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CORPORATE
LEGAL
FRAMEWORK
1
CORPORATE LEGAL FRAMEWORK
PART – I
Company: Meaning of company, Incorporation, Types of
Companies Memorandum and Articles of Association,
Prospectus.
Share Capital: Types of shares, Alterations of share capital,
Allotment of shares, Book building, Transfer of shares,
Dividend, Bonus shares, Buy Back of shares, Borrowing
Powers – Debentures, Charges.
Company Administration: Board of Directors and their
Qualifications, Appointment of Directors, Powers and legal
position, removal, remuneration of Directors (including
managing director, manager and company secretary).
PART – II
SEBI: Objectives, Status, Powers, Guidelines issued by
SEBI Regarding Disclosure and Investor Protection with
Reference to Pre-issue Obligations. IP: Limited Liability
Partnership-Incorporation, Conversion, winding up
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Company
What is a 'Company'
A company is a legal entity formed by a group of individuals to engage
in and operate a business enterprise. A company may be organized in
various ways for tax and financial liability purposes depending on the
corporate law of its jurisdiction. The line of business the company is in
will generally determine which business structure it chooses, for
example a partnership, a proprietorship, or a corporation. As such, a
company may be regarded as a business type.
Company Types
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In the United States, tax law as administered by the Internal Revenue
Service (IRS) dictates how companies are classified. Examples of company
types in the U.S. include the following:
Company Definition:
A legal entity, allowed by legislation, which permits a
group of people, as shareholders, to apply to the
government for an independent organization to be
created, which can then focus on pursuing set objectives,
and empowered with legal rights which are usually only
reserved for individuals, such as to sue and be sued, own
property, hire employees or loan and borrow money.
Company
A company has different definitions based on the country it is situated
in.
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In the UK:
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A person or a group of persons: It is no more required to
be an association of persons to form a company. A
company can also be started as a single person company
(one-person company).
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Common Seal: A company being an artificial legal person,
uses its common seal (with the name of the company engraved
on it) as a substitute for its signature. Any document bearing
the common seal of the company will be legally binding on the
company.
Types of Companies
A company can be classified into various types depending upon
the following requirements:
Statutory Companies
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come into existence only after these are registered under the
act and the certificate of incorporation is passed by the
Registrar of companies.
These companies may or may not have a share capital and the
liability of each member is limited by the memorandum to the
extent of the sum of money (s)he had promised to pay in the
event of liquidation of the company for payments of debts and
liabilities of the company.
Unlimited Companies
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members of a public company or to the transferability of shares.
However, there are some other restrictions:
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What is a Company?
Organizations require huge investments. As the investments are big, the
risks involved are also very high. While undertaking a big business, the
two important limitations of partnerships are limited resources and
unlimited liabilities of partners. The company form of partnerships has
become popular to overcome the problems of partnership business.
Various multinational companies have their investors and costumers
spread throughout the world.
Company
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Meaning and Nature of Company
According to the Companies Act, 1956, “A company is a person, artificial,
invisible, intangible, and existing only in the contemplation of the law.
Being a mere creature of the law, it possesses only those properties
which the character of its creation confers upon it either expressly or as
incidental to its very existence.”
The persons who contribute to the common stock are the members.
Incorporated Association
A company can be created only under the registration of the Company
Act.
It has the rights to acquire and dispose the properties, to enter into
contract with third parties in its own name, and can sue and can be
sued in its own name.
Similarly, the company in any way is not liable for the individual debts
of the members.
The properties of the company can only be used for the development,
betterment, maintenance, and welfare of the company and cannot be
used for personal benefits of the shareholders.
A member cannot claim any ownership rights over the company either
single-handedly or jointly.
The members of the company can enter into contracts with the
company in the same manner as any other individual can.
The company has to pay income tax as it earns profits and when
dividends are paid to the shareholders, the shareholders also have to
pay income tax based on the dividends earned. This highlights the
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fact that the shareholders and the company are two separate
individual entities.
Perpetual Existence
A company is said to be a stable form of business organization.
Members can join or leave the company but the company can continue
forever.
Common Seal
Transferrable Shares
The shares can be freely transferred in case of a public company.
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However, the manner in which such transfer of shares is to be made
should be provided and it may also contain bona fide and reasonable
restrictions on the rights of members for transfer of their shares.
Delegated Management
Any company can be considered as an autonomous, self-governing
and self-controlling organization.
Classification of Companies
All the companies must be registered under the Companies Act. A
certificate of incorporation must be issued by the registrar of the
company after registration. Different jurisdictions can form different
companies. Some of the most common types of companies are as follows
−
Private Company
A company is said to be a private company if it does not allow its
shareholders to transfer shares.
Public Company
The liability of the members is limited by the value of the shares they
purchase.
The shares of a public company are sold and bought freely without any
obstruction in the stock market.
Companies Limited by Guarantee
Every member of these companies promises to pay a fixed amount of
money in the event of liquidation of the company.
There is no liability to pay anything more than the value of the share
and the guarantee. Some of the substantial resultants of companies
limited by guarantee are charities, community projects, clubs,
societies, etc.
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These types of companies can be considered as private companies
offering limited liabilities to their members.
The members do not have to pay anything more than the fixed value
of the share. Companies limited by shares are the most popular
among the registered companies.
Unlimited Company
Unlimited companies are the companies where the liabilities of the
shareholders are unlimited as in the case of partnership firms.
Such companies are permitted under the Companies Act but are not
known.
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Meaning
A company is a third legal business structure and has entirely
a different organizational structure from the
sole proprietorship or partnership. Its formation is due to
firstly, the sole proprietorship and partnership cannot meet the
increased capital demand of industry and commerce. Secondly,
the company ensures the protection of limited liability to the
shareholders and investors.
Definition
According to Prof. L.H. Haney, “Company is an artificial
person created by law having separated entity with a perpetual
succession and common seal”. According to Justice
Lindley a company means association of persons who
contribute in shape of money or money’s worth to a common
stock and employ it for some specific purpose.
There are three main activities of a business
Characteristics of a Company
A company is a separate legal entity from its members who constitute it.
It can hold, purchase and sell properties and enter into contracts in its
own name. It is an artificial legal person who can sue aid be sued.
Companies are owned by shareholders and they elect the Board of
Directors, who run the company. The board in turn selects the
management. Thus the shareholders exercise only indirect control over
the affairs of the company. The separation of ownership from the
management some-times results in a conflict of interests between
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owners and management. The best the shareholders can do is to
change some of the directors through vote in the annual general meeting
subsequent to any such conflict.
Limited Liability
Transferability of Shares
The shares of a joint stock company are freely transferable. It does not
require any permission from the company or consent of other
shareholders. The shares of listed companies can be sold or purchased
on the stock exchange and ownership transferred without any difficulty.
However, in case of a private limited company, the transfer of shares is
subject to the restrictions given in the company's articles.
Continuous Existence
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Common Seal
Incorporation
What is 'Incorporation'
Incorporation is the legal process used to form a corporate entity or
company. A corporation is a separate legal entity from its owners.
Corporations can be created in nearly all countries in the world and
are usually identified as such by the use of terms such as "Inc." or
"Limited" in their names. It is the process of legally declaring a
corporate entity as separate from its owners.
BREAKING DOWN 'Incorporation'
Incorporation has many advantages for a business and its owners,
including 1) Protects the owner's assets against the company's liabilities 2)
Allows for easy transfer of ownership to another party 3) Achieves a lower
tax rate than on personal income 4) Receives more lenient tax restrictions
on loss carry forwards 5) Can raise capital through the sale of stock.
Throughout the world, corporations are the most widely used legal vehicle
for operating a business. While the legal details of a corporation's formation
and organization differs from jurisdiction to jurisdiction, most have certain
elements in common.
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The directors of the company are responsible for day-to-day activities. They
owe a duty of care to the company and must act in its best interest. They
are usually elected annually. Smaller companies can have a single director,
while larger ones often have a board comprised of a dozen or more
directors. Except in cases of fraud or specific tax statutes, the directors do
not have personal liability for the company's debts.
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preferred type for larger companies as stockholders -- owners -
- have asset and income protection.
Incorporation Realities
Considerations
Incorporation Protections
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attractive to investors, permitting an active and vibrant stock
market in the U.S.
Incorporation
Share
WHAT IT IS:
WHY IT MATTERS:
What Is Incorporation?
