Companies Act 2013

Companies Act 2013Companies Act 2013 timeline Companies Act, 2013: A statistical snapshot Number of schedules : 7Number of chapters: 29Number of sections: 470Definition of Company :-Company means a company incorporated under this Act or under any previous company law.Characteristics :Separate legal entityLimited liabilityPerpetual SuccessionCommon SealTransferability of sharesSeparate PropertyCapacity to sue

Types of CompanyPublic Limited CompanyPrivate Limited companyOne Person CompanySmall CompanyDormant Company5Private companySection2(68) private company means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by it articles,(i) restricts the right to transfer its shares;(ii) except in case of One Person Company, limits the number of its members to two hundred;Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single memberProvided further that(i) persons who are in the employment of the company; and(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and(iii) prohibits any invitation to the public to subscribe for any securities of the company

Public CompanySection 2(71) public company means a company which(a) is not a private company;(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed:Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles

Mr.Kumar is director of a private company (XYZ) situated in Delhi which is subsidiary of ABC limited.As the articles of association clears that the XYZ is purely private company.But there is some penal actions on XYZ company considering as deemed public company.The XYZ filed against penal action stating to MCA that it is a purely private company & the charges levied on it is considering it as Public company. Is XYZ is correct?Whether the subsidiary of a foreign company be termed as public company or private company as per the Companies Act, 2013.In terms of MCA General Circular no. 23/2014 dated 25th June 2014, an existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company as the case may be, without any change in the incorporation status of such company.One Person CompanySection2(62) One Person Company means a company which has only one person as a member.Waives a number of compliance requirements. Lives on even after the death/disability of the sole member.OPC registered with one member. Appointment of another person as a nominee member in the event of the subscribers death or his incapacityOnly natural person who is an Indian citizen and resident in India is eligible to incorporate OPC.

11Small Company2(85) small company means a company, other than a public company,(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:Provided that nothing in this clause shall apply to(A) a holding company or a subsidiary company;(B) a company registered under section 8; or(C) a company or body corporate governed by any special Act

Dormant CompanyDormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 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 one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company.[Section 455 of 2013 Act] 13Dormant companyWho can attain status of a dormant company? Companies;Formed for a future project, or to hold and asset / intellectual property and has no significant accounting transactionsNot carrying out any significant business or operation, or has not made any significant accounting transaction, or has not filed financial statements / annual returns for 2 yearsSpecial resolution in AGM / confirmation from at least 3/4th shareholders (by value) required to apply for being dormant companyCertain additional conditions prescribed for company to be eligible to make application to be dormant company14Dormant companyConcessions to dormant companiesDormant company not required to prepare cash flow statementDormant company to conduct at least 2 Board meetings in a calendar year (with gap of 90 days between 2 meetings)Rotation of auditors not applicableLimitationsROC to initiate process of striking off name of company in case it remains dormant for consecutive 5 yearsReturn to be filed within 30 days of end of financial year of financial position duly audited by CA15One Person CompanySimpler legal and governance regime for operation and maintenance Waives a number of compliance requirements. Lives on even after the death/disability of the sole memberOPC registered with one member Appointment of another person as a nominee member in the event of the subscribers death or his incapacityOnly natural person who is an Indian citizen and resident in India is eligible to incorporate OPC.

Types of OPC a company limited by shares; ora company limited by guarantee; oran unlimited company.

Appointment of directors Articles of a company may provide for the appointment of the first directorsIf articles are silent then the subscriber to the memorandum who is an individual shall be deemed to be the first director of the company May have a single director Maximum-15 directors more than 15 after passing Special ResolutionDirector must have stayed in India for a total period of not less than 182 days in the previous calendar year

Meetings of Board At least one meeting of the Board of Directors to conducted in each half of a calendar yearGap between the two meetings should not be less than ninety daysExemption if company has only one director.

Contract by One Person CompanyOne Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the terms of contract or offer are in writing or contained in a memorandum or recorded in the minutes of the Board meeting held next after entering into the contact.

Inform the Registrar about every contract entered into by the company within a period of fifteen days of the date of approval by the Board of Directors.

Contracts in ordinary course of business not required to comply with the above.

Financial Statement The financial statement, signed by one director, for submission to the auditor for his report thereon.Board of Directors Report means a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.Filed with ROC within 180 days from the closure of the financial year Financial statement, may not include the cash flow statement

ExemptionSection 96. Option to dispense with the requirement of holding an AGMSection 98. Power of Tribunal to call meetings of membersSection 100. Calling of extraordinary general meeting.Section 101. Notice of meeting. Section 102. Statement to be annexed to notice.Section 103. Quorum for meetings.Section 104. Chairman of meetingsSection 105.ProxiesSection 106. Restriction on voting rightsSection 107. Voting by show of handsSection 108. Voting through electronic meansSection 109. Demand for pollSection 110.Postal ballotSection 111. Circulation of members resolution

RestrictionsSuch Company cannot be incorporated or converted into a company under section 8 of the Act.Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporates.No such company can convert voluntarily into any kind of company until expiry of 2 years from the date of incorporation, except in cases where capital or turnover threshold limits are reached. No minor shall become member or nominee of the One Person Company or hold share with beneficial interest.

