under the Companies Act, 2013 for incorporation of a company, and on payment of the necessary fees, the Registrar of Companies issues a certificate that company is incorporated (u/s 34) Section 35 provides that a certificate of incorporation issued by the Registrar is conclusive as to all administrative acts relating to the incorporation and as to the date of incorporation.

The date of incorporation is the birth certificate of a company. The date of issue of birth certificate cannot affect the date of birth of company. The facts as given in the problem are similar to those in case of Jubilee Cotton Mills Vs. Lewis (1924) A.C. 1958 where it was held that an allotment of shares made on the date after incorporation could not be

declared void on the ground that it was made before the company was incorporated when the certificate of incorporation was issued at a later date.

Applying the above principles the contention of the company in this case cannot be tenable (means acceptable). It is immaterial that the certificate of incorporation was issued at a later date.

Since the company came into existence on the date of incorporation stated on the certificate, it is quite legal for the company to enter into contracts.

To conclude the contracts entered into by the company before the issue of certificate of incorporation shall be binding upon the company. The date of issue of certificate is immaterial.

Question 23.
The MOA of a Company was signed by two adult members and by a guardian of the other five minor members, the guardian signing separately for each minor member. The Registrar registered the company and issued under his hand a certificate of incorporation. The plaintiff contended that (a) conditions of registration were not duly complied with, (b) that there were no seven subscribers to the MOA. Will the Tribunal uphold his contention? (June 2014, 3 marks)
Answer:
No. Once the ROC issues the certificate of incorporation, it is the conclusive evidence that all the formalities as required by law regarding the incorporation of company have been complied with.

The certificate of incorporation is conclusive for all purposes. According to the Section 35 of the Companies Act, 2013, a certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereof and no arguments whatsoever can be heard against the incorporation after the issue of certificate of incorporation.

Question 24.
Answer the questions:
(a) The management of Ambika Properties Ltd., has decided to take up the business of chemical processing activity because of the downward trend in real estate business. There is no provision in the object clause of the Memorandum of Association to enable the company to carry on such business. State with reasons whether its object clause can be amended. State briefly the procedure to be adopted for change in the object clause in the light of Companies Act, 2013. (Dec 2015, 5 marks)
(c) Manish, a textiles dealer, supplied certain bales of cloth to the company which is duly incorporated has obtained a certificate of incorporation. However, the company went into liquidation before it could obtain certificate to commence business. Can Manish claim the price of bales of cloth in liquidation proceedings? (Dec 2015, 2 marks)
Answer:
(a) (i) According to Section 13(8) of the Companies Act, 2013, a company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and-
(i) The prescribed details in respect of such resolution are published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and are also placed on the website of the company, if any, indicating herein the justification for such change;

(ii) The dissenting shareholders shall be given a opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board. The Registrar shall register the alteration of the memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution. It may be noted that no alteration with respect to objects shall have any effect until it has been registered as aforesaid [Sec.13(10)].

(c) (i) No, as all contracts, after incorporation but before obtaining certificate to commence business are provisional and not binding on the company titi such certificate is obtained.

[Note: The answer ¡s given as per Section 149(4) of Companies Act, 1956, which is replaced by Section 11 of Companies Act, 2013. As per Companies (Amended) Act, 2015 Section 11 stands omitted]

Question 25.
XYZ Ltd. issued Notice for holding of its Annual General Meeting on 30th September 2019. The notice was posted to the members on 7th September 2019. Some members of the company allege that the company had not complied with the provisions of the Companies Act.
Referring to the provisions of the Act decide.
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall, state and explain by how many days does the notice fall short of the statutory requirement?
(iii) Can the delay in giving notice be condoned? (Dec 2019, 7 marks)
Answer:
Under Section 101(1) of the Companies Act, 2013, Annual General Meeting (AGM) of a company may be called by giving not less than dear twenty-one days notice either in writing or through electronic mode in such manner as may be prescribed.

Also, it is to be noted that clear 21 days notice mean that date of which notice is served and the date of meeting are excluded for sending the notice.

Further, Rule 35(6) of the Company (incorporation Rules,2014, provides that in case of delivery by post, such service shall be deemed to have been effected – in the case of the notice of meeting, at the expiration of forty-eight hours after the letter containing the same is posted. Therefore, in the given
question:

A 21-day clear notice must be given. In the given problem, only 20 days notice is served (after excluding 48 hours from the time of its posting and day of sending, and date of meeting). Hence, the meeting was not validly called.
As explained in (i) above, notice falls short by 1 day.
The Companies Act, 2013 does not provide anything specific regarding the condonation of delay in giving of notice. Therefore, the delay in giving the notice calling the meeting cannot be condoned.

Repeatedly Asked Questions
Question	Frequency
1. State the procedure for shifting of a registered office of the company from one state to another state under the provisions of the Companies Act, 2013. 16 – Dec, 19 – June	2 Times
2. Red herring prospectus 16 – Dec, 19- June	2 Times
3. Discuss the relevant provisions of the Companies Act, 2013 relating to issue of bonus shares. 18 – Dec, 22 – Dec	2 Times
4. What action may be taken by the Central Government on revocation of licence of Section 8 of the Companies Act, 2013? 21 – Dec,22 – Dec	2 Times

Directors And Other Concepts – CMA Inter Law and Ethics Study Material

Short Notes

Question 1.
Write short note of the following term:
Director Identification Number (DIN) (Dec 2017, 5 marks)
Answer:
Every individual, who is to be appointed as director of a company shall make an application electronically in Form No. DIR-3 to the Central Government for allotment of DIN along with the prescribed fees.

The applicant can download the said from the website of Ministry of Corporate Affairs (‘MCA’ for short) duly filled in all respects along with photograph and signed digitally.

The form shall be verified by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.

On application, the system shall generate an application number. The Central Government shall process the application and decide the approval or rejection and communicate the same to the applicant along with the DIN allotted in case of approval by way of a letter by post or electronically or in any other mode within 30 days from the receipt of such application.

If any defect is found in the application the Central Government shall give intimation of such defect or incompletion to the applicant by placing it on its website and by email to the applicant to rectify such defects within 15 days from the date of intimation.

If the same has not been rectified the Government shall reject the application directing to file a fresh application.
In case of rejection or invalidation of application, the fee so paid with the application shall neither be refunded nor adjusted with any other application.

The DIN allotted to a director before the commencement of this Act shall be deemed to be the DIN allotted under the present Act.
The DIN allotted shall be valid up to the lifetime of the Director.
The said number shall not be allotted to any other person. Similarly, a person shall be allotted only one DIN.
The director, on allotment of DIN, is to intimate the company in Form No. DIR-3B within 30 days from the intimation, given to him.

Amendment made by Companies (Amendment) Act, 2017 Proviso to Section 153-
“Provided that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act and in case any individual holds or acquires such identification number, the requirement of this section shall not apply or apply in such manner as may be prescribed.”

Section 159 provides that if any individual or director of a company, contravenes any of the provisions of Section 152 (dealing with the appointment of directors), Section 155 (dealing with prohibition to obtain more than one DIN), and Section 156 (Director to intimate DIN), such individual or director shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues.

Penalty if company does not Inform DIN to RoC within 15 days As per Companies (Amendment) Act, 2019 Section 157(1) of Companies Act, 2013 imposes obligation on every company to inform DIN to RoC within 15 days of receipt of information from the director.

If any company fails to furnish the Director Identification Number under section 157(1), such company shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of one lakh rupees, and every Officer of the company who is in default shall be liable to a penalty of not less than twenty-five thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of one lakh rupees section 157(2) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Penalty violation of provisions by director relating to DIN If any individual or director of a company makes any default in complying with any of the provisions of sections 152, 155, and 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues – section 159 of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Question 2.
Write short note on the following term:
Director Identification Number (Dec 2019, 5 marks)
Answer:
Every individual, who is to be appointed as director of a company shall make an application electronically in Form No. DIR-3 to the Central Government for allotment of DIN along with the prescribed fees.

The applicant can download the said from the website of Ministry of Corporate Affairs (‘MCA’ for short) duly filled in all respects along with photograph and signed digitally.

The form shall be verified by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.

If the same has not been rectified the Government shall reject the application directing to file a fresh application.
In case of rejection or invalidation of application, the fee so paid with the application shall neither be refunded nor adjusted with any other application.
The DIN allotted to a director before the commencement of this Act shall be deemed to be the DIN allotted under the present Act.
The DIN allotted shall be valid up to the lifetime of the Director.
The said number shall not be allotted to any other person. Similarly, a person shall be allotted only one DIN.
The director, on allotment of DIN, is to intimate the company in Form No. DIR-3B within 30 days from the intimation, given to him.

Amendment made by Companies (Amendment) Act, 2017 Proviso to Section 153- “Provided that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act and in case any individual holds or acquires such identification number, the requirement of this section shall not apply or apply in such manner as may be prescribed.”

Penalty if company does not Inform DIN to RoC within 15 days As per Companies (Amendment) Act, 2019 Section 157(1) of Companies Act, 2013 imposes obligation on every company to intimate DIN to RoC within 15 days of receipt of information from the director.

Amendment made by Companies (Amendment) Act, 2017 Proviso to Section 153- “Provided that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act and in case any individual holds or acquires such identification number, the requirement of this section shall not apply or apply in such manner as may be prescribed.”

Descriptive Questions

Question 3.
(a) (i) A company was formed and commenced business but directors were not appointed. In such case who will act as director? (Dec 2013, 2 marks)
(ii) Board acts on the advice given by a person in his professional capacity, whether he shall be treated as director. (Dec 2013, 1 mark)
(b) What are the conditions to be complied with to keep the minutes in the loose-leaf binders? (Dec 2013, 3 marks)
(c) “Audit committee is only luxury to the company”. Do you agree? (Dec 2013, 2 marks)
Answer:
(a) (i) Director: The designation as director does not mean that he indeed is a director. A person who has control over direction, conduct or management of the business of the company is a director. Company’s Act, 2013 provides that only individuals can be director hence a firm, company, association of persons, body of individuals or company can not function as director of a company.

Appointment of first directors: (Section 152 of Companies Act, 2013)

Normally AQA contains the names of first directors.
If AQA does not contain first directors then those who sign the MOA shall decide the names of first directors.
If first directors are not decided in this manner, the subscribers (signatories) to MOA will be deemed as first directors of the company.

(ii) As per Section 35 of, Indian Companies Act, 2013 such person shall not be deemed to be directors.

(b) Minutes may be kept In the loose leaf binders:
The modern practice is to type out or obtain computerized printing of the minutes in loose leaves and then keep them in a binder. The Department of Company Affairs vide File No. 8/16(1)/61 PR have prescribed that, in certain cases, minutes may be kept in loose-leaf binder provided the following conditions are fulfilled:

The pages are serially numbered;
The loose leaves are bound up at reasonable intervals, say not exceeding six months;
There should be proper locking device to ensure security and proper control to prevent irregular removal of the loose leaves.