Paying taxes
Owning property
Filing suit
Being sued
Taking out loans
Business Structures
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Corporations are formed when a business owner files articles of
incorporation with the state in which they plan to conduct
business. Most other types of business entities can choose to
incorporate once they've already been formed. If a business
owner originally started a sole proprietorship, but they decide
that they want to incorporate, they can do so by following their
state's rules and regulations for the process and filling out the
appropriate documentation.
Why Incorporate?
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Option to sell shares
Different stock options
Opportunities for growth through local and global stock
offerings
Highly structured business management
Cons to Incorporating
How To Incorporate
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Meet with an experienced business attorney to make sure
to choose the best fit for the company.
Decide on the management structure and board of
directors.
Choose a registered agent for the business.
File the articles of incorporation and any other
documentation requirements for the state in which the
business is incorporating.
Name Clause
The name clause requires you to state the legal and recognized
name of the company. You are allowed to register a company
name only if it does not bear any similarities with the name of
an existing company. Your company name must end with the
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word “limited” because the preparation of an MOA is a legal
requirement for limited liability companies only.
Objective Clause
Liability Clause
Capital Clause
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Association Clause
Memorandum of Association
A Memorandum of Association (MoA) represents the charter of
the company. It is a legal document prepared during the
formation and registration process of a company to define its
relationship with shareholders and it specifies the objectives for
which the company has been formed. The company can
undertake only those activities that are mentioned in the MoA.
As such, the MoA lays down the boundary beyond which the
actions of the company cannot go.
Format of MoA
Contents of MoA
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MoA consists of the following clauses :
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Main Objective: It states the main business of the
company
Lord Cairns:
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location of registered office to the registrar within thirty days
from the date of incorporation or commencement of business.
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It contains the names and addresses of the first subscribers.
The subscribers to the Memorandum must take at least one
share. The minimum number of members is two in case of a
private company and seven in case of a public company.
Characteristics / Features :
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deals with company.The importance of memorandum are
discuss below :-
Framing Memorandum :
CONTENT OF MEMORANDUM
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6. Subscription Clause – It contains the names and
addresses of the first subscribers. The subscribers to the
Memorandum must take at least one share. The minimum
number of members is two in case of a private company
and seven in case of a public company.
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forming a company and agree to have number of the
shares written against their respective names).
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different activities of different nature but only those
registered to be conducted by this company. A company
can be registered as food’s company but inside the
company there may be other activities like transporting
services and communication.
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the company, which is beyond the powers. Conferred on the
company by the objects clause of its memorandum, an ultra
vires act is void and cannot be ratified even if all the directors
wish to ratify it. Sometime the expression ultra vires is used to
describe the situation when the directors of a company have
exceeded the powers delegated to them. Where a company
exceeds its powers as conferred on it by the objects clause of
its memorandum, its not bound by it because it lacks legal
capacity to incur responsibility for the action, but when the
directors of a company have exceeded the powers delegated to
them. This use must be avoided for it is apt to cause confusion
between two entity distinct legal principles consequently, here
are restricting the meaning of ultra vires objects clause of the
company’s memorandum
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clause of it’s memorandum, were to make and sell, or lend on
hire railway carriages and wagons, and all kinds of railway
plaint, fittings, machinery and rolling stock to carry on the
business of mechanical engineers and general contractors to
purchase and sell as merchants timber, coal, metal or other
materials and to buy and sell any materials on commissions or
as agents, the directors of the company entered into a contract
with Riches for financing a construction of a railway line in
Belgium. All the members of the company ratified the contract,
but later on the company repudiated it. Riche sued the
company for breach of contract.
The issue in this case was whether the contract was valid and if
not, whether it could be ratified by the members of the
company.
The court held that, the contract was beyond the objects as
defined in the objects clause of its memorandum and therefore
it was void. The company had no capacity to ratify contract,
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Articles of Association
Company Name
Share Capital
Shareholder Meetings
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undertaken, and the means by which the shareholders exert
control over the board of directors.
The article is binding not only to the existing members, but also
to the future members who may join in the future. The hires of
members, successors and legal representatives are also bound
by whatever is contained in the Article. The Articles bind the
company and its members as soon as they sign the document.
It is a contract between the company and its members.
Members have certain rights and duties towards the company
and the company have certain obligations towards its
members. At the same time the company also expects some
duties and obligations which the member has to fulfil for the
smooth functioning of the company.
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for public access. It cannot be changed except at an AGM or
Extraordinary General Meeting (EGM) and statutory allowance.
The MOA is filed with a Registrar of Companies who is an
appointee of the Ministry of Corporate Affairs. For their
assurance, the shareholders are permitted to elect an Auditor
at each AGM. There can be Internal Auditors (employees) as
well as an External Auditor.
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confidentiality of know-how and the founders’ agreement
and penalties for disclosure
Article of Association
ARTICLES OF ASSOCIATION
NATURE OF ARTICLES
Thus, the memorandum lays down the scope and powers of the
company, and the articles govern the ways in which the objects
of the company are to be carried out and can be framed and
altered by the members. But they must keep within the limits
marked out by the memorandum and the Companies Act.
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Articles Subordinate to Memorandum
But neither the articles nor the memorandum can authorise the
company to do anything so as to contravene any of the
provisions of the Act. [See Re Peveril Gold Mines, (1989) 1 Ch
122 (CA)].
REGISTRATION OF ARTICLES
Section 5(2) provides that the articles shall also contain such
matters, as may be prescribed. However, nothing prescribed in
this sub-section shall be deemed to prevent a company from
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including such additional matters in its articles as may be
considered necessary for its management.
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appropriate regulations of Table G, H, I and J respectively in
Schedule I [Section 5(6)].
STATUTORY REQUIREMENTS
CONTENTS OF ARTICLES
The articles set out the rules and regulations framed by the
company for its own working. The articles should contain
generally the following matters:
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
9. Nomination.
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10. Forfeiture of shares.
14. Dematerialisation.
24. Seal.
32. Indemnity.
in Section 397 and 398 could move the Court for redressing
their grievances. The Courts have entertained such
applications from shareholders even where they are smaller in
number [See Menier N. Hooper Telegraph Works (1874) 9 Ch.
App. 350].
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shareholders. But the acts of the directors beyond the
articles can be ratified by the shareholders.
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held that the ‘doctrine of indoor management’ cannot
apply where the question is not one as to scope of the
power exercised by an apparent agent of a company but
is with regard to the very existence of the agency.
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attention to the contents of the articles of association already
during the company's founding phase, because the
amendments thereof always require at least two-thirds (a
qualified majority) of the votes and of the shares represented at
the general meeting of shareholders. In practice, significant
amendments always need to be agreed between the
shareholders. Moreover, amendments always result in Trade
Register costs as the amendments become effective only
following registration in the Trade Register.
1. Company name
4. Share capital
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The number of the members of the board of directors and
auditors, as well as the possible deputy members and their
term of office may be stated in the articles of association. The
number of the members may also be stated as a minimum or
maximum amount. At least one of the members of the board of
directors must have his/her place of residence in the EEA,
unless the National Office of Patents and Registration of
Finland grants the company a permission to deviate from this
requirement. Legally incompetent or bankrupt natural persons
or a legal person cannot be members of the board of directors.
In addition, the articles of association may include special
provisions concerning the eligibility of a board member and a
deputy member.
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The articles of association may state the agenda of the annual
general meeting. Matters, which according to mandatory law
provisions must be considered at the annual general meeting,
shall also be included on the agenda.
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as provided by law. These voluntary provisions may concern
e.g. following matters:
1. Memorandum of Association
2. Articles of Association, if necessary and
3. The agreement, if any, which the company proposes to enter into with any individual
for his appointment as its managing or whole-time director or manager.
The articles of association of a company are its by-laws or rules and regulations which
govern the management of its internal affairs and the conduct of its business. They are
framed with the object of carrying out the aims and objects as set out in the
Memorandum of Association. According to Section 2(2) of the Companies Act, 1956
‘articles’ means the articles of association of a company as originally framed or as altered
from time to time in pursuance of any previous companies laws or of the present Act, i.e.
the Act of 1956.
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The Articles regulate the internal management of the company. They define the powers
of its officers. In Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd
(AIR 1971 SC 422), the SC said that the articles of association also establish a contract
between the company and the members and between the members inter se. This
contract governs the ordinary rights and obligations incidental to membership in the
company.
Articles are like the partnership deed in a partnership. They set out provisions for the
manner in which the company is to be administered. In particular, they provide for
matters like the making of calls, forfeiture of shares, directors’ qualifications,
appointment, powers and duties of auditors, procedure for transfer and transmission of
shares and debentures.