Conversion of OPCWhere the paid up share capital exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees

OPC to convert itself, within 6 months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the last day of the relevant period during which its average annual turnover exceeds two crore rupees, into either a private company with minimum of two members and two directors or a public company with at least of seven members and three directors in accordance with the provisions of section 18 of the ActConversion of private company into One Person CompanyA private company other than a company registered under section 8 of the Act may convert itself into OPC by passing a special resolution in the general meeting.AND after obtaining a NOC from all its members and creditors.

Other features of OPCOPC to lose its status if paid up capital exceeds Rs. 50 lakhs or average annual turnover is more than Rs. 2 crores in 3 immediately preceding consecutive years.Mandatory rotation of auditor after expiry of maximum term is not applicable.The annual return of a One Person Company shall be signed by the company secretary, or where there is no company secretary, by the director of the company.Can a company form a One Person Company (OPC) as its subsidiary?

In terms of rule 3 of the Companies (Incorporation) Rules, 2014, only a naturalperson who is an Indian citizen and resident in India is eligible to incorporate OPC.Therefore, the question of any body corporate or other form of organizations being the single member does not ariseSMALL cOMPANYSmall CompanyThe concept of Small Company has been introduced for the first time by the Companies Act, 2013. The Act identifies some companies as small companies based on their capital and turnover for the purpose of providing certain relief/exemptions to these companies. Most of the exemptions provided to a small company are same as that provided to a One Person Company.

Small Company - Section 2 (85)A company, other than a public company,paid-up share capital of which does not exceed Rs. 50 lakh or such higher amount as may be prescribed which shall not be more than Rs. 5 crore; orturnover of which as per its last P&L A/c does not exceed Rs. 2crore or such higher amount as may be prescribed which shall not be more than Rs. 20 croreProvided that nothing in this clause shall apply to(A) a holding company or a subsidiary company;(B) a company registered under section 8; or(C) a company or body corporate governed by any special Act;

Salient FeaturesOnly a private company can be classified as a small company.

Holding company, subsidiary company, charitable company and company governed by any Special Act cannot be classified as a small company.

For a small company, either the paid up capital should not exceed Rs. 50 lakhs or the turnover as per latest statement of profit & loss should not exceed Rs. 5 crores.

The status of a company as Small Company may change from year to year. Thus the benefits which are available during a particular year may stand withdrawn in the next year and become available again in the subsequent year.

Special Provisions and Exemptions Privileges/exemptions available to a small company are same as OPC.

The annual return of a Small Company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.

A small company may hold only two board meetings in a year, i.e. one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.

Special Provisions and Exemptions A small company need not include Cash Flow Statement as a part of its financial statements.

Provision regarding mandatory rotation of auditor not applicable to a small company.

Holding and subsidiary companies are specifically excluded from the concept of small company.

In other words, a holding or a subsidiary company can never enjoy the privileges of a small company even though they may fulfill the capital or turnover requirement of a small company.

Whether a private Company having paid-up share capital of rupees 45 lakhs and turnover of Rs. 20 crores as per last audited balance sheet will be treated as small company?Incorporation of CompaniesStages in Company IncorporationPromotionRegistration FloatationCommencement of Business37A company comes into existence is generally by a process referred to as incorporation. Once a company has been legally incorporated, it becomes a distinct entity from those who invest their capital and labour to run the company.Usually the first step to form a company is the process known apromotion where a person persuades others to contribute capital to a proposed company before it is incorporated . Such a person is called the promoter of the company.Promoters also can enter into a contract on behalf of a company before or after it has been granted a certificate of incorporation, and arrange share issues in the name of the company38Definition :-Section 2 (69) of the Companies Act, 2013 defines the term promoter as under:-Promoter means a person (a) who has been named as such in a prospectus or is identified bythe company in the annual return referred to in section 92; or(b) who has control over the affairs of the company, directly orindirectly whether as a shareholder, director or otherwise; or(c) in accordance with whose advice, directions or instructions theBoard of Directors of the company is accustomed to act.Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.(giving only professional advice to the Board of directors, he shall not be treated as a promoter.)Fiduciary Position of Promoter in company:-1)Not to make any secret profit at the expense of the company2)To give benefit of negotiations to the company3)To make full disclosure of interest or profit4)Not to make unfair use of position.Position of promoters as regard pre-incorporation contracts:-1)Company not bind by pre-incorporation contract2)Company cannot enforce pre-incorporation contract3)Promoters personally liable.

Case studiesMr.Vikram is the promoter of Abascus Ltd.He entered into an agreement with Real estate dealer to buy an land on the behalf of the company on 15th july 2014.The Registrar of companies issued him certificate of incorporation on 22nd october 2014.After Incorporation company refuses to buy the said plot of land.Has the real estate dealer has an remedy against the promoter or against the company?

Mr Sinha(Corporate Professional) prepares an AOA & MOA on the instructions of the promoter of company.He also paid the registration fees & got the company registered.Mr Sihna filed a case against company for non-payment of his professional fees. From whom he can recover this amount?Incorporation of Company42Steps to be followed while Incorporation1) Obtain Digital Signatures: Nowadays various document prescribed under the Companies Act, 2013, are required to be filed with the digital signature of the Managing Director or Director or Manager or Secretary of the Company, therefore, it is compulsorily required to Obtain a Digital Signature Certificate from authorized DSC issuing authority for at least one director to sign the E-forms related to incorporate like form INC.1 and other documents..

Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. Examples of physical certificates are drivers' licenses, passports or membership cards. Certificates serve as proof of identity of an individual for a certain purpose; for example, a driver's license identifies someone who can legally drive in a particular country. Likewise, a digital certificate can be presented electronically to prove your identity, to access information or services on the Internet or to sign certain documents digitally2) Obtain Director Identification Number [Section 153]As per 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number in form DIR.3 to the Central Government in such form and manner and along with such fees as may be prescribed.Therefore, before submission of e-Form INC.1 for availability of name, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtainedWhat is the procedure of obtaining DIN? Any person intending to apply for DIN shall have to make an application in eForm DIR-3 and should follow the following procedure:1. eForm DIR-3 has to follow the online e-Filing process .2. Attach the photograph and scanned copy of supporting documents i.e. proof of identity, and proof of residence as per the guidelines. Physical documents are not required to submit at DIN cell.3. Along with the supporting documents, Verification as per Form DIR-4 shall also be attached. This shall contain the Name, Fathers name, date of birth and text of declaration and physical signature of the applicant.4. The eForm shall have to be digitally signed and shall be uploaded on MCA21 portal.5. Upon upload, Pay the fees for eForm DIR-3. Only electronic payment of the fees shall be allowed (I.e. Netbanking / Credit Card). No challan payment will be accepted under revised procedure of DIN allotment. The applicant is required to get himself/herself registered on the MCA21 Portal to obtain login id, which is necessary for payment of the fees. After obtaining the login-id, Login to the MCA21 portal and click on 'eForm upload' link available under the 'eForms' tab for uploading the eForm DIR-3 . eForm DIR-3 will be processed only after the DIN application fee is paid.6. Upon upload and successful payment,Form DIR-3 is mandatorily to be signed by an Applicant and a practicing professional or secretary (who is a member of ICSI) in whole time employment or the Director of the existing company

7. Processing of e Form DIR-3In case, DIR-3 gets certified by the professional (i.e. CA(in whole time practice)/ CS(in whole time practice)/ CWA (in whole time practice)/, the DIN will be approved by the system immediately online (in case it is not potential duplicate).8. Post-approval changes in particulars of Form DIR-3If there is any change in the particulars submitted in eform DIR-3, applicant can submit e-form DIR-6 online. For instance in the event of change of address of a director, he/ she is required to intimate this change by submitting eform DIR-6 along with the required attested documents

3. Name availability for proposed companyAs per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014, application for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines given in Rule-8 of Companies (Incorporation) Rules, 2014. After approval of name ROC will issue a Name availability letter w.r.t. approval for availability of name for a proposed company.Validity of Name approved by ROC: As per section 4(5), maximum time for which name will be available has been prescribed in the law itself under section 4(5). The name will be valid for a period of 60 Days from the date on which the application for Reservation was made. 4. Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match with the objects shown in e-Form INC.1. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the experts and the other object clause should be drafted in a very broader sense.As per section 4(6) the memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company. As per section 5(6) the articles of a company shall be in respective forms specified in Tables F, G, H, I and J in Schedule I as may be applicable to such company.

5. Application for incorporation of a company application for incorporation of a private and Public company, with the Registrar, within whose jurisdiction the registered office of the company is proposed to be situated, shall be filed in Form no. INC 7 [Rule 12 to 18] along with Form no. INC.22 for situation of registered office of the Company, Declaration in Form No. INC-8 by Professionals. (As per Rule-14 of Companies (Incorporation) Rules, 2014, A declaration in the prescribed form by an advocate, a CA, CMA or CS in practice who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made there under in respect of registration and matters precedent or incidental thereto have been complied with;)

Affidavit from each of the subscriber to the Memorandum in Form No. INC-9 , (an affidavit from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief;)

Form no. INC 22:As per Rule 25 of verification of registered officeSection 12(2) of the Companies Act, 2013 states that the Company shall furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation in such manner as may be prescribed.Section 12(4) of the Companies Act, 2013 states that Notice of every change of the situation of the registered office, verified in the manner prescribed, after the date of incorporation of the company, shall be given to the Registrar within fifteen days of the change, who shall record the same.

Incorporation of OPC1) Application for DIN2) Name Availability:After obtaining name availability, within 60 days its required to file incorporation documents with ROC.3)Filing Incorporation form: E-form INC-2- Application for IncorporationE-form INC-3 Nominee consent form.E- Form - INC-22 Situation of Registered officeE-form INC-9- Affidavit from subscriber of memorandum.E-form INC-10- form of verification of signature of subscriber.DIR-12- Consent of DirectorMOA & AOA.4)Certificate of Incorporation The register office will issue form No. INC- 11