(c) Audit committee serves as a communication link among various departments and has to interact with management, internal auditor, statutory auditor, and the public.

Audit Committee provides an independent and impartial reassurance to the board through its oversight, supervisory, and monitoring role.

The chief role of audit committee is to ensure that the reporting and disclosure made ¡n the financial statements of the company are correct, accurate, and proper.

The Audit Committee has a responsibility to ensure that the company’s financials do not contain any misrepresentation or misleading information.

There has been many failures on the field of corporate governance and this has given birth to the necessity of audit committee in corporate governance arid the Audit Committee has become increasingly relevant in enhancing confidence in the integrity of an organization’s processes and procedures relating to internal control and financial reporting.

The Audit Committee has become one of the main pillars of corporate governance in checking and forestalling corporate misconduct.

The effectiveness of the Audit Committee determines to a large extent the integrity of a company’s financial statements.

So, it can be said that the given statement is not true. Audit committee is not a luxury to the company and it is an essential element of good corporate governance.

Question 4.
Describe the provisions for disclosure of interest by directors u/s 184 of the Companies Act, 2013. (Dec 2013, 3 marks)
Answer:
The Act provides for the disclosure by directors relating his concern or interest in any company or companies or body corporate (including shareholding interest), firms or other association of individuals by giving a notice in writing in form MBP 1 (Rule 9(1)) at the first meeting of board after being appointed as director and at first meeting of board of every financial year, in addition to this, any change required to be disclosed in next board meeting.

Every director is required to discuss the nature of his concern or interest at the meeting of board in which the contract or arrangement is discussed and he has not to participate in such meeting.

The abovementioned interest may be direct or indirect and relating to some contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with other director holds more than two percent shareholding or is a promoter, mánager, Chief Executive Officer of that body corporate or with a firm or other entity in which such director is a partner, owner or member as the case may be.

It shall be the duty of the director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice. (Rule 9(2))

If a director is not concerned or interested at the time of contract but, subsequently becomes concerned or interested is required to disclose his interest or concern at the first meeting of the board.

All notices shall be kept at the registered office and such notices shall be preserved for a period of eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorized by the Board for the purpose. (Rule 9(3)).

If a contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

The contravention of the provisions leads to punishment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees or both.

Any contract or arrangement entered into or to be entered into between two companies, where any director of any company holds more than two percent of the paid-up capital in other company, the provisions of this section shall not apply.

Note:
Amendment made by Companies (Amendment) Act, 2020:
In Section 184 of the Principal Act, in sub-section (4), for the words “punishable with imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees, or with both”, the words “liable to a penalty of one lakh rupees” shall be substituted.

Question 5.
(a) In a public company the total number of Directors are 9 and 2 offices of the Directors have fallen vacant. Referring to the relevant provisions of the Companies Act, 2013:
(i) What would be the quorum for the Board Meeting?
(ii) Can the articles of a company fix the quorum (higher or lower) for the Board Meeting? (June 2014, 2 marks)
Answer:
Where the total number of Directors is 9 and 2 offices of the Directors have fallen vacant, the number of Directors remaining is 7. Therefore, quorum is to be calculated with reference to 7.
(i) As per Section 174 of Companies Act, 2013, quorum shall be 1/3rd of total strength of the directors and any fraction shall be rounded off to next full figure. In the given case 1/3rd is 2.33. Therefore, where the total strength is 7, the quorum shall be 3.
(ii) The articles of the company may fix a quorum higher than 1/3rd of total strength but not lower than that. If it is fixed on lower side, it will be void.

Question 6.
Answer the question:
(c) (iii) What is the time limit within which the Board has to appoint an Independent director and at which meeting the Independent director is appointed under the Companies Act, 2013? (June 2015, 2 marks)
Answer:
Section 149(5) of the Companies Act, 2013 inter alla provides that companies existing on before the commencement of this Act, which are falling within the ambit of Section 149(4), shall have to appoint Independent Directors within one year from the commencement of Companies Act, 2013 or rules made in this behalf, as may be applicable.

Further, as per Section 152(2) read with Schedule IV of the Companies Act, 2013, inter alla provides that, the appointment of the Independent Director shall be approved by the Company in its meeting of shareholders.

Question 7.
Answer the question:
(i) How many Independent Directors have to be appointed in a company under the Companies Act, 2013? (Dec 2016, 5 marks)
Answer:
Number of Independent Directors:
The following class or classes of companies shall have at least two directors as independent directors:

the Public Companies having paid up share capital of ten crore rupees or more; or
the Public Companies having turnover of one hundred crore rupees or more; or
the Public Companies which have, in aggregate, outstanding loans, debentures, and deposits, exceeding fifty crore rupees.

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

Provided further that any intermittent vacancy of an independent director shall be filled up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

Provided also that where a company ceases to fulfill any of three conditions laid down in sub-rule (1) for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.

Provided that a company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.

Question 8.
(a) Describe the Procedure for the resignation of Director. (June 2017, 9 marks)
(b) Describe the term ‘independent director’ as per the Companies Act, 2013. (June 2017, 6 marks)
Answer
(a) Resignation of a Director
Section 168 provides the procedure for the resignation of a director as detailed below:
A director may resign from his office by giving a notice in writing to the company;
He shall within 30 days from the date of resignation, forward to the Registrar a copy of his resignation along with the reasons for the resignation, in Form No. DIR – 11 along with the fee;

A foreign director may authorize in writing a practicing Chartered Accountant or Cost Accountant or Company Secretary in practice or any other resident director of the company to sign the Form No.
DIR – 11 and file the same on his behalf intimating the reasons for the resignation;
The Board shall on receipt of such notice take notice of the same;
The company shall intimate the Registrar in Form No. DIR- 12 within one month from the date of receipt of such notice;

The said information is to be posted on the website of the company;
The fact of the resignation shall be laid in the report of directors immediately following the general meeting by the company;
The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later;

The director who has resigned shall be liable even after his resignation for the offenses which occurred during his tenure;

Where all directors of a company resign from their offices the promoter or, in his absence, the Central Government shall appoint the required number of directors, who shall hold the office till the directors are appointed by the company in general meeting.

(b) ‘Independent director’ is defined under Section 149(6) of the Companies Act as a director other than a managing director or a whole-time director or a nominee director:

who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
he shall not a promoter of the company or its holding, subsidiary, or associate company;
he shall not relate to the promoters or directors in the company, its holding, subsidiary, or associate company;
he shall not have any pecuniary relationship with the company or their promoters or directors during the two immediately preceding financial years or during the current financial year;
his relatives shall not have any pecuniary relationship with the company or their promoters of directors amounting to 2% or more of its gross turnover or total income ₹ 50 lakhs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial years;
he or his relatives:
holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary, or associate company, in any of the three financial years immediately preceding the financial year;

Is or has been an employee or proprietor or partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of:

a firm of auditors or company secretaries in practice or cost auditors of the company; or
any legal or a consulting firm that has or had any transaction with the company, amounting to 10% or more of the gross turnover of such firm.

holds together with his relatives 2% or more of the total voting power of the company; or is a Chief Executive or Director of any nonprofit organization that receives 25% or more of its receipts from the company, any of its promoters, directors, or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; who possess such other qualifications as may be prescribed.

Question 9.
(a) What are the different duties of a director In a company as per the Companies Act, 2013? (8 marks)
(b) Enumerate the provisions relating to Restrictions on powers of Board. (Dec 2017, 7 marks)
Answer:
(a) Section 166 of the Act prescribes the duties of a director under the provisions of this Act as detailed below:

A director of a company shall act in accordance with the articles of the company
A director of a company shall act In good faith in order to promote the objectives of the company for the benefit of its members as a whole and In the best interests of the company, its employees, the shareholders, the community, and for the protection of environment;

A director of a company shall exercise his duties with due and reasonable care, skill, and diligence and shall exercise independent judgment;

A director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates, and if such director is found guilty of making
any undue gain, he shall be liable to pay an amount equal to that gain to the company;

A director of a company shall not assign his office and any assignment so made shall be void;
If a director of the company contravenes the provisions of Section 166 such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(b) The board can exercise the following powers only with the consent of the company by special resolution, namely –

to sell, lease, or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
to invest otherwise in trust securities the amount of compensation received by t as a result of any merger or amalgamation;
to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;
to remit, or give time for the repayment of, any debt due from a director.

The special resolution relating to borrowing money exceeding paid-up capital and tree reserves specify the total amount up to which the money may be borrowed by Board.

The title of buyer or the person who takes on lease any property, investment or undertaking on good faith cannot be affected and also in case if such sale or lease covered in the ordinary business of such company.

The resolution may also stipulate the conditions of such sale and lease, but this doesn’t authorise the company to rèduce its capital except the provisions contained in this Act.

The debt incurred by the company exceeding the paid-up capital and free reserves is not valid and effectual unless the lender proves that the loan was advanced on good faith and also having no knowledge of limit imposed had been exceeded.

Question 10.
Discuss the provisions of the Companies Act, 2013 regarding disqualifications for appointment of director. (June 2018, 10 marks)
Answer:
Section 164 of the Companies Act, 2013 details the disqualification of a person for the appointment as a Director. A person shall not be eligible for appointment as a Director of a company, if –

he is of unsound mind and stands so declared by a competent court;
he is an undischarged insolvent;
he has applied to be adjudicated as an insolvent and his application is pending;
he has been convicted by a Court of any offence, whether involving moral turpitude or otherwise, and sentenced to imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the Sentence;

Provided that
it a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as a director in any company;

an order disqualifying him for appointment as a director has been passed by the Tribunal and the Order is in force;
he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others and six months have elapsed from the last day fixed for the payment of the call;
he has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years; or
he has not complied with sub-Section (3) of Section 152;
he has not complied with the provision of Section 165(1). (As per Amendment Companies Act, 2019).

A private company may by its articles provide for any disqualifications for appointment as a director in addition to the above disqualifications.

The disqualifications in (d), (e) and (f) shall not take effect:

for 30 days from the date of conviction or order of disqualification;
where an appeal or petition is preferred within 30 days against the conviction resulting in sentence or order, until
expiry of 7 days from the date on which such appeal or petition is disposed of;

where any further appeal or petition is preferred against order or sentence within 7 days until such further appeal of petition is disposed of.

Note: Inserted a clause in section 164: Disqualifications from appointment of directors:
A new clause (i) after clause (h) in section 164(1) inserted, whereby a person shall be subject to disqualification if he accepts directorships exceeding the maximum number of directorships provided in Section 168.

Question 11.
“Directors are agents of the company.”- Discuss. (June 2018, 5 marks)
Answer:
The company can act only through Directors, and so the relationship between the company and the Director is that of Principal and Agent.