Utmost care must be taken to prepare the articles of association of the proposed
company. They are certain matters in respect of which powers can be exercised by the
company only if the articles so provide and in the manner provided therein. Therefore,
the articles must contain provisions in respect of all matters which are required to be
contained therein so as not to hamper the working of the company later. At the same
time, the articles of association should not provide for matters in respect of which it has
no powers to exercise. It cannot, for example, provide for expulsion of a member, as
such a power is opposed to the fundamental principal of company jurisprudence and,
therefore, ultra vires the company.
1. Unlimited companies
2. Companies limited by guarantee
3. Private companies limited by shares
The articles shall be signed by the subscribers of the Memorandum and registered along
with the Memorandum. A public company may have its own Articles of association. If it
does not have its own Articles, it may adopt Table A given in Schedule I to the Act.
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Section 27 provides that the regulations with respect to the aforesaid companies should
provide for the following:-
1. In case of unlimited companies, the articles shall state the number of members with
which the company is to be registered and if the company has a share capital, the
amount of share capital with which the company is to be registered.
2. In case of companies limited by guarantee, the articles shall state the number of
members with which the company is to be registered.
3. In case of private company having a share capital, the articles shall contain provisions
which-
Thus, in case of a limited liability company having share capital, if the articles do not
expressly exclude any or all provisions of table A, and at the same time not providing
anything for them, applicable clauses of Table A shall automatically apply to it.
a) be printed;
c) be signed by each subscriber of the memorandum of association (who shall add his
address, description and occupation, if any,) in the presence of at least one witness who
shall attest the signature and shall likewise add his address, description and occupation,
if any.
A copy of every special resolution altering the Articles shall be filed in Form no 23, with
the Registrar within 30 days its passing and attached to every copy of the Articles issued
thereafter. The fundamental right of a company to alter its articles is subject to the
following limitations:
a) The alteration must not exceed the powers given by the Memorandum of Association
of the company or conflict with the provisions thereof.
b) It must not be inconsistent with any provisions of Companies Act or any other statute.
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c) It must not be illegal or against public policies
d) The alteration must be bona fide for the benefit of the company as a whole.
e) It should not be a fraud on minority, or inflict a hardship on minority without any
corresponding benefits to the company as a whole.
f) The alternation must not be inconsistent with an order of the court. Any subsequent
alteration thereof which of inconsistent with such an order can be made by the company
only with the leave of the court.
g) The alteration cannot have retrospective effect. It can operate only from the date of
amendment. [Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989] 3 comp.
L.J. (SL) 70].
h) If a public company is converted into a private company, then the approval of the
Central Government is necessary. Printed copies of altered articles should be filed with
the Registrar within one month of the date of Central Government’s approval. [Section 31
(2A)].
i) An alteration that has the effect of increasing the liability of a member to contribute to
the company is not binding on a present member unless he has agreed thereto in writing.
j) A reserve liability once created cannot be undone but may be cancelled on a reduction
of capital.
k) An assumption by the Board of Directors of a company of any power to expel a
member by amending its Articles is illegal or void.
1. Take the necessary decision by convening a Board Meeting to change all or any of the
existing Articles of Association and fix up the day, time, place and agenda for a general
meeting for passing special resolution to effect the change.
2. See that any such change in the Articles of the company conforms to the provisions of
the companies Act, 1956 and the conditions contained in the Memorandum of
Association of the company.
3. See that any such change does not increase the liability of any member who has
become so before the alteration to contribute to the share capital of or otherwise to pay
money to, the company.
4. See that any such change does not have the effect of converting a public company
into a private company. If such is the case, then make an application to the Central
Government for such alteration.
5. See that any such change does not provide for expulsion of a member by the
company.
6. Issue notices for the General Meeting proposing the Special resolution and explaining
inter alia, in the explanatory Statement the implication and reasons of the changes being
proposed.
7. If the shares of the company are enlisted with any recognised Stock Exchange, then
forward copies of all notices sent to the shareholders with respect to change in the
Articles of Association to the Stock Exchange.
9. File with the stock exchange with which your company is enlisted six copies of such
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amendments as soon as the company adopts it in General Meeting. Out of the six
copies, one copy must be a certified true copy.
10. Forward promptly to the Stock Exchange with which your company is enlisted three
copies of the notice and a copy of the proceedings of the General Meeting.
11. File the Special resolution with the concerned Registrar of companies with
explanatory statement in Form No.23 within thirty days of its passing after payment of the
requisite filing fee in cash as per Schedule X. If the Articles of Association have been
completely or substantially changed, file a new printed copy of the Articles after paying
the requisite fee in cash prescribed under Schedule X to the Companies Act, 1956.
payments upto Rs.50/-
14. If the articles are altered pursuant to an order of the Company law Board made under
section 397 or 398 then see that such alterations is not inconsistent with the said and if it
is so then obtain first leave of the Company Law Board to make such alteration.
The discussion on legal effect of memorandum and articles may be made under
the following heads-
1. Members bound to the company
2. Company bound to its members
3. Members bound to members
4. Company and the outsiders
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adjudicated bankrupt. His trustee in bankruptcy claimed that he was not bound by these
provisions and should be at liberty to sell the shares at the true value. It was held that the
trustee was bound by the articles as a share was purchased by B in terms of the articles.
In Malleson vs National Insurance & Guarantee Corpn, it was held that each member is
bound by the covenants of memorandum and articles as originally framed or as altered
form time to time in accordance with the provisions of the companies Act.
In V.B Rangaraj vs V.B Gopalkrishnan [1992], 73 SC, it was held that the articles are the
regulations of the company binding on the company and on its shareholders.
Shareholders, therefore, cannot among themselves enter into an agreement which is
contrary to or is inconsistence with the articles of the company.
In Wood vs Odessa waterworks [1889] 42Ch. D. 636, the directors proposed to pay
dividend in kind by issuing debentures. The articles provided for the payment of dividend.
The courl held that the payment means payment in cash and therefore the company
could be compelled to pay dividend in terms of the articles.
After the articles are registered, they not only constitute a contract between the
association or company on the one hand and its members on the other, but also they
constitute a contract between the members inter se- Shiv Omkar Maheshwari vs
Bansidhar Jagannath, 1957.
In Eley vs Positive Govt. Security Life Ass. Co. 1876,1 Ex. D. 88, the articles of a
company provided that E should be the solicitor of the company for life and could be
removed from office only for misconduct. E took office and became a shareholder. After
sometime the company dismissed him without alleging misconduct. E sued the company
for damages for breach of contract. It was held that the articles did not constitute any
contract between the company and the outsider and as such no action could lie.
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Importance of Articles of
Association of a Company–
Explained!
Articles of Association, the second important document of a
company, contain rules, regulations and bye-laws for the
internal administration of the company. The articles regulate
the internal management of the company.
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should state both the number of members as well as the
amount of share capital (if any) with which the company is to be
registered.
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The fundamental points of distinction between MOA and
AOA are as follows:
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contained therein.
The articles can be
A memorandum
drafted according to
Contents must contain six
the decision of the
clauses.
Company.
The articles provide
The memorandum the regulations by
contains the which those
Objectives objectives and objectives and
powers of the powers are to be
company. conveyed into
impact.
Any provision, as
The memorandum
opposed to a
is the dominant
Validity memorandum of
instrument and
association, is
controls articles.
invalid.
Main Difference
Comparison Chart
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Memorandum of
Basis of Distinction Association Article of Association
Memorandum of Association
A Memorandum of Association also called as MOA become a
legal document that exists to define the relationship of the
company with its shareholders and helps with the initiation and
registration of a limited liability company. A Memorandum of
Association (MOA) is an official archive arranged in the
development and enlistment procedure of a restricted obligation
organization to characterize its association with shareholders.
The MOA is open to general society and portrays the
organization’s name, the physical address of registered office,
names of shareholders and the dissemination of offers. The
MOA and the Articles of Association fill in as the constitution of
the organization. The MOA does not connect in the U.S. be that
as it may, is a legal necessity for constrained obligation
organizations in European nations including the United
Kingdom, France and Netherlands, and also some
Commonwealth countries. It must get recorded with the
Registrar of Companies amid the procedure of joining of a
Company. It contains the essential conditions after that the
organization is permitted to operate.Its reason for existing is to
empower shareholders, leasers, and the individuals who
manage the organization to recognize what is its allowed scope
of big business. It educates all people what the team is framed
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to do and what capital it needs to do with. The report directs the
organization’s outside issues. The name condition obliges you
to express the official and perceived name of the group. You
are permitted to enroll a team name just on the off chance that
it doesn’t bear any likenesses with the name of a current group.