Sr. No. Nature of E-Forms Form No. Due Date Of Filing 1. Application for reservation of name INC.1 NA 2. Application for incorporation INC.2 60 days 3. Nominee Consent Form INC.3 15 days 4. Change in Member/Nominee INC.4 30 days 5. Intimation of exceeding threshold i.e. ceased to be OPC INC.5 60 days 6. OPC Application for conversion INC.6 NA 7. Filing of Special Resolution MGT.14 30 days 8. Application for DIN DIR 3 NA 9. Verification for DIN DIR 4 NA Memorandum & Articles of AssociationThe Memorandum of Association is the charter of a company. It is a constitution document, which amongst other things, defines the area within which the company can operate.As per section 2(56) memorandum means the memorandum 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.The company cannot depart from the provisions of the memorandum. If it enters into a 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 (Beyond Powers) the company and hence void.Model Forms of Memorandum Table A is applicable in the case of companies limited by shares; Table B is applicable to companies limited by guarantee not having a share capital; Table C is applicable to the companies limited by guarantee having a share capital; Table D is applicable to unlimited companies not having a share capital;Table E is applicable to unlimited companies having a share capital.Name Clause

A company being a legal entity must have a name of its own to establish its separate identity. The name of the company is a symbol of its independent corporate existence. The first clause in the memorandum of association of the company states the name by which a company is to be known. The company may adopt any suitable name provided it is not undesirable.It should be published & engraved in all documents along with the CIN No.in case of One Person Company, the words One PersonCompany shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.Rectification of name of a company (Section 16):-Section 16 provides that if by inadvertence or otherwise a name has been registered which is identical to or too nearly resembles the name of an existing company whether registered under this Act or the previous company law, the Central Government may direct thecompany to change its name. The company shall change its name within a period of 3 months from the issue of the above direction after passing an ordinary resolution for the purpose.Situation ClauseThe name of the State in which the registered office of the company is to be situated must be given in the memorandum. But the exact address of the registered office is not required to be stated therein. Within 15 days of it incorporation, and at all times thereafter, the company must have a registered office to which all communications and notices may be sentObjects ClauseUnder section 4(1)(c)of the Companies Act, 2013, all companies must state in their memorandum the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.Liability ClauseThe fourth compulsory clause must state that liability of the members is limited, if it is intended that the company be limited by shares or by guarantee. The effect of this clause is that, in a company limited by shares, no member can be called upon to pay more than what remains unpaid on the shares held by him.The fifth compulsory clause which must state the amount of the capital with which the company is registered, unless the company is an unlimited liability company. The shares into which the capital is divided must be of fixed value, which is commonly known as the nominal value of the share. The capital is variously described as nominal, authorised or registeredDeclaration for Subscription:- (INC-13) The statutory requirements regarding subscription of memorandum are that: each subscriber must take at least one share; each subscriber must write opposite his name the number of shares which he agrees to take. Signing & Stamping of MemorandumArticles of AssociationThe articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company.In terms of section 5(1), the articles of a company shall contain the regulations for management of the company. The articles of association of a company are its bye-laws or rules and regulations that govern the management of its internal affairs and the conduct of its business.They are subordinate to and are controlled by the memorandum of association.EntrenchmentThe entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction of certain conditions or restrictions (such as obtaining a 100% consent) greater than those prescribed under the Act.This provision acts as a protection to the minority shareholders and is of specific interest to the investment communityWhen can a Company add provisions for entrenchment to AOA?(1) Either on formation of a company, or(2) by an amendment in the articles In the case of a private company the amendment has to be agreed to by all the members of the company;In the case of a public company by a special resolution.

Contents of ArticlesAdoption of preliminary contracts.3. Number and value of shares.4. Issue of preference shares.5. Allotment of shares.6. Calls on shares.7. Lien on shares.8. Transfer and transmission of shares.9. Nomination.10. Forfeiture of shares.11. Alteration of capital.12. Buy back.13. Share certificates.14. Dematerialisation.15. Conversion of shares into stock.Alteration of MOA1) Alteration of Name Clause:-Special resolution to be filed by company Form No. MGT-14(Special resolution)Approval from central government in writingOnce approval granted within specific time period the form no. INC-25(Certificate of incorporation pursuant to name change) will be issued.Its not applicable to those company who default in filing annual returns or deposit or debentures or interest thereon.

2)Alteration of Registered Office Clause:- Change within the local limits of same town-Board Resolution filed by company.Notice to ROC in form No. INC-22Change from one city to another within the same State-Special Resolution filed by company(MGT-14)Notice to ROC in form No. INC-22Change within the same State from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies-Confirmation by Regional Director.Special Resolution filed by company(MGT-14)Notice to ROC in form No. INC-22

Change of Registered office from one State to another-Application by Central Government.Special Resolution filed by company(MGT-14)Notice to ROC in form No. INC-22

Alteration of Objects Clause & Liability Clause:-By passing an special resolution (Form No.MGT-14)Alteration of Capital Clause:-By passing an ordinary Resolution

Alteration of AOAA 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.XYZ limited is shifting their registered office from Mumbai to Pune. The company took approval from shareholders & filed MGT-14 along with INC-22 with ROC.But ROC has not approved the form mentioning that they did not took approval from authority.Is any remedy available to Company?Prospectus & Allotment of SecuritiesThe act governs the issue of not only shares but all types of securities.

Companies may now issue Global Depository Receipt by passing the special resolution and subject to such conditions as may be prescribed.