A contract entered into by a person as a Director of a company will be binding on the Company. However, Directors are note Agents of Members of the company.

Directors have personal Iiablflty. They would be personally liable under the following circumstances:
Director acts in his own name, Director enters into an agreement! contract which does not state clearly as to whether the Director signing in his personal capacity or in his representative capacity as an Agent of the Company.

Rights of the Company:
Contract executed by the Director in excess of his authority is binding on the Company. However, the Company may claim damages from the Director for breach of implied warranty of authority. When Directors act properly on behalf of the Company, they do not incur personal liability; they do not exceed their powers.

Question 12.
(a) Discuss the powers of the Board of Directors of a company as per the Companies Act, 2013. (Dec 2018, 10 marks)
(b) Enumerate the provisions of the Companies Act, 2013 relating to women directors in a company. (Dec 2018, 5 marks)
Answer:
(a) According to Section 179 of the Companies Act, 2013 provides that the powers of the board; all powers to do such acts and things for which the company is authorised is vested with board of directors.

But the board can act or do the things for which powers are vested with them and not with general meetings.

The following Section 179(3) read with Rule 8 of Companies (Management & Administration) Rules, 2014 powers of the Board of Directors shall be exercised only by means of resolutions passed at meetings of the Board, namely:

to make calls on shareholders in respect of money unpaid on their shares
to authorise buy-back of securities under Section 68
to issue securities, including debentures, whether in or outside India
to borrow monies
to invest the funds of the company
to grant loans or give guarantee or provide security in respect of loans
to approve financial statement and the Board’s report
to diversify the business of the company
to approve amalgamation, merger or reconstruction
to take over a company or acquire a controlling or substantial stake in another company
to make political contributions
to appoint or remove key managerial personnel (KMP)
to appoint internal auditors and secretarial auditor

Important: The Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in (4) to (6) above on such conditions as it may specify.

The banking company is not covered under the purview of this section.
The company may impose restrictions and conditions on the powers of the Board.
Although, unless specifically restricted under the Act or Article of Association, Board has all the powers to manage the affairs of the company

(b) Second proviso to Section 149(1) of the Companies Act, 2013 read with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014 provides that the following classes of companies shall appoint at least one woman director

every listed company;
every other public company having
paid-up share capital ₹ 100 crores or more; or
turnover of ₹ 300 crores or more.

For this purpose, the paid capital or turnover as on the last date of latest audited financial statements shall be taken into account.

A company incorporated under the Companies Act shall comply with such appointment of woman director within a period of six months from the date of its incorporation.

Any intermittent vacancy of a woman director shall be filed up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

Question 13.
(a) Describe the procedure for the resignation of Director under the Companies Act, 2013. (June 2019, 10 marks)
(b) Discuss the rules of appointment of directors elected by small shareholders in a company. (June 2019, 5 marks)
Answer:
(a) Resignation of Director:
Section 168 of the Companies Act 2013, provides the procedure for the resignation of a director as detailed below:

A director may resign from his office by giving a notice in writing to the company
He may within 30 days from the date of resignation, forward to the Registrar a copy of his resignation along with the reasons for the resignation, in Form No. DIR – 11 along with the fee
A foreign director may authorize in writing a practicing Chartered Accountant or Cost Accountant in practice or Company Secretary in practice or any other resident director of the company to sign the Form No. DIR – 11 and file the same on his behalf intimating the reasons for the resignation
The Board shall on receipt of such notice take notice of the same;
The company shall intimate the Registrar in Form No. DIR-12 within one month from the date of receipt of such notice
The said information is to be posted on the website of the company;
The fact of the resignation shall be included in the report of directors laid, in immediately following general meeting by the company
The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later
The director who has resigned shall be liable even after his resignation for the offenses which occurred during his tenure.

Note: Amendment made by Companies Amendment Act, 2017 in Section 168(1):
Provided that a [director may also forward] a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.

(b) Process of appointment of director elected by small shareholders:
‘Small shareholder’ means a shareholder holding shares of nominal value of not more than ₹ 20,000 or such other sum as may be prescribed. A listed company may have one director elected by small shareholders.

Rules 7 requires that a listed company, may upon notice of not less than 1000 small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by small shareholders.

Such director shall not be liable to retire by rotation. The tenure shall not exceed a period of three consecutive years and on the expiry of the tenure such director shall not be eligible for reappointment. A disqualified person for the appointment of director shall not be eligible for such appointment. No person shall hold the position of small shareholder’s director in more, than two companies at the same time. A small shareholders’ director shall not, for a period of 3 years from the date on which he ceases to hold office as a small shareholders’ director in a company, be appointed in or be associated with such company in any other capacity either directly or indirectly.

Question 14.
(a) What are the different duties of a director in a company as per the Companies Act, 2013? (Dec 2019, 7 marks)
(b) What are the disqualifications of a person for the appointment as a director under the Companies Act, 2013? (Dec 2019, 8 marks)
Answer:
(a) Section 166 of the Act prescribes the duties of a director under the provisions of this Act as detailed below:

A director of a company shall act in accordance with the articles of the company
A director of a company shall act In good faith in order to promote the objects of the company for the benefit of its members as a whole and In the best interests of the company, its employees, the shareholders, the community, and for the protection of environment;
A director of a company shall exercise his duties with due and reasonable care, skill, and diligence and shall exercise independent judgment;
A director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company;
A director of a company shall not assign his office and any assignment so made shall be void;
If a director of the company contravenes the provisions of Section 166 such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(b) The board can exercise the following powers only with the consent of the company by special resolution, namely –

to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
to invest otherwise in trust securities the amount of compensation received by t as a result of any merger or amalgamation;
to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;
to remit, or give time for the repayment of, any debt due from a director.
The special resolution relating to borrowing money exceeding paid-up capital and tree reserves specifies the total amount up to which the money may be borrowed by Board.

The title of buyer or the person who takes on lease any property, investment, or undertaking on good faith cannot be affected and also in case if such sale or lease covered in the ordinary business of such company.

The resolution may also stipulate the conditions of such sale and lease, but this doesn’t authorise the company to rèduce its capital except the provisions contained in this Act.

(b) Section 164 of the Companies Act, 2013 details the disqualification of a person for the appointment as a Director. A person shall not be eligible for appointment as a Director of a company, if –

he is of unsound mind and stands so declared by a competent court;
he is an undischarged insolvent;
he has applied to be adjudicated as an insolvent and his application is pending;
he has been convicted by a Court of any offence, whether involving moral turpitude or otherwise, and sentenced to imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the Sentence;

an order disqualifying him for appointment as a director has been passed by the Tribunal and the Order is in force;
he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others and six months have elapsed from the last day fixed for the payment of the call;
he has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years; or
he has not complied with sub-Section (3) of Section 152;
he has not complied with the provision of Section 165(1). (As per Amendment Companies Act, 2019).

A private company may by its articles provide for any disqualifications for appointment as a director in addition to the above disqualifications.

The disqualifications in (d), (e) and (f) shall not take effect:

for 30 days from the date of conviction or order of disqualification;
where an appeal or petition is preferred within 30 days against the conviction resulting in sentence or order, until expiry of 7 days from the date on which such appeal or petition is disposed of;
where any further appeal or petition is preferred against order or sentence within 7 days until such further appeal of petition is disposed of.

Question 15.
What are the different duties of a director of a company under the Companies Act, 2013? (Dec 2021, 6 marks)
Answer:
(a) Section 166 of the Act prescribes the duties of a director under the provisions of this Act as detailed below:

A director of a company shall act in accordance with the articles of the company;
A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees, the shareholders, the community, and for the protection of environment;

A director of a company shall exercise his duties with due arid reasonable care, skill and diligence and shall exercise independent judgment;

A director shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;

A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates, and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company;

A director of a company shall not assign his office and any assignment so made shall be void;
It a director of the company contravenes the provisions of Section 166 such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(b) The board can exercise the following powers only with the consent of the company by special resolution, namely –

to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and tree reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;
to remit, or give time for the repayment of, any debt due from a director.

The special resolution relating to borrowing money exceeding paid-up capital and free reserves specify the total amount up to which the money may be borrowed by Board. The title of buyer or the person who takes on le e any property, investment or undertaking on good faith cannot be affected and also in case if such sale or lease covered in the ordinary business of such company.

The resolution may also stipulate the conditions of such sale and lease, but this doesn’t authorise the company to ròduce its capital except the provisions contained in this Act. The debt incurred by the company exceeding the paid-up capital and free reserves is not valid and effectual unless the lender proves that the loan was advanced on good faith and also having no knowledge of limit imposed had been exceeded.

Question 16.
(a) Can a director be removed? If so give the procedure in detail as per Companies Act, 2013. (Dec 2022, 10 marks)
(b) Discuss the prohibitions and restrictions regarding political contributions made by a company under the Companies Act, 2013. (Dec 2022, 5 marks)

Practical Questions

Question 17.
(a) Mr. Lalit, a Director of XY Limited proceeding on a long foreign tour, appointed Mr. Mohan as an alternate director to act for him during his absence. The articles of the company provide for appointment of alternate directors. Mr Lalit claims that he has a right to appoint alternate director. State whether Mr. Lalit is correct based on legal provision? ‘ (June 2014, 3 marks)
Answer:
Appointment of alternate director can be done by the BOD and not by any individual director. Mr. Lalit ¡s not correct based on legal provision. Section 161(2) of the Companies Act, 2013 provides that the Board of Directors of a company may, if authorized by its Articles or by resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than 3 months from the State in which the meetings of the Board are ordinarily held. The alternate director can be appointed only by the Board of Directors and only in cases where the Board is authorized by Articles or by the company in general meeting.

Hence Mr. Lalit the director in question, is not competent to appoint alternate director and the appointment of Mr. Mohan as alternate director is not valid.

Question 18.
Answer the question:
Mr. Joseph is the director of a Public Limited Company. He has been removed by the company before the expiry of his term, by passing an ordinary resolution in general meeting. Is the company justified in its action? Is Mr. Joseph entitled to claim compensation for loss of his office? (June 2015, 3 marks)
Answer:

Yes, the company is justified in this action;
As per Section 169 of Companies Act, 2013, a company has the power to remove a director by ordinary resolution before the expire of his office.

Mr. Joseph is not entitled to claim any compensation for loss of his office. As per Section 202, a director is not entitled to any compensation for loss of office. In the present case Mr. Joseph is removed by passing an ordinary resolution, and such removal is valid being authorized under Section 169. There is no entitlement of a director to claim compensation for such removal in view of Section 202. Only a managing director, or a director holding office of manager, or a director in whole-time employment are entitled to compensation for loss of office [Section 202].