Articles of Association
An Articles of Association also called AOA becomes a
document that has all the purposes and aims of a company and
the type that defines the duties and responsibilities of all the
members that become a part. It becomes a compulsion and
therefore gets filed with the registrar of companies. The article
of affiliation is a report that indicates the controls for an
organization’s operations, and they characterize the
administration’s motivation and lay out how assignments are to
be proficient inside the association, including the procedure for
selecting chiefs and how money related records will be dealt
properly. Articles of affiliation frequently recognize the way in
which an organization will issue stock offers, pay profits and
review financial records and energy of voting rights. This
arrangement of principles can be viewed as a client’s manual
for the organization since they diagram the approach for
achieving the everyday errands that must be finished. An
organization is a joined body so there ought to be a few
principles and directions framed for the administration of its
fundamental issues and lead of its business and the connection
between the individuals and the organization. Also, the rights
and obligations of its persons and the group are to record. It is
the reason Articles of Association are necessary. The Articles
of Association is an archive that contains the cause of the
group and also, the obligations and duties of its individuals
characterized and recorded unmistakably. It also becomes an
important document which needs to get filed with the Registrar
of Companies.
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Key Differences
Prospectus
What is a 'Prospectus'
A Prospectus is a formal legal document that is required by and
filed with the Securities and Exchange Commission (SEC) that
provides details about an investment offering for sale to the
public. The preliminary prospectus is the first offering document
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provided by a security issuer and includes most of the details of
the business and transaction in question; the final prospectus,
containing finalized background information including such
details as the exact number of shares/certificates issued and
the precise offering price, is printed after the deal has been
made effective. In the case of mutual funds, a fund prospectus
contains details on its objectives, investment strategies, risks,
performance, distribution policy, fees and expenses, and fund
management.
Fees in a Prospectus
Because the fees that mutual funds charge take away from
investors’ profits, the fees are listed in a table near the
beginning of the prospectus. Fees for purchases, sales and
moving among funds are included. This simplifies comparing
the costs of various mutual funds. High-cost funds have fees
exceeding 1.5%, whereas low-cost funds have expenses below
1%.
Risks in a Prospectus
Prospectus Example
Prospectus:
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A document shall be called a prospectus if it satisfy two
things:
Contents of a prospectus:
8. The authority for the issue and the details of the resolution
passed therefore.
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12. Main object of public offer and terms of the present issue.
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have been made with a view to the shares or debentures
being offered for sale to the public if it is shown
b. That at the date when the offer was made the whole
consideration to be received by the company in respect of
the shares or debentures had not been received by it.
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C. Every prospectus must have, on the face of it, a statement
that:
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5. is an expert;
Meaning of Prospectus
Contents of Prospectus
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4. The names, addresses and occupations of the directors,
managing directors or managers etc.
1. Civil liability
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2. Criminal liability
Importance of a Prospectus
A prospectus is a document that companies and others file
with the Securities and Exchange Commission when they
are offering new shares of a security to the public. One of
the most common reasons for issuing a prospectus is
when a company is making an initial public offering,
putting shares of stock up for sale for the first time. Mutual
funds issue a prospectus at regular intervals because they
routinely make new shares available.
Issuer Information
Among the most salient details in the prospectus for a new
stock are the descriptions that the company offers of itself, its
assets, its operations, its goals and its business plan. The
prospectus also features a section known as "certain
considerations," which explains any particular risk factors that
could impede the success of the company and harm a
shareholder's investment in its stock. Other company
information includes an examination of the competition,
pending legislation and the broader economy and its influence
on the company. A prospectus for a stock also features a
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financial statement for the company and the opinion of an
independent auditor about the company's financials. A bond
prospectus similarly features relevant financial information
about the corporation or public entity issuing the bond.
Offering Information
In addition to issuer information, a prospectus for a stock or
bond offering includes information about the security itself. It
describes the number of shares or bond certificates being sold
in an offering, the price, the underwriter and how the security
will be available for purchase. For either a stock or a bond, the
prospectus should specify how the company or public entity
that is selling the security will use the funds that are being
raised from the sale. If the prospectus is for a stock, it will
include information about its dividend policy and it will describe
the different classes of stock and the voting rights for
shareholders.
Mutual Fund Activity, Objectives and Leadership
A mutual fund prospectus details the performance of the fund,
often including both recent quarterly results and those from
previous calendar years. It also specifies the various goals for
the fund and the basic overarching investment strategies that
guide it. For instance, the prospectus for a fund might indicate
that the fund invests in American stocks with strong long-term
growth potential. This type of description gives investors an
opportunity to review a fund's objectives to make sure that they
match the investors' own goals. The identity of the managers
who are steering the fund also often appears in the prospectus.
Mutual Fund Fees, Expenses and Guidance
A mutual fund prospectus provides investors with guidance to
help with their role as shareholders. For instance, it gives
investors instructions on their tax obligations related to the
shares that they own, and it also details instructions on how to
buy and sell shares of the fund. The prospectus provides a
reliable place for investors to track down the various fees that
are attached to owning shares of the fund, such as the amount
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of the management fee. In addition, the prospectus is a
document that an investor can study in order to understand all
of a fund's expenses to determine if it is operating efficiently
enough for the investor's taste.
Meaning of Prospectus of Company
“prospectus of company” means any document described or
issued as a prospectus and includes a red herring prospectus
or shelf prospectus 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 prospectus of company may issued by or behalf of a public
company. It can issue either with reference to its formation or
subsequently, or on behalf of any person who has engaged or
interested in the formation of a public company.
Types of Prospectus
Advertisement of Prospectus
Where an advertisement of any prospectus of a company is
published in any manner, it shall be necessary to specify
therein the contents of its memorandum as regards the objects,
the liability of members and the amount of share capital of the
company, and the names of the signatories to the
memorandum and the number of shares subscribed for by
them, and its capital structure.
Shelf Prospectus
(1) Any class or classes of companies, as the Securities and
Exchange Board may provide by regulations in this behalf, may
file a shelf prospectus with the Registrar at the stage of the first
offer of securities included therein which shall indicate a period
not exceeding one year as the period of validity of such
prospectus which shall commence from the date of opening of
the first offer of securities under that prospectus, and in respect
of a second or subsequent offer of such securities issued
during the period of validity of that prospectus, no further
prospectus is required.
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(2) A company filing a shelf prospectus shall be required to file
an information memorandum containing all material facts
relating to new charges created, changes in the financial
position of the company as have occurred between the first
offer of securities or the previous offer of securities and the
succeeding offer of securities and such other changes as may
be prescribed, with the Registrar within the prescribed time,
prior to the issue of a second or subsequent offer of securities
under the shelf prospectus:
Provided that where a company or any other person has
received applications for the allotment of securities along with
advance payments of subscription before the making of any
such change, the company or other person shall intimate the
changes to such applicants and if they express a desire to
withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen
days thereof.
(3) Where an information memorandum then filed, every time
an offer of securities thus made under sub-section (2), such
memorandum together with the shelf prospectus shall deemed
as prospectus.
Explanation.—For the purposes of this section, the expression
“shelf prospectus” means a prospectus in respect of which the
securities or class of securities included therein hence issued
for subscription in one or more issues over a certain period
without the issue of a further prospectus.
Red Herring Prospectus
(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.
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(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 thus 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 not included in the red
herring prospectus shall then filed with the Registrar and the
Securities and Exchange Board.
Explanation.—For the purposes of this section, the expression
“red herring prospectus” means a prospectus which does not
include complete particulars of the quantum or price of the
securities included therein.
PROSPECTUS (Companies Act 2013)
In last post, public offer and private placement we have
discussed public offer. In this post we will discuss Prospectus
under Companies Act, 2013
Clause (70) of Section 2 of this Bill define “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
corporate.
Section 26 deals with matters to be stated in prospectus.
MATTERS TO BE STATED IN PROSPECTUS (SECTION 26):
A prospectus may be issued by or behalf of a public company
either with reference to its formation or subsequently, or by or
on behalf of any person who is or has been engaged or
interested in the formation of a public company.