The content to be prescribed the Prospectus has now been made more detailed.

Chapter III76Raising of Capital From PublicThe companies can raise money by offering securities for sale to the public. They can invite the public to buy shares, which is known as public issue.For this purpose the company may issue a prospectus, which may include a notice circular, advertisement or other documents which are issued to invite public deposits.

Public Company may issue securities:- -Through prospectus -Through private placement - Through right issue or bonus issue.Private Company may issue securities:- -Through private placement - Through right issue or bonus issue.

Prospectus Sec2(70) prospectus means 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 corporateIt is an invitation issued to the public to purchase or subscribe shares or debentures of the company.

Contents of the prospectus General informationCapital structureTerms of present issueManagement and projectsManagement and perception of risk factor It is compulsory to register the prospectus with the Registrar

Process of filing ProspectusDraft Offer document SEBIOffer document ROC/Stock exchange.Red hearing prospectus. ROC/Stock exchange.Red Hearing ProspectusRed herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.The company shall file red herring prospectus with Registrar of companies at least three days before the opening of the subscription list and the offer.A red herring prospectus shall carry the same obligation as are applicable to a prospectus. In case there is any variation between red herring prospectus and a prospectus shall be highlighted as variation in the prospectus.ISSUE OF APPLICATION FORMS AND ABRIDGE PROSPECTUSEvery application form for the purchase of the securities of a company shall be issued unless the form is accompanied by an Abridge ProspectusThere is no need for abridge prospectus in case of:a) Underwriting Agreement; andb) Private placement.

Private PlacementWhen an issuer makes an issue of securities to a select group of persons not exceeding 200, which is neither right issue or bonus issue,it is called private placement. It is of two types:-Preferential allotmentQualified Institutional placement(QIP)Conditions to be fulfilled Approval of shareholders-Special resolution.Invitation to not more than 200 persons in any financial year.Value of such offer per person should not be less than twenty thousand of the face value of securites.

Shelf Prospectus It 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.Any class of company may file a shelf prospectus with the Registrar of Companies at the stage of first offer of securities.The shelf prospectus shall indicate that validate period of the shelf prospectus is a period not exceeding one year from the date of first offer of securities under that prospectus. Once, a shelf prospectus has been issued, there will be no requirement of any further prospectus for any subsequent offer of these securities issued during this validity period.

For any subsequent issue, company shall file an Information Memorandum. This information memorandum shall contain all material facts relating to (i) new charges created; and (ii) changes in financial position of the company from first/previous offer to this second/subsequent offer under this Shelf Prospectus.When an offer of securities is made on shelf prospectus, the information memorandum together with shelf prospectus shall be deemed to be a prospectus.Civil Liability for MisstatementsIn case of any untrue statement in the prospectusThe liability will be on the director of the company , whose name was written during the time of issueThe persons who have authorized their names to be theirs in the prospectus to be named as directorsPromoterEvery person including the person who is an expert and has authorized his name to be issued with the prospectus

If a prospectus is issued in contravention of the provisions of section 26, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with bothMr.X filed a case against ABC limited fort the misrepresentation of prospectus. Plaintiff received a prospectus regarding the incorporation of Defendants company, which highlighted that the company would have the right to use steam or mechanical power. After receiving the prospectus, Plaintiff bought shares of the company, relying on the allegations of the prospectus, and believing that the company had the absolute right to use steam or mechanical power. The board of trade refused to allow steam or mechanical power, and the company was wound up, unable to complete its work.The plaintiff can get remedy against it? A purchased from B 1000 shares of a company on the basis of prospectus containing wrong statements. What remedies are available to A against the company? If there is privities of contract between A and B then what will be your argument?

Chapter IV- Share Capital and Debentures

ILLUSTRATION A company is registered with a capital of Rs. 1,00,000 divided into 10,000 shares of Rs. 10 each. The authorized capital of the company in such a case is Rs. 1,00,000. The company offers 8,000 shares to the public which takes them up. The issued capital of the company is Rs. 80,000. The calls up only Rs 6 per share. In such a case the called up capital is Rs. 48,000 and the uncalled capital is Rs. 32,000.Public CompaniesPrivate CompaniesPublic IssuePrivatePlacementRight & Bonus IssuePrivatePlacementRight & Bonus IssueCondition for voting rights to Preference Shareholders has been changed. Now preference shareholders can vote on all resolution placed before the company when dividends payable in respect of a class of preference shares are in arrears for a period of 2 years or more.

Company cannot issue shares at discount other than as sweat equity, no provision has been provided for any approval.

A company may issue preference shares redeemable after 20 years for such infrastructure projects as may be specified subject to redemption of specified % of preference shares on annual basis at the option of the preference shareholder.