Question 19.
Answer the question:
Atul was appointed director of the company in its Annual General Meeting. He took over the office and started acting on behalf of the company as its director. Subsequently, it was found that the appointment of the director was not valid because in the meeting where he was appointed, certain members who had voted were not qualified to vote and certain members had voted twice by mistake.

There were also certain mistakes in the counting of votes. As such, the appointment of the director was held to be invalid. Would the acts of Atul, done by him as director, be vaIj1 and binding upon the company? (Dec 2015, 3 marks)
Answer:
According to Sec. 176 of Companies Act, 2013, all acts of the director are valid notwithstanding the fact that his appointment is afterwards discovered to be invalid, the reason of any defect in his appointment.

This is to protect outsiders as well as members dealing with the company. In this case, the defects in the appointment of the director were found out subsequent to his appointment. The director had no knowledge of the defects until he had started acting as a director. The validity of the acts of the director cannot be questioned just on the basis of irregularities subsequently discovered in the appointment of the director.

Question 20.
Answer the question:
AB Ltd. has advanced a loan of ₹ 2,00,000 to one of its directors in Contravention of the provision of Section 185 of the Companies Act, 2013. State the consequences of such contravention. (Dec 2016, 5 marks)
Answer: .
Loans to Directors (Section 185 of Companies Act, 2013):
Amendment made by Companies (Amendment) Act, 2017. Section 185 of the principal Act, the following section shall be substituted, namely:-
1. No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,-

any director of company, or of a company which is its holding company or any partner or relative of any such director; or
any firm in which any such director or relative is a partner.

2. A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that-

a special resolution is passed by the company in general meeting:
Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security and any other relevant fact; and
the loans are utilized by the borrowing company for its principal business activities.

Explanation.-For the purposes of this sub-section, the expression ‘any person in whom any of the director of the company is interested’ means-

any private company of which any such director is a director or member;
any body corporate at a general meeting of which not less than twenty-five percent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(3) Nothing contained in sub-sections (1) and (2) shall apply to
(a) the giving of any loan to a managing or whole-time director-

as a part of the conditions of extended by the company to all its employees; or,
pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or

(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

(4) If any loan is advanced ora guarantee or security is given or provided or utilised in contravention of the provisions of this section,

the company shall be punishable with fine which shalÌ riot be less than five lakh rupees but which may extend to twenty-five lakh rupees.
every officer of the company who is ¡n default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend twenty-five lakh rupees, or with both.”

Repeatedly Asked Questions
Question	Frequency
1. Write short note of the following term: Director Identification Number (DIN) 17- Dec, 19- Dec,	2 Times
2. Descriptive the following: What are the different duties of a director in a company as per the Companies Act, 2013? 17 – Dec, 19 – Dec	2 Times
3. Descriptive the following: Discuss the provisions of the Companies Act, 2013 regarding disqualifications for appointment of director. 18 – June, 19 – Dec	2 Times

Company Types, Promotion, Formation, And Related Procedures CMA Inter Law, and Ethics Notes

1. Company
A company is an association of both natural and artificial persons incorporated under the existing law of a country. A company has a separate legal entity from the persons constituting it.

2. Characteristics of a Company
The main characteristics of a company are corporate personality, limited liability, perpetual succession, separate property, transferability of shares, common seal, capacity to sue and be sued, contractual rights, limitation of action, separate management, termination of existence, etc.

3. Compared to other types of business associations
As compared to other types of business associations, an incorporated company has the advantage of corporate personality, limited liability, perpetual succession, transferable shares, separate property, capacity to sue, flexibility and autonomy.

4. Disadvantages and inconveniences in incorporation
There are, however, certain disadvantages and inconveniences in incorporation. Some of these disadvantages are formalities and expenses, corporate disclosures, separation of control from ownership, greater social responsibility, greater tax burden in certain cases, and cumbersome winding-up procedure.

5. Doctrine of lifting of or piercing the corporate veil Separate personality of a company is a statutory privilege and 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 Tribunal will break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate veil”.

6. LLP
It is an alternative corporate business form that give the benefits of limited liability of a company and the flexibility of 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 and is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

7. Corporation
An organization formed under state law for the purpose of carrying on a business enterprise is such a manner as to make the enterprise distinct froms owners.

8. Illegal association
As per Section 464 of Companies Act, no association or partnership consisting of more than such number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force. The number of persons which may be prescribed under this section shall not exceed 100. Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.

9. Types of Company
From the point of view of incorporation, companies can be classified as chartered companies, statutory companies, and registered companies. Companies can be categorized as unlimited companies, companies limited by guarantee, and companies limited by shares.

Companies can also be classified as public companies, private companies, one-person companies, small companies, associations not for profit having license under Section 8 of the Act, Government Companies, Foreign Companies, Holding Companies, Subsidiary Companies, Associate Companies, Investment Companies, and Producer Companies.

10. Private Company
A private company has been defined under Section 2(68) of the Companies Act, 2013 as a company which has a minimum paid-up capital of ₹ 1,00,000 or such higher paid-up capital as prescribed and by its articles restricts the right to transfer its shares, limits the number of its members to two hundred and prohibits any invitation to the public to subscribe for any securities of the company.

Amendment Made by Companies (Amendment) Act, 2015 Provides that ¡n clause (68), the words “of one lakhs rupees or higher paid-up share capital” shall be omitted.

11. One-Person Company
One Person Company” means a company which has only one person as a member.

12. “Small Company”
“Small company” means a company, other than a public company, (i) paid-up share capital of which does not exceed ₹ 4 crores or such higher amount as may be prescribed which shall no be more than ₹ 10 crores, or

(ii) turnover of which as per its last profit and loss account does not exceed ₹ 40 crores or such higher amount as may be prescribed which shall not be more than ₹ 100 crores.

13. Public Company
A public company is a company which (a) is not a private company (b) has a minimum paid-up share capital of 5 Iakh or such higher paid-up capital, as may be prescribed.

Amendment Made by Companies (Amendment) Act, 2015:
Provides that in clause (68). the words “of ₹ 5 lakhs or higher paid share capital” shall be omitted.

14. Limited Company
A limited company is a company limited by shares or by guarantee. An unlimited company is a company not having any limit on the liability of its members.

15. Foreign Company
Foreign Company means any company or body corporate incorporated outside India which (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.

16. Investment Company
Investment Company means a company whose principal business is the acquisition of shares, debentures or other securities.

17. Association not for profit
Section 8(1) permits the registration, under a licence granted by the Central Government, of associations not for profit with limited liability without being required to use the word “Limited” or the words “Private Limited” after their names. The Central Government may grant such a license if:

it is intended to form a company for promoting commerce, art, science, sports, education, research, social welfare, religion, charity protection of environment or any such other object; and
the company prohibits payment of any dividend to its members but intends to apply its profits or other income in promotion of its objects.

18. Government Companies
A company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company whach is a subsidiary company of such a Government Company.

19. Holding Company
As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Amendment made by Companies (Amendment) Act, 2017:
Explanation to Section 2(46)-
“Explanation.- For the purposes of this clause, the expression company’ includes anybody corporate;”

20. Subsidiary Company
Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company-

controls the composition of the Board of Directors; or
exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.

21. Control
It shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

22. Dormant Companies
As per Section 455 (1) where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

23. Associate Company
As per Section 2(6), “Associate Company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Amendment made by Companies (Amendment) Act, 2017:
Revised Explanation to Section 2(6)- ‘Explanation.
For the purpose of this clause- the expression “significant influence” means control of at least twenty percent, of total voting power, or control of or participation in business decisions under an agreement;
the expression “joint ventures means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.”

24. Position of OPC In India under the Companies Act, 2013
As per Section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member. Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be formed is to be One -person company, that is to say, a private company. In other words, one person company is a kind of private company.

A One-person company shall have a minimum of one director. Therefore, a one-person company will be registered as a private company with one member and one director.

Promoters
25. Promoters are the persons who conceive the idea of forming a company and take the necessary steps to incorporate it by registration, provide it with share and loan capital, and acquire the business or property which it is to manage [Section 2(69)].

26. A promoter is neither an agent of nor a trustee for the company. But he occupies a fiduciary position in relation to the company.

27. Disclosure by promoters to the company should be through the medium of the Board of Directors.

28. A promoter has ho legal right to claim promotional expenses for his services unless there is a valid contract.

29. Liabilities of promoter

Incorporation of company by furnishing false information.
Civil Liability for misstatements in prospectus;
Punishment for fraudulently inducing persons to invest money;
Contravention of provisions relating to private placement;
Failure to cooperate with Company Liquidator during winding up;
Criminal Liability for misstatement in prospectus.

30. Rights of promoters

Right to receive preliminary expenses;
Right to recover proportionate amount from the Co-promoters.

31. Procedure for incorporation of a Company

Application for Availability of Name of Company;
Preparation of Memorandum and Articles of Association;
Filling of Documents with Registrar of Companies;
Declaration from the professional;
Declaration from the subscribers to the Memorandum;
Furnishing verification of Registered Office
Filing of particulars of Subscribers
Filing particulars of first directors along with their consent to act as directors
Power of Attorney: Execution of power of attorney on a non-judicial stamp paper of a value prescribed in state stamp laws.
Issue of Certificate of Incorporation by Register.

32. Steps to be taken by a promoter
The first few steps to be taken by a promoter in incorporating a company are to apply for availability of name of company, prepare the memorandum and articles of association, and get them vetted, printed, stamped, and signed. The promoter should then execute power of attorney and file additional documents as required under section 7. He should then file statutory declaration and pay the registration fees.

33. Civil as well as criminal liability
Civil as well as criminal liability may be imposed on a promoter for any misleading statement in the prospectus if loss or damage has been sustained by a person who has subscribed for any securities of the company on the faith of the prospectus.

34. Conclusive evidence
The certificate of incorporation is conclusive evidence that everything is in order as regards registration and that the company has come into existence from the earliest moment of the day of incorporation stated therein.

35. Memorandum of Association
The Memorandum of Association is a document which sets out the constitution of the company and is the foundation on which the structure of the company stands. It defines as well as confines the powers of the company. If the company enters into contract or engages in any trade or business which is beyond the powers conferred on it by the memorandum, such a contract or the act will be ultra vires the company and hence void.

However, the Companies Act, 2013 shall override the provisions in the memorandum of a company, if the latter contains anything contrary to the provisions in the Act.

36. Clauses
Memorandum of Association consists of:

Name Clause
Situation Clause
Object Clause
Liability Clause
Capital Clause
Subscription Clause

37. Articles
Articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act. It also includes the regulations contained in Tables F to J in Schedule I of the Act, in so far as they apply to the company.

38. Scope and powers of the company
The memorandum lays down the scope and powers of the company and the articles govern the ways which the objects of the company are to be carried out and can be framed and altered by the members.