Information in Prospectus:
Every prospectus shall state following information:-
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i. names and addresses of the registered office of the
company, company secretary, Chief Financial Officer, auditors,
legal advisers, bankers, trustees, if any, underwriters and such
other persons as may be prescribed;
ii. dates of the opening and closing of the issue, and
declaration about the issue of allotment letters and refunds
within the prescribed time;
iii. a statement by the Board of Directors about the
separate bank account where all monies received out of the
issue are to be transferred and disclosure of details of all
monies including utilised and unutilised monies out of the
previous issue in the prescribed manner;
iv. details about underwriting of the issue;
v. consent of the directors, auditors, bankers to the
issue, expert’s opinion, if any, and of such other persons, as
may be prescribed;
vi. the authority for the issue and the details of the
resolution passed there for;
vii. procedure and time schedule for allotment and issue
of securities;
viii. capital structure of the company in the prescribed
manner;
ix. main objects of public offer, terms of the present issue
and such other particulars as may be prescribed;
x. main objects and present business of the company
and its location, schedule of implementation of the project;
xi. particulars relating to—
1. management perception of risk factors specific to the
project;
2. gestation period of the project;
3. extent of progress made in the project;
4. deadlines for completion of the project; and
5. any litigation or legal action pending or taken by a
Government Department or a statutory body during the
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last five years immediately preceding the year of the issue
of prospectus against the promoter of the company;
xii. minimum subscription, amount payable by way of
premium, issue of shares otherwise than on cash;
xiii. details of directors including their appointments and
remuneration, and such particulars of the nature and extent of
their interests in the company as may be prescribed; and
xiv. Disclosures in such manner as may be prescribed
about sources of promoter’s contribution.
Reports with Prospectus:
Every prospectus shall set out following reports for the purpose
of financial information:
i. Reports by the auditors of the company with respect
to its profits and losses and assets and liabilities and such other
matters as may be prescribed;
ii. Reports relating to profits and losses for each of the
five financial years immediately preceding the financial year of
the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed. Where
company has not completed five financial years than such
report for all financial years is required.
iii. Reports made in the prescribed manner by the
auditors upon the profits and losses of the business of the
company for each of the five financial years immediately
preceding issue and assets and liabilities of its business on the
last date to which the accounts of the business were made up,
being a date not more than one hundred and eighty days
before the issue of the prospectus. Where company has not
completed five financial years than such report for all financial
years is required.
iv. Reports about the business or transaction to which the
proceeds of the securities are to be applied directly or
indirectly.
Declaration of Compliance:
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Every prospectus shall make a declaration about the
compliance of the provisions of this Act and a statement to the
effect that nothing in the prospectus is contrary to the
provisions of this Act, the Securities Contracts (Regulation) Act,
1956 and the Securities and Exchange Board of India Act, 1992
and the rules and regulations made there under.
Other matters in Prospectus:
Clause (d) of Sub – section (1) of section 26 give unlimited
power to central government to list other matters and set out
other reports to be included in a prospectus.
Delivery of Prospectus with Registrar:
A copy of prospectus shall be delivered to the Registrar for
registration signed by every person who is named as a director
or proposed director of the company or by his duly authorised
attorney on or before the date of its publication and only then it
shall be issued by or on behalf of a company or in relation to an
intended company.
Statement of an Expert:
A statement made by an expert shall be included only if expert
is or was engaged or interested in the formation or promotion or
management of the company and has given his written consent
to the issue of the prospectus. Such consent of expert must not
be withdrawn by his before the delivery of prospectus to the
Registrar for registration and a statement to that effect shall be
included in the prospectus.
Every prospectus issued shall state that a copy has been
delivered to the Registrar and specify attached documents.
The registrar shall not register a prospectus all requirements
has been complied with and the prospectus is accompanied by
the consent in writing of all the person named in the
prospectus.
Prospectus shall not be valid if it is issued more than ninety
days after the date on which a copy thereof delivered to the
Registrar.
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Caution:
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 both.
VARIATION IN TERMS OF CONTRACT OR OBJECTS IN
PROSPECTUS (SECTION 27):
A company may vary the terms of a contract refered in the
prospectus or object for which the prospectus was issued, only
under approval or authority given by way of special resolution.
The notice of such resolution to shareholders shall also be
published in the newspapers (one in English and one in
vernacular language) in the city where the registered office of
the company is situated. These notices shall clearly indicate
justification for such variation.
The shareholders who have not agreed to the proposal to vary
the terms of contracts or objects referred to in the prospectus,
shall be given an exit offer by promoters or controlling
shareholders at exit price as determined in accordance with
regulation made by the Securities and Exchange Board of
India.
Requirement in Deemed Prospectus (Section 25):
Section 26 as applied by Section 25 shall have effect as if —
1. it required a prospectus to state in addition to the matters
required by section 26 to be stated in a prospectus—
i. 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
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ii. the time and place at which the
contract where under the said securities have been or are to be
allotted may be inspected;
1. the persons making the offer were persons named in a
prospectus as directors of a company.
Prospectus as a topic is long to discuss. We will discuss
advertisement of prospectus, Shelf prospectus, Red herring
prospectus and application in a future post.
VARIANTS OF PROSPECTUS (Companies Act, 2013)
In our last blog post Prospectus (Companies Act 2013) , we
discussed provisions related to prospectus. We will continue
our study in this post.
ADVERTISEMENT OF PROSPECTUS (SECTION 30):
When a company issue an advertisement of prospectus, the
advertisement shall specify contents of its memorandum; the
objects, the liability of members, amount of share capital, name
of signatories, and number of shares subscribed for by these
signatories and its capital structure.
SHELF PROSPECTUS (SECTION 31):
Any class of company may file a shelf prospectus with the
Registrar of Companies at the stage of first offer of securities.
“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.
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)
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changes in financial position of the company from first/previous
offer to this second/subsequent offer under this Shelf
Prospectus.
It may be possible that a company or any other person has
received an application and advance payment of subscription
before any material changes like new charges or financial
position. In these cases, the company or that other person shall
intimate these changes to the applicants. If they express a
desire to withdraw their application, the company or other
person shall refund all the money received as share application
money for subscription within fifteen days.
When an offer of securities is made on shelf prospectus, the
information memorandum together with shelf prospectus shall
be deemed to be a prospectus.
RED HERRING PROSPECTUS (SECTION 32):
A company may issue a red herring prospectus before the
issue of a prospectus.
“Red 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.
Upon the closing of the offer of securities, the prospectus shall
be filed with the Registrar and the Securities and Exchange
Board of India. This prospectus shall state (a) total capital
raised, (b) whether debt capital or share capital, (c) closing
price of the securities and (d) any other details not included in
red herring prospectus.
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ISSUE OF APPLICATION FORMS AND ABRIDGE
PROSPECTUS (SECTION 33):
Every application form for the purchase of the securities of a
company shall be issued unless the form is accompanied by an
“Abridge Prospectus”.
There is no need for abridge prospectus in case of:
a) Underwriting Agreement; and
b) Private placement.
Any person may make a request for a copy of the prospectus
before closing of the subscription list and the offer. The
company shall furnish a copy to him.
Any default in under this section, company shall be liable to a
penalty of fifty thousand rupees for each default.
In our next post, we will discuss matters related to issue and
allotment of securities.
What Are the Different Types of Prospectus?
A prospectus is a brief, legal document formulated in a simple
style and used to present to potential investors all important
information about a given company (issue of securities,
investment offering, etc) in relation to its . This document must
be prepared by the company which files it with and gets it
approved by the securities commission before the company
may issue shares or debt to the public. The company sets out
in its prospectus the securities offered for sale, the unit and
total issue price, its management, its operations, how it intends
to use the raised funds, and all relevant technical and financial
information (underwriting agreement, dividend
policy, capitalization, etc). A typical prospectus must contain all
material information that would allow investors to make an
informed decision as to whether to purchase the securities of
the company that constitute the offer.
The most common types (classifications) of prospectus are red-
herring prospectus, pink-herring prospectus, free-writing
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prospectus, abridged prospectus, and reconfirmation
prospectus.
Red-herring prospectus: a prospectus that contains
most of the information that will be presented in the final
prospectus but often does not mention a price and/or the
number of securities. It can be distributed to potential
investors after the registration statement for a securities
offering has been filed with the securities commission. The
name is derived from the red legend printed across the
body of the prospectus illustrating that the registration has
been filed but is not yet effective. A red-herring prospectus
is alternatively known as apreliminary prospectus.
Pink-herring prospectus: a prospectus that is issued
without disclosure of the number of securities being
offered or, in an initial public offering, the estimated or
indicative price range. It is a preliminary prospectus that
precedes the filing of a red-herring prospectus.