Kinds of Share Capital The share capital of a company limited by shares shall be of two kinds, namely: (a) Equity share capital(i) with voting rights; or(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and(b) Preference share capital:

Equity Shares with Differential Rights

Both Public and Private companies are continued to be permitted.Conversion of existing equity share capital with voting rights into equity share capital carrying differential voting rights and viceversa not permitted Differential rights can be with respect to dividend, voting or otherwise, only if: -Authorisation by Articles and Shareholders by SR; -Upto 26% of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time; -Track record of dividend payment in last 3 immediate last FYs -No default in filing Accounts and Annual Return in 3 immediate last FYs -No default in payment of dividend, debentures, deposit, preference shares, loan from bank/FIs, statutory dues of employees. Principle and Interest/Dividend both -No default under SEBI, SCRA, FEMA and RBI Act

DVR shares were allowed in India in 2000DVR shares are like ordinary shares, but with fewer voting rights. These allow a company to dilute equity without a matching reduction in promoters' stake. The aim of limiting voting rights is preventing hostile takeovers by separating economic interests and voting rights.DVR shares are priced lower at issuance and offer higher dividends; in return, the voting rights are limited.Tata Motors:In 2008, Tata Motors became the first company in India to issue DVR shares. To fund the acquisition of Jaguar Land Rover, it issued 6.4 crore DVR shares at Rs 305 a share when the ordinary shares were at Rs 340. These DVRs offer higher dividends but carry one-tenth the voting rights of ordinary shares. This means 10 DVR shares equal one ordinary share as far as voting rights are concernedFor instance, the holders of Tata Motors' DVR shares can cast one vote for every 10 shares held. However, they get 5% more dividend than ordinary shareholders. On 18 July 2012, the company gave Rs 4.10 a share as dividend to DVR holders and Rs 4 a share to ordinary shareholders.

Pantaloon Retail India:The company issued bonus shares that were DVRs in February 2009. These carry one-tenth voting rights of ordinary shares and pay 5% additional dividend.

Gujarat NRE Coke:The company issued DVR shares in 2010. The investor has to hold 100 DVR shares for getting voting rights equal to one ordinary share.

Jain Irrigation:Jain Irrigation is a leading player in the micro-irrigation system market. The company issued DVR shares in November 2011 in the form of bonus to its existing shareholders. Its 10 DVRs entitle investors to one vote in shareholder meetings.

(i) Equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital;Rights of Equity shareholder :-Right of pre-emption in the matter of fresh issue.Right to apply to the court to set aside the variations to their rights to their detriment.Right to receive a copy of statutory report before holding of statutory meeting by public companies.Right to apply to CLB(now NCLT) for calling of an EGM,if company fails to call such a meeting.Rights to receive annual accounts with auditors report ,directors reports & other information.

Preference share capital means that part of the issued share capital of the company which carries or would carry a preferential right with respect to a)Payment of dividendb)Repayment of the amount of the share capital paid-up or deemed to have been paid upRestriction on Preference share:-No company shall issue any preference shares which are irredeemable

Conditions to be complied with before issuing preference sharesa) Articles of Association must authorize to issue preference sharesb) Approval of members is sought by way of special resolution in the general meetingc) At the time of issue of preference shares,- there should not subsist default in the redemption of preference shares issued either before or after the commencement of 2013 Act.- no payment of dividend due on any preference shares

Maximum period upto which a company limited by shares, can issue redeemable preference shares Not exceeding 20 years from the date of issue.A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects (Specified in Schedule VI).

Sources for redemption of preference shares

Redemption of preference shares shall be made only from the following;i) Out of the profits of the company which would otherwise available for dividend.ii) Out of the proceeds of a fresh issue of shares made for the purpose of such redemption.A sum equal to the nominal amount of the shares to be redeemed is to be transferred to a reserve called Capital Redemption Reserve.If redemption is at premium then premium amount out of the profits of the company or securities premium account.

Capital Redemption Reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.What is the position of a company when it is unable to redeem any preference shares?When a company is unable to redeem any preference shares, it can issue further redeemable preference shares equal to the amount due, including the dividend thereon subject to the following conditions;i) With the consent of the preference shareholders holding three-fourths in value; andii) With the approval of the Tribunal on a petition made by it in this behalf.

Voting on preference shares:Section 47 prescribes restrictions on voting rights of preference shareholders. The preference shareholders can vote only on those resolution which can directly affect their rights attached to their shares. It entitles a preference shareholder to vote on every resolution placed before the company at any meeting if the company has not paid the dividend in respect of a class of preference shareholders for a period of consecutive 2 (two) or more years.This is applicable to both public & private companiesFurther Issue of Capital

If company having share capital proposes to increase its subscribed capital by the issue of further shares.Provisions relating to further issue of capital to be applicable to all types of companiesExisting shareholders on proportionate basisApart from existing shareholders , shares may also be offered to employees as ESOPThe condition of expiry of two years of formation of company OR 1 year from. Letter of offer shall be made limiting not less than 15 days & not more than 30 days.(if not accepted it shall deemed to have been declined)

Preferential BasisTo any person (including existing shares) for cash or other than cash, if: -Special Resolution passed; -Price determined by Registered ValuerPreferential Offer means: Issue of shares or other securitieses by a company to any select person or group of person on preferential basis & doesnot include public issue, PI, Bonus, ESOP, ESPS,Sweat Equity, Depository receipt in India/AbroadInclue equity shares , PCD/NCD or any securities convertible into equity at later date.Allotment be completed within 12 months from the date of SRIncase of convertible securities, the price of resultant share be known beforehand.