39. Alter its articles of association
A company has a statutory right to Alter its articles of association. But the power to alter is subject to the provisions of the Act and to the conditions contained in the memorandum. Any alteration so made shall be as valid as if originally contained in the articles.

40. Registration of MOA/AOA
The memorandum and articles, when registered, bind the company and its members to the same extent as if they have been signed by the company and by each member to observe and be bound by all the provisions of the memorandum and of the articles.

41. Alteration of memorandum
1. Name Change:

Pass Special Resolution
Approval of Central Government
To delete the word “private” approval from Central Government is not required in case of conversion of private company to public company.

2. Change in Registered Office:

Change within local limits:
Pass Board Resolution and Special Resolution Notice of change to registrar in INC 22 within 15 days of such change

Change of State:
Approval of Central Govt. In INC 23 the Approval should be registered with Registrar for Incorporation Certificate

Change in jurisdiction of Registrar:
Get confirmation by Regional Director Communication of confirmation by Regional Director to the company within 30 days.

3. Change In Liability:

Needs Special Resolution to be passed.
File the same with Registrar in form MGT 14.

4. Change In Capital:

alteration of capital clause to be authorised by the Articles ot Association [Section 61]; Ordinary Resolution
If by division or consolidation in capital the voting percentage gets affected then a confirmation from Tribunal is mandatory.
Notify the alterations made and a copy of Resolutions passed shall be filed with Registrar within 30 days.
Registrar shall record the notice and make alterations required.

42. Doctrine of constructive notice
As per doctrine of constructive notice, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles. Outsiders dealing with incorporated bodies are bound to take notice of limits imposed on the corporation by the memorandum or other documents of constitution. Nevertheless, they are entitled to assume that the directors or other persons exercising authority on behalf of the company are doing so in accordance with the internal regulations as set out in the Memorandum & Articles of Association.

43. Doctrine of indoor management
While the doctrine of constructive notice seeks to protect the company against the outsiders, the doctrine of indoor management operates to protect the outsiders against the company. While persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles have been observed by the officers of the company. However, there are certain exceptions to doctrine of indoor management.

44. Doctrine of ultra vires
In the case of a company whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires (The word ‘ultra’ means beyond and the word ‘vires’ means powers).

45. Share capital
Share capital of a company can be classified as:

nominal, authorized, or registered capital;
issued and subscribed capital;
called up and uncalled capital;

46. Share
A share is defined as a share in the share capital of a company, including stock except where a distinction between stock and shares is expressed or implied.

47. Two classes of shares
The Companies Act, 2013 permits a company limited by shares to issue two classes of shares, namely equity share capital and preference share capital.

48. Preference share
A preference share or preference share capital is that part of share capital which carries a preferential right with respect to both dividends and capital.

49. Types of preference shares
Preference shares may be of various types, namely participating and non-participating, cumulative and non-cumulative shares, and redeemable and irredeemable preference shares.

50. Equity share capital
Equity share capital means all share capital which is not preference share capital

51. Sweat equity snares
Means equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Issue of sweat equity shares to be authorized by special resolution at a general meeting.
The special resolution authorizing sweat equity shares is not valid if the allotment is made after 12 months of passing
the resolution. i.e. the validity of special resolution is 12 months.
The price of sweat equity shares is to be determined by a registered valuer.
The company shall maintain a Register of Sweat Equity Shares in Form No. SH3 Issue of sweat equity shares to employees and directors at a discount under section 54 is outside the scope of Section 53.

52. Rights issue

Rights issue is an issue of capital to be offered to the existing shareholders of the company through a letter of offer.
Listed companies to inform concerned stock exchanges
Company to give notice to equity shareholder giving him 15-30 days to decide
Company can issue shares to other than existing shareholders for cash or other than cash if a special resolution is obtained
Price to be determined by the registered valuer’s report
The provisions of Section 62 are applicable to all type of companies.

53. Bonus share
When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. A company may if its Articles provide, capitalize its profits by issuing fully-paid bonus shares

Authorized by articles

Authorised on recommendation of the board in general meeting
No default in payment of interest or principle in respect of debt securities and fixed deposits and in respect of payment to employees
Partly paid-up shares to be made fully paid up on allotment
Listed companies to follow SEBI regulations
Once announced by the board about bonus issue no company shall withdraw the same.

54. Issue of shares at premium [Section 52]

Share premium to be transferred to share premium account.
Utilisation of share premium account should be as prescribed in Section 52.

55. Issueot shares at discount [Section 53]

Issue of shares at discount is prohibited except by issue of sweat equity shares.
Any share issued by the company at a discount shall be void.

56. Issue of shares with differential voting rights [Section 43(a) (ii)]

Articles to authorise the issue
Ordinary resolution to be passed and if shares are listed then approval through postal ballot.
Not to exceed 26% of total post issue paid up equity capital including shares with differential voting rights at any point of time
The company not to be penalised under specified legislature in last 3 years
No default in filing financial statements in the last 3 years.
No default in payment of dividend.

57. Issue/redemption of preference shares [Section 55]

Issue to be authorised by special resolution
Explanatory statement to be annexed to the notice of general meeting containing the relevant material facts
No company shall issue irredeemable preference shares of redeemable preference shares with the redemption period beyond 20 years.
Infrastructural companies may issue preference shares for a period exceeding 20 years but not exceeding 30 years

58. ESOP

Pass special resolution
Disclosures to be made in explanatory statement
Free pricing in conformity with accounting policies
Separate resolution to be obtained for granting options to employees of holding/subsidiaries
Minimum 1-year period between grant of options and vesting of option Company is tree to set lock-in period
Option granted shall not be transferable, pledged, hypothecated, mortgaged in any manner
Disclosures to be made in board report
Register to be maintained in form sh-6
Listed companies to comply with SEBI guidelines

59. Preferential issue Rule 13 of the companies (share capital and debentures) rules, 2014

Pass special resolution
Listed company shall follow SEBI regulations
Issue to be authorised by the articles
Securities to he macle fully paid up on allotment
Disclosures to be made in explanatory statement to be annexed to the notice of general meeting
Allotment to get completed within 12 months if not completed a fresh resolution is required
Price determination by the registered valuer’s report

60. Prospectus
Prospectus has been defined as any document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32 or shelf prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate. A company is an association of both natural and artificial persons incorporated under the existing law of a country. A company has a separate legal entity from the persons constituting it.

61. IngredIents of a prospectus
One of the ingredients of a prospectus is to make invitation to the public to subscribe for securities of a body corporate which is construed as including a reference to any section of the public, whether selected as members or debentureholders of the company or as clients of the person issuing the prospectus. However, there are exceptions to it.

62. Shelf prospectus
A shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus (Section 31).

63. Red herring prospectus
Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

64. Content of prospectus
Companies Act and SEBI guidelines provide for contents and disclosures required in a prospectus.

65. Abridged prospectus
Abridged prospectus is usually a shorter form of the Prospectus and possesses all the significant features of a Prospectus. This accompanies the application form of public issues.

66. Private placement
Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in Section 42.

Offer Letter to be in Form No. PAS-4

The offer shall not be made to more than 200 persons excluding Q/Bs and the employees of the company in a financial year under the scheme of ESOS only the person addressed in the application can apply Prior passing a special resolution at general meeting.
All monies payable on subscription shall not be paid by cash.
If unable to allot within 60 days then repay the money in 15 days from the end of those 60 days and money shall be refunded with interest @12%p.a.
Offer only to be made to those whose names are recorded by the company
The record shall be kept in Form No. PAS-5
A copy of record to be filed with registrar along with PAS-4 and with SEBI and the stock exchange within 30 days.

Amendment made by Companies (Amendment) Act, 2017:
The Private Placement process is simplified by doing away with separate offer letter details to be kept by company and reducing number of filings to Registrar.

In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 1 3(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form.

There would be ease in the private placement offer-related documentation to enable quick access to funds. Change in definition of private placement is proposed to cover all securities offer and invitations other than right.

There is condensed format of private placement offer letter and application form likely to be introduced The Companies would be allowed to make offer of multiple security instruments simultaneously. Restriction on utilization of subscription money before making actual allotment and additionally before filing the allotment return to the registrar. Since contract is concluding on allotment and return filing is just a post-conclusion compliance, there may be difficulty in compliance.

The penalty provisions for raising of capital are proposed to be rationalized by linking it to the amount involved in the issue (twice the amount involved or ₹ 2 crores whichever is lower). Period for filing return of return of allotment is proposed to be reduced to 15 days.

67. Buy-back of shares
The repurchase of shares by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply) or to eliminate any threats by shareholders who may be looking for a controlling stake.

68. Reduction of capital

Reduction of capital means reduction of issued, subscribed or paid-up share capital of the company. Various modes of reduction have been laid down in the Companies Act.
Reduction of share capital is governed by the provisions of Section 66 of the Companies Act, 2013.
Reduction of share capital is required to be done by special resolution.
Reduction of share capital is to be confirmed by the Tribunal.

69. Surrender of shares
Surrender of shares means surrender to the company on part of shareholder of shares voluntarily. It amount to reduction of capital.

70. Forfeiture of shares
A company may if authorized by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Tribunal and amounts to reduction of capital.

71. Diminution of capital
Diminution of capital is the cancellation of the unsubscribed part of the issued capital. It can be effected by an ordinary resolution provided articles of the company authorize to do so. It does not need any confirmation of Tribunal.

72. Debenture
A debenture is a document given by a company under its seal as an evidence of a debt to the holder usually arisen out of a loan and most commonly secured by a charge.

Amendment made by Companies (Amendment) Act, 2017
In Section 2 in clause (30), the following proviso shall be inserted, namely: “Provided that-

the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company, shall not be treated as debenture.

73. Kinds of debentures
Debentures may be of different kinds, viz, redeemable debentures, registered and bearer debentures, secured and unsecured or naked debentures, convertible debentures.

74. Debenture stock
A debenture stock is a borrowed capital consolidated into one mass for the sake of convenience.

75. Debenture Redemption Reserve
Section 71(4) of the Act required every company to create a debenture redemption reserve account to which adequate amount shall be credited out of its profits available for payment of dividend until such debentures are redeemed and shall utilize the same exclusively for redemption of a particular set or series of debentures only.

76. Appointment of Debenture Trustees
Section 71(5) read with Rule 18(2) of aforesaid rules, provide that a company before making issue of prospectus or an offer or inviting public or members to more than 500 persons, shall appoint one or more debenture trustees. The names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders. Before the appointment of debenture trustee or trustees, a written
consent shall be obtained from such debenture trustee.

77. Duties of Debenture Trustees
Section 71(6) read with Rule 18(3) of aforesaid rules provide that a debenture trustee shall take steps to protect the interests of the debenture holders and redress their grievances.