Free-writing prospectus: any sort of written, electronic,
or graphic statement that describes an offer in terms of its
issuer or securities. It includes a legend stating that the
investor can have a copy of the prospectus at the website
of relevant securities commission. Typically, the issuer
must file this prospectus with the securities commission no
later than the first date it is obtained. In the case of
inexperienced issuers, the securities commission may
require that a preliminary prospectus is filed before the
filing of a free-writing prospectus.
Abridged prospectus: a shorter version of the
prospectus that includes all the most key elements of the
typical prospectus. An abridged prospectus contains
information very similar to the typical prospectus but in a
concise and compact form. Both versions of the
prospectus must comply with the disclosure requirements
prescribed by the relevant securities commission.
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Reconfirmation prospectus: a prospectus that a shell
company must prepare and submit for the approval of
relevant securities and exchange authorities (the SEC)
prior to considering areverse merger. This prospectus
contains detailed information about the private company
merging into the shell. It is handed over to purchasers in
the shell's initial public offering(IPO) who must reconfirm
their investment after perusing the prospectus before the
merger can be finalized. At least 80 percent of purchasers
must reconfirm so that the merger transaction can be
effected. Purchasers who do not confirm will receive their
investment back (of course, less expenses).
Other types that do exist in the global world of investment
include shelf prospectus and deemed prospectus:
Shelf prospectus: a prospectus that describes a set of
unissued, but registered securities. It is used in situations
where securities are issued in consecutive stages over a
period of time because the size of issue is too large (and
funds to be raised are enormous, making the filing of
prospectus each time very expensive). Later on, an issuer
will only need to file the so-called information
memorandum with the relevant securities commission.
Deemed prospectus: a prospectus that is deemed to
have been made by the issuer, though it is actually offered
to the public by a third party or the so-called issue
house (Indian terminology). The issuer saves the
underwriting expenses in selling its securities.
Types of business entities in India( Types of
Companies in India)
India is an emerging market with wide scope and opportunities
for both Indian and foreign investors. The Government of India
offers entrepreneurial friendly policies which makes invasion
and growth of businesses in India easier.
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Before starting a business it is very important for the
entrepreneur to prepare a blueprint of his business. This
blueprint is referred to as business plan which serves as a tool
for planning. It is a formal written document which specifies the
entrepreneurial vision, mission and strategy.
1. Cover page
2. Table of contents
3. Executive Summary
4. Development and Production
5. Resource Requirement
6. Format and Presentation
7. Writing and Editing
8. Summary
There are various forms of business entities in India:
Private Ltd Company
Unlimited Company
Sole proprietorship
Partnership
Cooperatives
Liaison Office
Branch Office
Project Office
Subsidiary Company
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1. Restricts the right of the shareholders to transfer their
shares.
2. Has a minimum of 2 and maximum of 50 members.
3. does not invite public to subscribe to its share capital
4. Must have a minimum paid up capital of Rs. 1 lakh or such
a higher amount which may be prescribed from time to
time.
Public Ltd Company :
A public Ltd company has the following characteristics:
Sole proprietorship
Sole proprietorship is a form of business entity where a single
individual handles the entire business organization. He is the
sole recipient of all profits and bearer of all loses. There is no
separate law that governs sole proprietorship.
Partnership
Partnership is “the relation between persons who have agreed
to share the profits of the business carried on by all or any one
of them acting for all”. It is governed by the Indian Partnership
Act 1932.
Co-operatives
Co-operatives is a form of voluntary organization, wherein the
members work together for the promotion of the interests of its
members. There is no restriction to the entry or exit of any
member. It is governed by Cooperative Societies Act 1912.
Liaison Office
Liaison Office is a kind of representative office which is set up
to understand the business and investment environment. It is
barred from taking up any commercial/industrial/trading activity
and its role is limited to aggregation of information and
promotion of exports/imports. It has to maintain itself out of
inward remittances received from the parent company.
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Branch Office
Foreign companies which are into manufacturing and trading
activities abroad are permitted to set up branch offices in India
for various purposes like rendering of professional and
consultancy services, export/import of goods etc. Branch
offices are not permitted to carry out manufacturing activities on
their own. RBI is the statutory body that grants permission to
foreign companies for setting up branch offices in India.
Project Office
Foreign companies can set up temporary project offices in India
for carrying out activities related to that specific project.
Subsidiary Company
In India the sectors where 100% foreign direct investment is
permitted there foreign companies can set up wholly-owned
subsidiary. The wholly-owned subsidiary can be either of the
following business entities:
Private Ltd Company
Unlimited Company
Sole Proprietorship
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Regulations Sole Proprietorship Company
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Company Law Board
The Ministry of Environment and Forest -It is the major
administrative entity for:
1. Governing and ensuring environmental protection
2. Designing the environmental policy framework in
India
3. Undertaking conservation and survey of flora, fauna,
forest and wildlife
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A company formed by a special Act passed either by the
central or the state legislature is called a statutory company.
These companies are governed by the provisions of their
special Acts. These companies are usually formed to carry out
some special public undertakings. The object such companies
are not to as such earn profits but to serve people. The audit of
such companies is conducted under the supervision, control
and guidance of the Comptroller and Auditor General of India.
Some important statutory companies are Reserve Bank of
India, State Bank of India, Life Insurance Corporation of India,
industrial Finance Corporation etc.
Registered Company
Company registered under the Indian Companies Act is known
as Registered Company. These companies are governed and
regulated by the provisions of the Companies Act, 2013. They
may be limited by shares or limited by guarantee or unlimited
companies.
KINDS OF COMPANIES ON THE BASIS OF LIABILITY OF
MEMBERS
1. Company limited by shares: This is a company having the
liability of its members limited by the memorandum to the
amount unpaid on the shares respectively held by them. A
large majority of the companies registered in India belong to
this category. The last word of the name of such companies
should be “Limited”. For example, if AB Ltd. has a share capital
of 10,000 shares of Rs. 0 each, and A has purchased 100
shares on which he has paid so far Rs. 6 per share, the
maximum liability of A is only Rs. 4 per share.
2. Company limited by Guarantee: This is a company in
which the liability of each member is limited to such amount as
the members may voluntarily undertake under the
memorandum to contribute to meet out the deficiency of the
assets of the company in the event of its being wound up. Such
companies may or may not have share capital. If it has share
capital, the liability of the members becomes two-fold; firstly,
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the amount unpaid on the shares held by them and secondly,
amount payable under the guarantee.
3. Unlimited companies: a company not having any limit
towards the liability of its members is an unlimited company.
The liability extends to the whole amount of the company’s
debts and liabilities. The registered companies (whether limited
or unlimited) may be either private or public companies.
Private limited company
Private limited company is held by few individuals privately
having separate legal entity. In this the shareholders cannot
trade shares publicly. Shareholders cannot sell their shares
without the approval of other shareholders. It is a company
which restricts the right of its members to transfer its shares
and it doesn’t send invitation to the public for subscription of its
shares.
Characteristics of the private limited company:
1. Members– To start a company, a minimum number of 2
members are required and a maximum number of 200
members as per the provisions of the Companies Act 2013.
2. Index of members– A private company has a privilege over
the public company as they don’t have to keep an index of its
members whereas the public company is required to maintain
an index of its members.
3. Exemptions regarding directors– When it comes to
directors, a private company needs to have only two directors.
With the existence of 2 directors, a private company can come
into operations. Also, private company need not appoint
independent directors. The maximum number of companies of
which a person may be appointed as a director is 20 in case of
private company.
4. Paid up capital– It must have a minimum paid-up capital of
Rs 1 lakh or such higher amount which may be prescribed from
time to time.
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5. Prospectus– Prospectus is a detailed statement of the
company affairs which is issued by a company for its public.
However in case of private limited company there is no such
need to issue a prospectus because in this public is not invited
to subscribe for the shares of the company.
6. Name– It is mandatory for all the private companies to use
the word private limited after its name.
In the case if any private limited company doesn’t follow any of
the above mentioned features, it ceases to be private company.
Public Company
A public limited company is a form of business organization that
operates as a separate legal entity from its owners. It is formed
and owned by shareholders. Shares of a public limited
company are listed and traded at a stock exchange market
freely.
Characteristics of a public company:
1. It must have a minimum of 7 members and no limit with
regards to the maximum number of members.
2. The shares of a public company are freely transferable.
3. It can invite the public to subscribe to its shares or
purchase its shares.
4. It must constitute an Audit Committee of the Board.
ONE PERSON COMPANY
This is a type of company that has only one member. OPC
provides the benefits of both forms of business- Proprietorship
and Company. With formation of an OPC business can be run
in the same way as a proprietorship by complying with law and
keeping the liability of the member limited by shares or
guarantee.