Private PlacementPrivate Placement to be made through issue of offer letter.- The offer to be made to maximum 50 persons at a time and not more than to 200 persons in aggregate (excluding QIB and ESOP), in a Financial Year.- Such allotment of shares restricted to 4 in a Financial Year and not more than once in a calendar quarter with a minimum gap of 60 days between any 2 such offers or invitations.- Value of such offer or invitation shall be with an investment size of minimum Rs. 20,000 per person.- Payment be made by subscribers Bank Account only. No Cash payment- S/R be passed - Allotment be completed within 60 days from date of receipt of share application else repay within 15 days from date of completion of 60 days. - If unable to pay liable to repay interest @ 12% pa from expiry of 60th day.- Share application be kept in separate bank account and utiliize only for issue of shares else repay is unable to allotIf made to more than 50 persons or such higher number of persons as may be prescribed shall be deemed to be an offer to the public.Non-compliance to above lead to stringent penalty which may extend to higher of: Amount involved in Offer: or Rs. Two CroresSahara Case:Under the Act, 1956 the conditions relating to private placement were applicable only to public companies. on the contrary Act, 2013 provides various conditions for private placement of shares and debentures which apply to both private companies and public companies.The conditions imposed in relation to private placements by companies seem to have been issued after the ruling of the Hon"ble Supreme Court of India in the case of Sahara Group.Sahara India Real Estate Corporation Limited ('SIRECL') and Sahara Housing Investment Corporation Limited ('SHICL') issued unsecured optionally fully-convertible debentures ("OFCDs") amounting to about Rs 24,000 crores to more than 2 crore investors

When Securities Exchange Board of India ('SEBI'), had came to know of the large scale collection of money from the public by Sahara through issuance of OFCDs, it issued a show cause notice to SIRECL and SHICL inter alia stating that the issuance of OFCD's are public issue and therefore liable to be listed u/s 73 of Act, 1956 and also directed to refund the money solicited and mobilized through the prospectus issued with respect to the OFCDs, since they had violated various other clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and also various provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

it was urged by the Sahara Group that OFCDs were issued in the nature of "hybrid instruments" as defined u/s 2(19A) the Act, 1956 and SEBI did not have jurisdiction to administer those securities since Hybrid securities were not included in the definition of 'securities' under the Securities and Exchange Board of India Act, 1992 ("SEBI Act"), or the Securities Contract Regulation Act, 1956 ("SCRA"), but would be governed by the Central Government under section 55A(c) of the Act, 1956. The Supreme Court held that OFCDs issued by Sahara Group were public issue of debentures, hence securities and once the number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the public, which attracts Section 73(1) of Act, 1956 and application for listing becomes mandatory which falls under the administration of SEBI u/s 55A(1) (b) of the Act, 1956. The Court upheld the proceedings of the SEBI and Sahara Group was ordered to refund the amount to investors along with interestSahara CaseUse of term securities instead of shares - Use of the term shares in the Companies Act, 1956 restricted regulations of issuances of various other instruments by Company to raise funds . Companies manipulated this loophole by using other terminology or nomenclature for instruments used to raise funds, thereby easily escaping the regulatory oversight.

Case:Panacea Biotec Ltd has informed BSE that the Company had allotted 3,43,00,000 , 0.5%, Non-Convertible Cumulative Redeemable Preference Shares (NCCRPS) of Rs.10 (Rupees Ten) each at par aggregating to Rs. 34.30 on private placement basis to the promotes of the Company in pursuance of Special Resolution passed by the shareholders in their Extra-Ordinary General Meeting held on January 06, 2015 at the Registered Office of the Company.Further, the aforesaid shares are issued in physical form and the Company does not intend to list the aforesaid shares on Stock exchange(s).

Case 2:Reliance Chemotex Industries Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on January 17, 2015, inter alia, for allotment of 3,00,000 10% Cumulative Redeemable Preference Share of Rs.100 each.

Issue of shares at discountShares at Discount now not possible except Sweat Equity Shares & dvrs.

Sweat equity sharesSweat equity shares means such equity shares, which 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.Eligibility for Sweat-a) Permanent employee of the Company who has been working in India or outside India, for at least last 1 yearb) Director of Company-Whole time director or notc) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary (in India or outside India) or of a holding Company. Value Addition- Has been defined. It means actual or anticipated economic benefits derived or to be derived by Company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights. Authorisation by shareholders- Yes, prior shareholders approval through special resolution is required.Time limit for issuing Sweat: Allotment of sweat equity shares shall be made within 12 months from the date of passing special resolution. Time Gap- There should be at least 1 year between the commenced of business and issue of such shares. Valuation- Valuation of sweat shares and intellectual property rights(IPR)/know how/ value additions shall be done by Registered Valuer. Limit on sweat equity: In a year, sweat shares shall not exceed 15% of existing paid up equity share capital or shares having issue value of Rs. 5,00,00,000, whichever is higher. However, it should not exceed 25% of paid up equity capital of Company at any time. Mandatory lock-in period- 3 years from the date of allotment. The fact that the share certificates are under lock-in and the period of expiry of lock in shall be mentioned in prominent manner on share certificate.Infosys Technologies, which proposed sweat equity in 1998 and 1999, has issued options worth Rs 5,000 crore.AM Naik, chairman of Larsen & Toubro, holds 480,000 shares granted under sweat equity valued at Rs 71 crore(as per 2009) Anil Singhvi of Gujarat Ambuja Cement BS Nagesh of Shopper's Stop YC Deveshwar of ITC KV Kamath and Lalita Gupte of ICICI Bank Dipak Gupta and Shivaji Dam of Kotak Mahindra Bank are among the few holding shares worth over Rs 10 crore granted under sweat equity. Issue of Bonus SharesIssue of Bonus Shares can be made out of:-Free reserves; or -the securities premium account; or -capital redemption reserve account