It shall be the duty of every debenture trustee to:

satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
call for periodical status or performance reports from the company;
inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;
ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;

78. Debenture trust deed
Debenture trust deed is a document created by the company, whereby debenture trustees are appointed to protect the interest of Debenture holders before they are offered for public subscription.

79. Company
Company may accept deposit from its members by passing a resolution in general meeting and subject to conditions as may be prescribed in the Rules including Credit rating, Deposit insurance, etc.

80. Eligible company
Eligible company public company may accept deposits, if it has a net worth of not less than ₹ 100 crore or a turnover of not less than ₹ 500 crore and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies and where applicable, with the Reserve Bank of India before making any invitation to the Public for acceptance of Deposits.

81. Deposit trustees
No company under sub-section (2) of section 73 or any eligible company shall issue a circular or advertisement inviting secured deposits unless the company has appointed one or more deposit trustees for creating security for the deposits.

82. Deposit Insurance
Amendment made by Companies (Amendment)Act, 2017
A contract providing for deposit insurance at least thirty days before the issue of circular or advertisement. In Section 73of the principal Act, in sub- Section (2),- clause (d) shall be omitted;

83. Foreign Investment
Repatriation Capital flow from a foreign country to the country of origin. This usually refers to returning returns on a foreign investment in case of a corporation or transferring foreign earnings home in case of an individual.

84. Quantum of deposits

Type of company	Members	Public
Eligible Company	Upto 10% of aggregate of the paid-up share capital, free reserves, and Security Premium Account.	Upto 25% of aggregate of the paid-up share capital free reserves and Security Premium Account.
Company other than Eligible Company	Upto 35% of aggregate of the paid-up share, free reserves, and Security Premium Account.	Prohibited
Government Company	–	Upto 35% of aggregate of the paid-up share capital, free reserves, and Security Premium Account.

85. Procedure of acceptance of deposit
(a) Points of difference

Category of Company	Private Company	Public Company (other than eligible company)	Public company (eligible company under Section 76 of the Act)
Source of Deposits	From directors and members	From directors and members	From directors, members and general public
Condition for deposits to be taken from shareholders	It is allowed to be taken subject to the limit of 35% of the paid-up share capital, free reserves and Premium Security Account.	It is allowed to be taken subject to the limit of 35% of the paid-up share capital, free reserves and Premium Security Account.	It is allowed to be taken subject to the limit of 10% of the paid-up share capital, free reserves and Premium Security Account.
Conditions for deposits to be taken from Public	Prohibited	Prohibited	It is allowed to be taken subject to the limit of 25% of the paid-up share capital, free reserves and Premium Security Account.
Resolution	The company should pass a resolution in a general meeting	The company should pass a resolution in a general meeting	The company should pass a special resolution in a general meeting and file the same with the Registrar. However, ordinary resolution would be sufficient if the amount is within the limit specified under Section 180 of the Act.
Advertisement	Not necessary	Not necessary	Necessary
Circular	Circular shall be issued to its members by registered post with Acknowledgment due or by speed post or by electronic mode in Form DPT-1	Circular shall be issued to its members by registered post with Acknowledgment due or by speed post or by electronic mode in Form DPT-1	Circular shall be issued to its members by registered post with Acknowledgment due or by speed post or by electronic mode in Form DPT-1
Display of circular on the website	Optional	Optional	Mandatory, if any
Credit Rating	Required to be taken before the submission of the circular to the registrar	Required to be taken before submission of the circular to the registrar	Required to be taken

(b) Points of Similarity

Category of Company	Private Company	Public Company (other than eligible)	Public company (eligible company under Section company 76 of the Act)
Tenure of deposits	The deposit shall not be repayable on demand or upon receiving a notice within a period less than 6 months and more than 36 months.
Registration of circular	The circular signed by majority of directors or their agents duly authorised along with the statement shall be submitted to registrar 30 days before the date of such issue.
Validity of circular	6 (six) months from the end of the financial year in which it was issued or the date on which the AGM is held whichever is earlier.
Return of deposits	A return shall be filed on or before 30th June of every year with the Registrar in Form DPT-3 along with giving the status as on 31st March of that year duly audited by the auditor of the company.
Penal rate interest	A penal Rate of 18% p.a. shall be payable for the overdue period ¡n case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.
Premature payment	In case of premature payment of deposits, 1% shall be reduced from the interest agreed to be paid.

Amendment Made by Companies (Amendment) Act, 2015
Punishment for Contraction at Section 73 or 76
Section 76A. Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under Section 73 or Section 76 or rules made there under or if a company falls fo repay the deposit or part thereof or any interest due thereon within the time specified under Section 73 or 76 or rules made thereunder or such further time as may be allowed by the Tribunal under Section 73:

the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than ₹ 1 crore but which may extend to ₹ 10 crores; and
every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with time which shall not be less than ₹ 25 lakhs but which may extend to ₹ 2 Crores, or with both.

Provided that if it is proved that the officer of the company who ¡s in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under Section 447.

List of Important Forms

Form No	Purpose of Form as per Companies Act, 2013	Important Section	Important Rule
DPT-1	Circular or Circular in the form of Advertisement inviting Deposits	73 (2)(a), (76)	4(1), 4(2)
DPT-2	Deposit Trust Deed	–	7(2)
DPT-3	Return of deposits	–	16
DPT-4	Statement regarding deposits existing on the commencement of the Act	–	20

86. Charge

A charge is a security given for securing loans or debentures by way of a mortgage on the assets of the company. As mentioned earlier, the power of the company to borrow includes the power to give security also.
A charge may be created either through the act of parties or by operation of law.
A charge created by operation of law does not require registration.
But a charge created by act of parties requires registration.
The charge may be in perpetuity.
A charge only gives a right to receive payment out of a particular property.
A charge is good against subsequent transferees with notice.
In case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy.
There is no such transfer of interest in the case of a charge.

87. Two Kinds of Charges
There are two kinds of charges, fixed or specific charge and floating charge.

88. Fixed Charge
A charge is called fixed or specific when it is created to cover assets which are ascertained and definite or are capable of being ascertained and defined, at the time of creating the charge e.g., land, building, or plant and machinery. A fixed charge, therefore, is a security in terms of certain specific property, and the company gives up its right to dispose off that property until the charge is satisfied.

89. Floating Charge
A floating charge. as a type of security, is peculiar to companies as borrowers. A floating charge is not attached to any definite property but covers property of a fluctuating type e.g., stock-in-trade and is thus necessarily equitable. A floating charge is a charge on a class of assets present and future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of charge take steps to enforce their security.

90. Crystallisation of Floating Charge
A floating charge attaches to the company’s property generally and remains dormant till it crystallizes or becomes fixed. The company has a right to carry on its business with the help of assets over which a floating charge has been created till the happening of some event which determines this right. A floating charge crystallises and the security becomes fixed in the following cases:

when the company goes into liquidation;
when the company ceases to carry on its business;
when the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver to take possession of the property charged;
on the happening of the event specified in the deed.

91. Mortgage
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement which may give rise to pecuniary liability.

A mortgage is created by the act of the parties.
A mortgage requires registration under the Transfer of Property Act, 1882.
A mortgage is for a fixed term.
A mortgage is a transfer of an interest in specific immovable property.
A mortgage is good against subsequent transferees.
A simple mortgage carries personal liability unless excluded by express contract.
A mortgage is a transfer of an interest in a specific immovable property.

92. Registration of Charges- Section 77(1)
Any charge created

(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India Shall be registered.

Particulars of charges that are being filed with Registrar of Companies is to be signed by the company creating the charge and the charge holder in Form No. CHG-1 (for other than Debentures) or Form CHG-9 (for debentures) as the case may be.
The Charge has to be registered within 30 days of its creation.

As per Companies (Amendment), Act, 2019
Time limit for tiling charge created on or after 2.11.2018 reduced
The charge should be filed within 30 days from its creation. In case of charges created on or after 2 11.2018, RoC can allow extension upto 30 days (total 60 days from date of creation of charge, on payment of prescribed additional fees. RoC can allow further extension of 60 days on after payment of such ad valorem fees as may be prescribed – first and second proviso to Section 77(1) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

There is no provision to grant further extension for registration of charges.
Section 87 of Companies Act, 2013 has been amended w.e.f. 2.11.2018 to provide that Central Government cannot order rectification of register of charges in such cases.

Provision in respect of charges created before 2.11.2018
Registrar can allow filing of particulars of such registration within 300 days of such creation, on payment of additional fee as prescribed.
He can grant further extension up to 6 months on payment of additional fees as may be prescribed – first and second proviso to Section 77(1) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Registrar can condone delay upto 300 days on being satisfied that company had sufficient cause for not filing particulars and instrument of charge within 30 days, on payment of additional tee – Rule 4 of Companies (Registration of Charges) Rules, 2014.

If the charge is not filed within 300 days of creation, further extension could be granted by Central Government under section 87 of Companies Act, 2013 – second proviso to Section 77(1) of Companies Act, 2013 as existing upto 2.11.2018 [powers delegated to Regional Director]. Now, such extension cannot be granted.

Punishment for not filing charges or giving false Information Amendment made by Companies (Amendment) Act, 2020
“(1) If any company is in default in complying with any of the provisions of this Chapter, the company shall be liable to a penalty of five lakh rupees and every otficer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”

93. Satisfaction of Charges
According to Section 82 read with the rules the company shall give intimation to the Registrar of the payment or satisfaction in full of any charge within a period of thirty days from the date of such payment or satisfaction in Form No. CHG-4 along with the fee. The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or satisfaction to be made within a period of three hundred days of such payment or satisfaction on payment of such additional fees as may be prescribed.

94. Notice of Charge
According to Section 80, where any charge on any property or assets of a company or any of its undertakings is registered under Section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration. The section clarifies that if any person acquires a property, assets or undertaking for which a charge is already registered, it would be deemed that he has complete knowledge of charge from the date the charge is registered.

95. Consequences of Non-registration of Charge
According to Section 77 of the Companies Act, 2013, all types of charges created by a company are to be registered by the ROC, where they are non-compliant and are not filed with the Registrar of Companies for registration, it shall be void as against the liquidator and any other creditor of the company.

96. Particulars of Charges
The following particulars in respect of each charge are required to be filed with the Registrar:

date and description of instrument creating charge;
total amount secured by the charge;
date of the resolution authorising the creation of the charge; (in case of issue of secured debentures only);
general description of the property charged;
list of the terms and conditions of the loan; and
name and address of the charge holder.