Provisions of OPC under Companies Act 2013:
All the provisions of the Act applicable to private
companies shall also be applicable to OPC unless
otherwise excluded from compliance.
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It should be treated as a private company for all legal
purposes.
The name of the company shall include the words ‘One
Person Company’ within brackets below the name of the
company.
The person forming an OPC has to nominate a person
with that person’s written consent as a nominee of the
OPC.
It should have a maximum of 15 directors, and they aren’t
required to retire by rotation.
HOLDING AND SUBSIDIARY COMPANY
A company which controls another company is called a Holding
Company and the company so controlled is called a Subsidiary
Company.
A company shall be deemed to control another company in the
following cases-
1. If it controls the majority composition of the board of directors
of another company.
2. If it 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.
3. If another company is a subsidiary of the first mentioned
company’s subsidiary (i.e. subsidiary of the subsidiary)
ASSOCIATE COMPANY
“Associate Company” as 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. “Significant Influence” means control of at least 20%
of total share capital but less than 50% of share capital by
another company, or control of business decisions under an
agreement.
SMALL COMPANY
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Small company means a company, other than a public
company, whose-
1. Paid-up share capital doesn’t exceed Rs. 50 lakhs or such
higher amount as may be prescribed.
2. Turnover of which as per its last P&L A/C doesn’t exceed Rs.
2 crore or such higher amount as may be prescribed.
However, a small company cannot be-
A holding or a subsidiary company
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will have the power to direct the company’s auditor relating to
the manner of audit and the performance of his duties. He shall
also have the power to conduct a supplementary test audit of
the company’s account by persons appointed by him; and the
auditor is required to submit a copy of his audit report to the
Comptroller and Auditor General, who shall have the right to
comment upon the report.
(b) Where the Central Government is a member of a
Government Company, the Central Government shall prepare
an annual report on the working and affairs of the company
within three months of its annual general meeting before which
the audit report is placed. The annual report is to be laid before
both houses of Parliament together with a copy of the audit
report
FOREIGN COMPANY
Foreign company is a company incorporated outside India
which-
Has a place of business in India whether by itself or
through an agent, physically or through electronic mode.
Conducts any business activity in India in any other
manner.
PRODUCER COMPANY
It means a body corporate having objects or activities specified
in section 581B and deals primarily with the produce of its
active Members for carrying out any of its specified objects.
The objects of producer companies shall include one or more of
the eleven items specified in the Act, the more important being:
Production, harvesting, procurement, grading, pooling,
handling, marketing, selling, export of primary produce of
members or import of goods or services for their benefit;
Processing including preserving, drying, distilling, brewing,
venting, canning and packaging of produce of its
members; and
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Manufacture, sale or supply of machinery, equipment or
consumables mainly to its members.
rendering technical or consultancy services,
a. Chartered Companies
Companies which are incorporated under special charter or
proclamation issued by the head of state, are known as
chartered companies. The Bank Of England, The East India
Company, Chartered Bank etc. are the examples of chartered
companies.
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b. Statutory Companies
Companies which are formed or incorporated by a special act
of parliament, are known as statutory companies. The activities
of such companies are governed by their respective acts and
are not required to have any Memorandum or Articles Of
Association.
c. Registered Companies
Registered companies are those companies which are formed
by registration under the Company Act. Registered companies
may be divided into two categories.
* Private Company
A company is said to be a private company which by its
Memorandum of Association restricts the right of its members
to transfer shares, limits the number of its members and does
not invite the public to subscribe its shares or debentures.
* Public Company
A company, which is not private, is known as public company. It
needs minimum seven persons for its registration and
maximum to the limit of its registered capital. There is no
restriction on issue or transfer of its shares and this type of
company can invite the public to purchase its shares and
debentures.
a. Government Companies
A government company is a company in which at least 51% of
the paid up capital has been subscribed by the government.
b. Non-government Companies
If the government does not subscribe a minimum 51% of the
paid up capital, the company will be a non-government
company.
a. National Companies
A company, which is registered in a country by restricting its
area of operations within the national boundary of such country
is known as a national company.
b. Foreign Companies
A foreign company is a company having business in a country,
but not registered in that country.
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c. Multinational Companies
Multinational companies have their presence and business in
two or more countries. In other words, a company, which
carries on business activities in more than one country, is
known as multinational company.
a. Holding Companies
A holding company is a company, which holds all, or majority of
the share capital in one or more companies so as to have a
controlling interest in such companies.
b. Subsidiary Company
A company, which operates its business under the control of
another company (i.e holding company), is known as a
subsidiary company.
3. Public Company.
3. Unlimited Company.
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unpaid amount of the share-holder, whether original or the
transferee.
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S.2(68) of the Companies Act, 2013 define a ‘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 its articles,—
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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.
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company of another if the other is its subsidiary. According to
Sec.2(46) “Holding Company”, in relation to one or more other
companies, means a company of which such companies are
subsidiary companies;
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(ii) The acquisition of shares, stocks, bonds, debentures, or
securities issued by a Government or a local authority or other
marketable securities of similar nature;
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11. Companies Regulated by Special Acts- The companies
which are regulated by Special Acts such as the Banking
Companies governed by the Banking Companies Act, 1949;the
Insurance Companies governed by the Insurance Act,1938;
Electrcity (Supply) Acts 1948; Food Corporation Act,1964 etc.
shall have to be incorporated and registered under the
Companies Act and the provisions of the Companies Act, 1956
shall, therefore, also apply to them like any other company
except in so far as they are inconsistent with the Special Act
which constitutes them.
Characteristics of Company:
Its members are its owners but they can be its creditors
simultaneously as it has separate legal entity. A shareholder
cannot be held liable for the acts of the company even if he
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holds virtually the entire share capital. The shareholders are not
agents of the company and so they cannot bind it by their acts.
3. Perpetual Succession:
The life of company is not related with the life of members. Law
creates the company and dissolve it. The death, insolvency or
transfer of shares of members does not, in any way, affect the
existence of a company.
According to Tennyson-
ADVERTISEMENTS:
But I go on forever.”
4. Common Seal:
5. Limited Liability:
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extent of the amount of his shares and nothing more. If some
amount is uncalled upon a share, he is liable to pay it and not
beyond that.
6. Transferability of Shares:
7. Limitation of Work:
9. Representative Management:
Characteristics of a Company
A company as an entity has many distinct features which
together make it a unique organization. The essential
characteristics of a company are following:
Limited Liability:
The liability of the members of the company is limited to
contribution to the assets of the company upto the face value of
shares held by him. A member is liable to pay only the uncalled
money due on shares held by him. If the assets of the firm are
not sufficient to pay the liabilities of the firm, the creditors can
force the partners to make good the deficit from their personal
assets. This cannot be done in the case of a company once the
members have paid all their dues towards the shares held by
them in the company.
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Perpetual Succession:
A company does not cease to exist unless it is specifically
wound up or the task for which it was formed has been
completed. Membership of a company may keep on changing
from time to time but that does not affect life of the company.
Insolvency or Death of member does not affect the existence of
the company.
Separate Property:
A company is a distinct legal entity. The company's property is
its own. A member cannot claim to be owner of the company's
property during the existence of the company.
Transferability of Shares:
Shares in a company are freely transferable, subject to certain
conditions, such that no share-holder is permanently or
necessarily wedded to a company. When a member transfers
his shares to another person, the transferee steps into the
shoes of the transferor and acquires all the rights of the
transferor in respect of those shares.
Common Seal:
A company is an artificial person and does not have a physical
presence. Thus, it acts through its Board of Directors for
carrying out its activities and entering into various agreements.
Such contracts must be under the seal of the company. The
common seal is the official signature of the company. The
name of the company must be engraved on the common seal.
Any document not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.
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Separate Management:
A company is administered and managed by its managerial
personnel i.e. the Board of Directors. The shareholders are
simply the holders of the shares in the company and need not
be necessarily the managers of the company.
1. Limited Liability:
2. Perpetual Existence:
3. Professional Management:
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In company business, the management is in the hands of
the directors who are elected by the shareholders and are
well experienced persons. In order to manage the day-to-
day activities, salaried professional managers are
appointed. Thus, the company business offers
professional management.
4. Expansion Potential:
5. Transferability of Shares:
6. Diffusion of Risk:
Disadvantages:
1. Lack of Secrecy:
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As per the legal provisions, a company has to make
various statements available to the Registrar of the
Companies, Financial Institutions; the secrecy of business
comes down. It is further reduced when the company
provides its annual report to the shareholders as the
competitors do also find out the details of all financial
data.