Decision of issue of Bonus Shares once made by the Board cannot be withdrawn Bonus Shares can be issued if (i) Authorisation by articles of association;(ii) Board and shareholders approval;(iii) there being no partly paid-up shares.(iv)No issue of bonus shares in lieu of dividendProhibition on Issue of Bonus shares:-if the Company has defaulted in payment of:Interest/ Principal in respect of Fixed Deposits or Debt Securities issued by itStatutory dues of employees such as contribution to provident fund, gratuity , Bonus.

Case 1:A company issue bonus shares in the 2:1 ratio.They distributed the bonus out of capital revaluation reserves.The CLB(now NCLT) opposed the bonus issue of the company. Can company still issue bonus after CLB objection?

Buy-back of Shares/SecuritiesSEBIs norms It is mandatory for the companies to repurchase at least 50 per cent of the offers, under the new norms issued by Sebi in August, 2013.Those not able to meet the target would be barred from launching another offer for a period of one year while they could also be imposed with a penalty amounting to maximum of 2.5 per cent on the funds lying in the escrow account.Moreover, the companies are now required to complete their buyback offers within six months as against 12 months allowed earlier.Companies can buyback shares in two way -- open market and tender offer.In an open market offer, firms can buyback shares from shareholders without knowing the buyer, while tender offer involves the company writing to its shareholders individually to know their willingness for sale of shares in the buyback.

ApplicabilityFor Unlisted Public and Private Companies Section 68, 69 and 70 of Companies Act, 2013 & Rule 17 of Companies (Share Capital and Debentures) Rules, 2014For Listed Companies : Section 68, 69 and 70 of Companies Act, 2013 Rule 17 of Companies ( Share Capital and Debentures) Rules, 2014 Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 and Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013 Buyback of Shares

1) A company may buy its own securities from (referred to buy back) out of :-a. its free reserves;b. the securities premium accountC. proceeds of the issue of any shares or other specified securities.Provided that no buy back of any kind of shares or securities from same kinds of proceeds2) No company shall purchase its own shares or other specified securities under sub-section (1), unless (a) the buy-back is authorised by its articles; (b) a special resolution has been passed at a general meeting of the company authorising the buy-backProvided that nothing contained in this clause shall apply to a case where(i) the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company; and(ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting;(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company:Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. in this clause shall be construed with respect to its total paid-up equity capital in that financial year;(d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves:Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;

(e) all the shares or other specified securities for buy-back are fully paid-up;(4) Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board under clause (b) of sub-section (2).(5) The buy-back under sub-section (1) may be(a) from the existing shareholders or security holders on a proportionate basis; (b) from the open market;(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity

6) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(7) No company shall directly or indirectly purchase its own shares or other specified securities(a) through any subsidiary company including its own subsidiary companies; (b) through any investment company or group of investment companies; or(c) 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.

(8) Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.(a) The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.9)Declaration of solvency.

Case 1:Jindal Steel & Power Ltd has informed BSE that as per Regulation 14(3) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998, as amended (the Buy-Back Regulations), the Company has utilized at-least 50% of the amount earmarked for the Buy-Back as specified in the resolution passed by the Board of Directors at its meeting held on August 30, 2013, i.e., the Minimum Buy-Back Size of Rs. 500 crores. Accordingly, pursuant to paragraphs 1.7 and 4.3 of the public announcement dated September 06, 2013 (the Announcement), the duly authorized Sub-Committee of Directors of the Company at its meeting held on February 04, 2014, unanimously approved that the buy-back offer of equityshares of the Company be closed on February 18, 2014, being a date earlier than the last date for the completion of buy-back mentioned in the Announcement, i.e. March 15, 2014. The intimation regarding early closure of Buy back was sent vide Company's letter dated February 04, 2014.Further the Company has informed that, as per above decision, the Buy back has closed on February 18, 2014

On 9th Oct 2014: Infosys' board on Friday approved a bonus issue of one equity share for every equity share held by investors. The company also announced a dividend of Rs 30 per share . The two announcements led to a 7 per cent surge in stock prices and sent Infosys to a 52-week high of Rs 3,908 in intraday trade. Infosys has not fixed a record date for the bonus issue yet.

Debentures

(1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption:Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.(2) No company shall issue any debentures carrying any voting rights.(3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.(4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debenturesThe Central Government may prescribe the procedure, for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, quantum of debenture redemption reserve required to be created and such other matters.

Power to nominate(1) Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death.(2) Where the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.(3) Where the nominee is a minor, it shall be lawful for the holder of the securities, making the nomination to appoint, in the prescribed manner, any person to become entitled to the securities of the company, in the event of the death of the nominee during his minority.