97. Central Government can Order Rectification of Register of Charges Only When Delay was in Respect of Filing of Satisfaction of Charge or Mistake Made In Filing Charges
The Central Government can order rectification of register on any of the following grounds:
The Central Government on being satisfied that:
(a) the omission to give intimation to the Registrar of the payment or satisfaction of a charge, within the time required under this Chapter,
or
(b) the omission or misstatement of any particulars with respect to any such charge or modification or with respect to any memorandum of satisfaction or other entry macle in pursuance of section 82 or 83, was accidental or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders of the company, ¡t may, on the application of the company or any person interested and on such terms and conditions as the Central Government deems just and expedient, direct that the time for the giving of intimation of payment or satisfaction shall be extended or, as the case may require, that the omission or misstatement shall be rectified Section 87 of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

Central Government cannot order rectification of register of charges if there was delay in f iIin of the original charge itself, beyond the specified period or extended period as allowable under section 77 of
Companies Act, 2013.

Application for rectification can be made by company or any person interested. Thus, secured creditor (Bank or Fl) can make application if the charge or its modification was not filed in time, as the secured creditor is certainly interested in registration/modification of charge.

Powers to order rectification of register of charges have been delegated to Regional Director vide Notification F No. 1/6/2014 – CL.V dated 21.5.2014.

98. Annual general meeting
An annual general meeting is required to be held every year by every company whether public or private, limited by shares or by guarantee, with or without share capital or unlimited company.

Annual general meeting should be held once every year.
First annual general meeting of the company should be held within 9 months from the closing of the first financial year.
Subsequent annual general meeting of the company should be held within 6 months from the closing of the financial year.
The gap between two annual general meetings should not exceed 15 months.

99. Extra-Ordinary General Meeting
All general meetings other than annual general meeting are called extra-ordinary general meetings (EGM). According to SS-2 items of business other than ordinary business may be considered at an EGM or by means of a postal ballot, if thought fit by the Board. This means that all the transactions dealt upon in an EGM shall be special business.

By the Board Suo motu
By Board on requisition of members
By requisitionists
By Tribunal

100. Class meetings
Class meetings are those meetings which are held by holders of a particular class of shares e.g. preference shares.

101. Motion
A motion becomes a resolution only after the requisite majority of members have adopted it.

102. Methods voting
Various methods which may be adopted for taking votes on a motion properly placed before a meeting are by show of hands, by poll, by postal ballot and by electronic voting.

103. Kinds of resolutions
There are four kinds of resolutions under the Act

Ordinary Resolution
Special Resolution
Resolution requiring special notice
Board Resolution.

104. Notice of Meeting
A general meeting of a company may be called by giving not less than 21 clear days’ notice either in writing or through electronic mode. Notice through electronic mode shall be given in such manner as may be prescribed. In case of Section 8 company, 14 days’ clear notice is required instead of 21 days. Clear days’ means days exclusive of the day of the notice of service and of the day on which the meeting is held.

105. Contents of Notice

Place of meeting
Day of meeting
Time of meeting
Agenda
Proxy clause with reasonable prominence

106. Notice through Electronic Mode Rule 18 of Companies (Management and Administration) Rules, 2014 A company may give notice through electronic mode. Electronic mode’ means any communication sent by a company through its authorized and secured computer programme:

The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of the company.
E-mail shall state the name of the company, notice of the type of meeting and the date on which meeting is scheduled.
If notice is sent in the form of an attachment to e-mail, such attachment shall be in the Portable Document Format (PDF).
There shall be no difference in the text of the physical version of the notice and electronic version except in respect of mode of dispatch of notice.
If a member entitled to receive notice fails to provide or update relevant e-mail address to the company, company shall not be in default for not delivering notice via e-mail.
Company may send e-mail through in-house facility or authorize any third party agency providing bulk e-mail facility.

107. Persons entitled to receive Notice
In terms of Section 101(3), notice of every meeting of the company must be given to:

every member of the company, legal representative of any deceased member or the assignee of an insolvent member;
the auditor or auditors of the company; and
every director of the company.

A private company, which is not, a subsidiary of a public company may prescribe, by its Articles, persons to whom the notice should be given.

108. Quorum

In case of public company, the quorum shall depend on number of members as on the date of meeting:
If members not more than 1000- quorum shall be 5.
If members more than 1000 but less than 5000- quorum shall be 15.
If members more than 5000- quorum shall be 30
In case of private company 2 members personally present shall be the quorum of the meeting.

109. Adjourned Meetings
Notice of an adjourned meeting- Where the meeting stands adjourned to the same day in the next week at the same time and place, or to such other day, not being a National Holiday, or at such other time and place as the Board may determine, there the company shall give at least 3 days notice to the members either individually or by publishing an advertisement in 2 newspapers (one in English and one in vernacular language).

No quorum in an adjourned meeting- If at the adjourned meeting also, a quorum is not present within half- an-hour from the time appointed for holding meeting, the members present, being not less than two in numbers, will constitute the quorum.

If a Meeting is adjourned sine-die or for a period of thirty days or more, a Notice of the adjourned Meeting shall be given in accordance with the provisions contained here in above relating to Notice.

110. Chairman of Meetings
Unless the articles of the company otherwise provided, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.

If a poll is demanded on the election of the Chairman, it shall be taken forth with in accordance with the provisions of this Act and the Chairman elected on a show of hands shall continue to be the Chairman of the meeting untìl some other person is elected as Chairman as a result of the poll, and such other person shall be the Chairman for the rest of the meeting.

111. Proxies
A person who is appointed by a member to attend and vote at a meeting in the absence of the member at the meeting is termed as proxy. Thus proxy is an agent of the member appointing him. The term ‘proxy’ is also used to refer to the instrument by which a person is appointed as proxy. Section 105 of the Companies Act, 2013 provides that a member, who is entitled to attend to vote, can appoint another person as a proxy to attend and vote at the meeting on his behalf.

112. Demand for Poll
Before or on the declaration of the result of the voting on any resolution on show of hands, a poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall be ordered to be taken by him on a demand made in that behalf by the following person(s):

in the case a company having a share capital: by the members present in person or by proxy, where allowed, and having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less than ₹ 5,00,000/- or such higher amount as may be prescribed, has been paid-up; and
in the case of any other company: by any member or members present in person or by proxy, where allowed, and having not less than one-tenth of the total voting power.
The Chairman shall get the validity of the demand verified.
The demand for a poll may be withdrawn at any time by the persons who made the demand.

113. Postal Ballot
As per Section 2(65) “postal ballot” means voting by post or through any electronic mode. Following items of business shall be transacted only by means of voting through a postal ballot:

Alteration of the objects clause of the memorandum
Alteration of articles of association
Change in place of registered office outside the local limits of any city, town or village
Change in objects for which a company has raised money from public through prospectus
Issue of shares with differential rights as to voting or dividend
Variation in the rights attached to a class of shares or debentures
Buy-back of shares by a company
Election of a director
Sale of the whole or substantially the whole of an undertaking of a company.

Amendment made by Companies (Amendment) Act, 2017
Any item of business required to be transacted by means of postal ballot (as stated above), maybe transacted at a general meeting by a company which is required to provide the facility to members to vote by electronic means under Section 108, in the manner provided in that section.

114. Circulation of Members’ Resolution
As per Section 111, a company shall, on requisition in writing of certain number of members, give notice to members of any proposed resolution intended to be moved in the meeting or circulate any statement with respect to matters referred in proposed resolution. The company shall be bound to give notice of resolution only if the requisition is deposited not less than six weeks before the meeting. In case of other requisition not less than 2 weeks before the meeting.

115. Minutes
Section 118 provides that every company shall prepare, sign and keep minutes of proceedings of every general meeting, including the meeting called by the requisitionists and all proceedings of meeting of any class of shareholders or creditors or Board of Directors or committee of the Board and also resolution passed by postal ballot within thirty days of the conclusion of every such meeting concerned.

Directors And Other Concepts CMA Inter Law and Ethics Notes

1. No.of directors
Every public company shall have at least 3 directors and every private company shall have at least 2 directors and every one-person company shall have at least 1 director under Section 149.

2. Legal position of director
Directors are trustees for the company i.e. the directors are persons selected to manage the affairs of the company for the benefit of the shareholders.

3. Maximum Number of Director
Maximum Number of Director is 15, which can be increased by passing a special Resolution.

4. Woman director
Certain prescribed class or classes of companies is required to have at least one woman director. This is a mandatory provision.

5. Resident of director
Every company including one person company shall have at least one director who stays in India for a period of not less than 182 days in the previous calendar year.

6. Number of directorships
Maximum limit on total number of directorships has been fixed at 20 companies including sub limit of 10 for public companies.

7. Removed of director
A director may be removed from the office by giving a special notice.

8. Managerial remuneration
The overall limit on managerial remuneration shall not exceed 11% of the net profits.

9. More than one such director
If there is more than one such director, remuneration shall not exceed 10% of the net profits of the company.

10. Independent director
An independent director in relation to a company means a director other than a managing director or a whole-time director of a nominee director.

11. An independent director can be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent director.

12. Independent No. of director
Every listed company shall have one-third independent directors.

13. Section 149(8)
Section 149(8) provides that the company and independent directors shall abide by the provisions specified in Schedule IV.

14. Term of independent director
An independent director shall hold office for a term up to 5 consecutive years on the Board of a company.

15. Resignation or removal of an Independent director
The resignation or removal of an independent director will be in the manner as is provided in Sections 168 & 169 of the act.

16. Composition of Board of Directors
50% of the Board is to be independent if the Chairman is a promoter, otherwise 1/3rd of the board are to be independent prescribed under Clause 49 of Listing Agreement.

Note:
Regulation 17(1) 0f the SEBI (LODR) Regulation 2015. SEBI has notified new regulation named SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 on 2nd September, 2015. A time period o 90 days has been given for implementing the Regulations. However, two provisions of the regulations, which are facilitating in nature, are applicable with immediate effect. Other provisions of this new regulation have come into effect from 1st Dec 2015. The new regulation aims to consolidate arid streamline the provisions of existing Listing Agreements for different segments of the capital market.

However, for the sake of students’ help, we have provided the questions and answer under this chapter as per old listing Agreement as well as new regulation about listing agreement.

17. Nomination Committee
The Nomination Committee shall lay down the evaluation criteria for performance evaluation of independent directors.

18. Director
Director can participate in the Board Meeting through video conferencing or other audio-visual mode as may be prescribed.

19. Notice of Board Meeting
Notice of not less than seven days in writing is required to call a board meeting and notice of meeting to all directors shall be given, whether he is in India or outside India by hand delivery or by post or by electronic means.

20. The participation of director at Board Meeting through video conferencing or by other electronic means shall be counted for the purpose of Quorum.

21. Audit Committee
Every Listed Company and such other company as may be prescribed shall form Audit Committee comprised of minimum 3 directors with majority of the Independent Directors and majority of members of committee shall be person with ability to read and understand financial statements.

22. Nomination and Remuneration Committee
Every listed company and prescribed class or classes of companies shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

23. Intercorporate Investments
Intercorporate investments not to be made through more than 2 layers of investment companies.

24. Meeting of Board
In addition to the first meeting to be held within thirty days of the date of incorporation, there shall be minimum of four Board Meetings every year and not more one hundred and twenty days shall intervene between two consecutive Board Meetings.

In case of One Person Company (OPC), small company and dormant company, at least one Board Meeting should be conducted in each half of the calendar year and the gap between two meetings should not be less than Ninety days.

25. Matters not to be dealt with in a Meeting through Video Conferencing or other Audio Visual Means

the approval of the annual financial statements;
the approval of the Board’s report;
the approval of the prospectus;
the Audit Committee Meetings for consideration of accounts; and
the approval of the matter relating to amalgamation, merger, demerger, acquisition and take over.

26. Quorum for Board Meeting

One-third of total strength or two directors, whichever is higher, shall be the quorum for a meeting.
For the purpose of determining the quorum, the participation by a director through Video Conferencing or other audio-visual means shall also be counted.
If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested and present at the meeting, being not less than two shall be the quorum during such time.

27. Audit Committee
The requirement of constitution of Audit Committee has been limited to:
(a) Every listed Public Companies; or
(b) The following class of companies –

all public companies with a paid-up capital of ₹ 10 crores or more;
all public companies having turnover of ₹ 100 crores or more;
all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding ₹ 50 crores or more.

28. Corporate Social Responsibility Committee
The Section applies to the following classes of companies during any financial year:

Companies having Net Worth of ₹ 500 crores or more;
Companies having turnover of ₹ 1,000 crores or more;
Companies having Net Profit of ₹ 5 crores or more.

Amendment made by Companies (Amendment) Act, 2017 Revised Section 135(1)-
“Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Provided that where a company is not required to appoint an independent director under sub-section (4) of Section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”

Revised Section 135(3)(a)-
“(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII.”

Revised Explanation to Section 135(5)
“For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of Section 198.”

29. Prohibitions and Restrictions Regarding Political Contributions
The non-government company or the company which has been in existence less than three financial years may contribute any amount directly or indirectly to any political party. Further, the limit of contribution to political parties is 7.5% of the average net profits during the three immediately preceding financial years.

Note:
Section 154 of the Finance Act, 2017 amends Section 182 of the Companies Act, 2013. As per the amendment, the limit on the maximum amount that can be contributed by a company to a political
party has been removed.

30. Key Managerial Personnel
Under Section 2(51) a Key Managerial Personnel is defined as the Chief Executive Off iCor or Managing Director or the manager or, a Company Secretary or the whole time director, and the Chief Financial Officer in relation to a company.

Amendment made by Companies (Amendment) Act, 2017 Revised Section 2(51)-
“Key managerial personnel” in relation to a company, means-

the Chief Executive Officer or the managing director or the manager
the Company Secretary;
the whole-time Director;
the Chief Financial Officer;
such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
such other officer as may be prescribed;”

Every listed Company having a paid-up share capital of ₹ 10 crore or more is compulsorily required to have a key managerial personnel.

The whole time key managerial personnel is to be appointed by the Board and shall not hold office in more than one company however he is permitted to hold such other office with the permission of Board of the company.

31. Penalty for not Appointing Key Managerial Personnel when Mandatory
Every director or the key managerial personnel who is in default shall be liable to penalty which may extend to ₹ 50,000 and a further fine which may be extended to ₹ 1,000 for every day during which the default continues.

As per Companies (Amendment) Act, 2019
Section 203 of Companies Act, 2013 make provisions for mandatory appointment of certain Key Managerial personnel like MD or CEO, Company Secretary, and CFO.

If any company makes any default in complying with the provisions of section 203, such company shall be liable to a penalty of five lakh rupees, and every director and key managerial personnel of the company who; in default shall be liable to a penalty of fifty thousand rupees and where he default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees – Section 203(5) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019.

In section 203 of the principal Act, for sub-section (5), the following sub-section shall be substituted, namely:
“(5) If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees, and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.”

32. Section 203.
The Company Secretary has been covered under the same section of KMP i.e. Section 203. Rule 8A Appointment of Company Secretaries in companies not covered under rule 8 A company other than a company covered under rule 8 which has a paid-up share capital of ₹ 5 crore or use shall have a whole the company secretaries.

33. Managerial Personnel
1. Overall managerial remuneration
Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration by a public company to its managing director whole-time director, and manager which shall not exceed 11 % of the net profit of the company in that financial year computed in accordance with Section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

2. Remuneration to Managing Director/whole time Director/Manager
The remuneration payable to any one managing director or whole-time director or manager shall not exceed 5% of the net profits of the company and if there are more than one such director remuneration shall not exceed 10% of the net profits to all such directors.

3. Remuneration to other directors
Except with the approval of the company in general meeting, the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,-

1% of the net profits of the company, if there is a managing or whole-time director or manager;
3% of the net profits in any other case.

4. Remuneration by a company having no profit or Inadequate profit
If, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including managing or whole-time directors or managers, any remuneration exclusive of any fees payable to directors except in accordance with the provisions of Schedule V and if it is not able to comply with Schedule V, with the previous approval of the Central Government.

Managerial Remuneration under Schedule V (Part II)
Section I: Remuneration by Companies Having Profits
A company having profits in a financial year may pay remuneration to its managerial persons or persons or other directors or directors in accordance with Section 197.

Section II: Where in any financial year during the currency of tenure of a managerial person, or other directors a company has no profits or its profits are inadequate It may without Central Government approval, pay remuneration to the managerial person not exceeding the limits under (A) and (B) given below:

1. Where the Effective Capital (in rupees) is	2. Limit of yearly Remuneration payable shall not exceed (in Rupees) in case of a managerial person	3. Limit of yearly Remuneration payable shall not exceed (in Rupees) in case of other directors
(i) Negative or less than 5 crores.	60 lakhs	12 lakhs
(ii) 5 crores and above but less than 100 crores.	84 lakhs	17 lakhs
(iii) 100 crores and above but less than 250 crores.	120 lakhs	24 lakhs
(iv) 250 crores and above	120 lakhs plus 0.01% of the effective capital in excess of ₹ 250 crores.	24 lakhs plus 0.01% of the effective capital in excess of ₹ 250 crores.

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

Explanation-
It is hereby clarified that for a period less than one year, the limits shall be pro-rated.
(B) In case of a managerial person or other directors who is functioning in a professional capacity, no approval of Central Government is required, if such managerial person or other director is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last two years before or on or after the date of appointment and possesses graduate level qualification with expertise and specialized knowledge in the field in which the company operates:
Provided that any employee of a company holding shares of the company not exceeding 0.5% of its paid-up share capital under any scheme formulated for allotment of shares to such employees including Employees Stock Option Plan or by way of qualification shall be deemed to be a person not having any interest in the capital of the company.

Amendment made by Companies (Amendment) Act, 2017
Revised First Proviso to Section 197(1)-
‘Provided that the company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven percent. of the net profits of the company, subject to the provisions of Schedule V:”
Revised Second Proviso to Section 197(1)-
“Provided further that, except with the approval of the company in general meeting by a special resolution,-
(i) the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five percent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten percent. of the net profits to all such directors and managers taken together;

(ii) the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,-

one percent. of the net profits of the company,, if there is a managing or whole-time director or manager;
three percent. of the net profits in any other case. Third Proviso to Section 197(1)-

“Provided also that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditors, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.”

34. Secretarial audit
The Central Government through rules has prescribed such other classes of companies as under-

every public company having a paid-up share capital of fifty crore rupees or more; or
every public company having a turnover of two hundred fìftycrore rupees or more

Steps for the Appointment of Whole-time Director

Appointment of Whole-time Director as per Schedule V	Appointment of a Whole-time Director with the prior approval of Central Government
1 Convene a Board Meeting- (a) to appoint Whole-time Director of the Company till the ensuing. General Meeting of the Company (additional director). (a) To fix date, time, and place of the General Meeting in order to take the approval of the shareholders to appoint a “Whole-time Director” of the Company.	Convene a Board Meeting- (a) to appoint Whole-time Director of the Company till the ensuing General Meeting of the Company (additional director). (b) To fix date, time and place of the General Meeting in order to take the approval of the shareholders to appoint a whole-time Director” of the Company.
2. File E-form MGT-14 and DIR-12 (with necessary attachments) with ROC within 30 days from the date of appointment as an additional director of the Company.	File E-form MGT-14 and DIR-12 (with necessary attachments) with ROC within 30 days from the date of appointment as an additional director of the Company.
3. Convene Extra-ordinary General Meeting of the Company and take shareholders’ approval for the appointment of Whole-time Director of the Company.	Convene the Extra-ordinary General Meetings of the Company and take shareholders’ approval for the appointment of Whole-time Director of the Company.
4. Not Applicable	File E-form MA-2 to obtain the approval of Central Government with regard to the appointment of whole-time Director of the Company.
5. File E-Form DIR-12 within 30 days from the date of general meeting for regularization of whole-time Director of the Company.	File E-Form DIR-12 within 30 days from the date of general meeting for regularization of whole-time Director of the Company.
6. File E-form MR-1 (Return of Appointment) within 60 days of the date of appointment in the board meeting with regard to the appointment of whole-time director.	File E-form MR-1 (Return of Appointment) within 60 days of the date of appointment in the board meeting with regard to the appointment of whole-time director.

List of Important Forms

Form No.	Purpose of Form as per Companies Act, 2013	Important Section	Important Rule
DIR-1	Application for inclusion of name in the databank of independent Directors	150	6(4)
DIR-2	Consent to act as it director of a company	152(5)	8
DIR-3	Applicant for allotment of Director Identification Number	153	Rule 10 of Limited Liability Partnership Rules, 2009
DIR-4	Verification of applicant for applicant for DIN	153	9(3)(a)(iv)
DIR-5	Application for surrender of Director Identification Number	153	11(f)
DIR-6	Intimation of change in particulars of Director to be given to the Central Government	–	12(1)
DIR-7	Verification of applicant for change in DIN particulars	–	12(1)(i)
DIR-8	Intimation by Director	164(2)	14(1)
DIR-9	Report by the Company Registrar to	164(2)	14(2)
DIR- 10	Form of Applicant for Removal of Disqualification of Directors	164(2)	14(5)
DIR-11	Notice of resignation of a Director to the Registrar	168(1)	16
DIR- 12	Particulars of appointment of directors and the key managerial personnel and the changes among them	7(1)(c), 168,170 (2)	17
MR. 1	Return of appointment of key managerial personnel	196,197 and sch. V	3
MR. 2	Form of application to the Central Government for approval of appointment or reappointment and remuneration or increase in remuneration or waiver for excess or overpayment to managing director or whole-time director or manager and commission or remuneration to directors	196, 197,200, 201 (1), 203 (1) and Sch V	7
MR. 3	Secretarial Audit Report	204 (1)	9