2. Restrictions:
3. Management Mischief’s:
Share Capital
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Assume company ABC issues and sells 1,000 shares. Each
share has a par value of $1 but sells for $25. The company
accountant logs $1,000 raised as paid share capital and the
remaining $24,000, attributed to share premium, as additional
paid in capital.
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the entire authorized capital at once. It goes on raising the
capital as and when the need for additional funds is felt.
Example:
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Apart from the above 5,000 shares are issued to vendor as fully
paid. What will be amount of different capitals?
Solution:
Issued Capital:
Unissued Capital:
Subscribed capital:
Unsubscribed Capital:
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(b) Public has subscribed for 70,000 shares of Rs 10 each.
Therefore, subscribed capital is Rs 7, 00,000 since subscribed
capital is equivalent to issued capital, therefore, there is No
unsubscribed capital.
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If in the above example, out of 10,000 shares of Rs 100 each,
on which Rs 60 has been called by the company from the
shareholders, one shareholder, holding 100 shares, fails to pay
the first call of Rs 30 per share on his shares, the paid up
capital of the company would be Rs 6, 00,000— Rs 3,000 i.e.
Rs 5, 97,000.
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because share capital is calculated based on the par value of
shares and not on the basis of market price.
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Called up share capital:
Example:
Now,
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Features of Share Capital:
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than creditors. Therefore, a company typically loses more stock
for a lower price to a shareholder to compensate for this risk.
An additional cost is that a company cannot deduct any
dividends it pays out or any money it uses to repurchase
shares. In comparison, any interest paid on a debt can be
deducted from its taxes.
There is also a cost implication for the arrangement of
organising a public share offering since the company has to
prepare an IPO (initial public offering) prospectus to invite the
general public to buy shares. There will probably also be
advertising costs and the company may need an underwriting
agreement with an underwriter to purchase shares that are not
purchased by investors. The fee for this will have to be paid
whether or not the shares are all purchased by investors. The
company will probably also need to take legal advice, which is
another cost.
There is also a time implication. Shareholders will need to be
kept updated by the company on how it is performing and other
relevant matters. In the initial states of offering shares for sale,
the focus of the business can be moved from the main
business activities to dealing with the issues around the share
sales. The company will need to prepare the prospectus and
other related documents as well as organising advertising of
the sale of shares and arranging for the implementation of the
shares being issued.
Although it is possible to issue further shares in the future, this
does have an impact on the value of the shares that have
already been sold. Usually this will mean that the share price
will drop and so will the dividends paid out on each share. This
can anger current shareholders who then use their voting
power as described above.
Finally, any company issuing shares to the public has to make
sure that it discloses certain information on the finances of the
company and how it functions. This obviously will result in a
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cost to the firm but also means that information that was
previously able to remain private is now in the public domain.
Equity finance
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However, there are drawbacks of equity finance too. It's worth
considering that:
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When establishing a corporation, owners may choose to issue
common stock or preferred stock.
Example of Shares
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As the 10-year bull market that began in 2008 stretched on,
shares of companies continually reached new highs through
2017. So-called FANG (Facebook, Apple, Netflix and Google)
tech stocks led the market rally, as their share prices soared by
double digits in 2017 on strong earnings results. The increasing
price meant that investors were willing to pay more to own
shares of these companies. All told, the shares of the
companies in the S&P 500 Technology Select Sector traded up
34.57% in 2017. In 2018, the shares of companies on the stock
market began to experience volatility due to economic and
political uncertainty.
What is a share? Definition and meaning
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In the past, stock certificates were issued as evidence of
ownership of a share. However, nowadays systems such as
CREST record a shareholder’s ownership electronically.
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rights that go with different classes of shares, which are at
least in part described in the prescribed particulars for the
class, can be whatever the shareholders are willing to
accept.
Entitlement to dividends
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remain after others have received their full distribution of
capital.
Voting rights
To attract investment
To push dividend income in a certain direction
To remove (or enhance) voting powers of certain
individuals
To motivate staff (to remain as employees)
A company can issue shares which will not pay a dividend until
all other classes of shares have received a minimum dividend.
Thereafter they will usually be fully participating. On a winding
up they will only receive something once every other
entitlement has been met.
5.Preference shares
If the dividend is missed or not paid in full then the shortfall will
be made good when the company next has sufficient
distributable reserves. It follows that ordinary shareholders will
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not receive any dividends until all the arrears on cumulative
preference shares have been paid.
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To register any class other than ordinary, you will have to
amend the Model articles to reflect the prescribed particulars of
rights attached to each class.
Preference share
These carry the preferential right of certain owners to receive a
fixed percentage of profits before others . In some cases, they
also offer the preferential right to capital distribution before
other classes. As a result, however, they often carry no voting
rights.
Non-voting shares
Typically issued to family members of the main shareholders,
or to employees as part of a share scheme. This class enables
existing members to maintain full control of the company whilst
distributing a portion of profits to other people in a tax-efficient
way.
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harder. Dividends from non-voting ordinary shares can be used
as a tax-efficient way to pay part of an employee’s salary.
Redeemable shares
This class enables a company to buy back its issued shares
after a fixed period of time. Often, they are created for
employees and issued with the provision of being taken back if
an employee leaves the company. They are often non-voting.
Alphabet shares
These are usually ordinary shares that are divided into different
sub classes, such as ‘A’, ‘B’ and ‘C’. This allows a company to
vary the percentage of each prescribed particular. Example:
A company has two owners. They each hold one share but
contribute different amounts of capital to the business.
One owner is given 50% voting rights, 50% dividend rights and
70 % capital rights. The other owner is given 50% voting rights,
50% dividend rights, and only 30% capital rights to reflect his or
her smaller capital contribution upon company formation.
Management shares
These carry a smaller nominal value than other classes and/or
provide multiple voting rights. They are often held by the
original members as a way to retain more control of the
business than newer members.
Shares:
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A company to put its share in the market have to first prepare a
memorandum in which the authorized capital is to be written
down which is further to be verified by the competent authority
which is SEBI.
Types of Shares:
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a. Slow growers: These are the companies having growth
rate equal to the industrial growth rate or higher than GDP.
b. Fast Growers: Newly started companies having good
growth rate.
c. Stalwarts: The big companies having and whose dividend
payout is high.
d. Cyclicals: The shares of these companies are not going
through the business cycle or varying to the business cycle.
e. Turn-around: The shares of those big companies whose
performance were very bad in the past but a sudden turn
around takes place and they started performing very good.
f. Asset Plays: these shares generally do not have recognition
instead of having a large asset base.
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non-convertible shares.
d. Participating and Non-participating: In case of winding
up of the company, the debenture holders were paid up first,
then the preference shareholders and then the equity
shareholders were paid up, after this if any surplus amount is
left, it is distributed equally to equity shareholders and
participating shareholders if investors have participating
preference.
Types of Shares
This article describes about the different types of shares that
are present in the market. Read this article to know more about
equity shares, preference shares, deferred shares, bonus
shares and other related information.
There are different types of shares. I have mentioned about the
most popular shares which are as follows:-
Equity shares: These shares are also known as ordinary
shares. They are the shares which do not enjoy any preference
regarding payment of dividend and repayment of capital. They
are given dividend at a fluctuating rate. The dividend on equity
shares depends on the profits made by a company. Higher the
profits, higher will be the dividend, where as lower the profits,
lower will be the dividend.
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held by the founders or pioneer or beginners of the company.
They are also called as Founder shares or Management
shares.
In deferred shares, the right to share profits of the company is
deferred, i.e. postponed till all the other shareholders receive
their normal dividends. Being the last claimants of the profits,
they have a considerable element of speculation or uncertainty
and they have to bear the greatest risk of loss. The market
price of such shares shows a very wide fluctuation on account
of wide dividend fluctuations. Deferred shares have
disproportionate voting rights. These shares have a small
denomination or face value.
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Conditions for issue of bonus shares:
Alteration of Capital
Alteration of Capital can be done by way of increasing
authorized and paid capital of a company. Authorized Capital is
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the maximum amount of capital which a Company can raise
through the issue of shares to its shareholders. It is mentioned
in the Memorandum of Association of the company. The
company can raise capital up to this amount. Therefore to
increase the authorized capital of company we always need the
approval of shareholder in general meeting of the company.
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1. It has to be confirmed whether a company is authorized to
increase its share capital according to the Articles of
Association (AOA) and if it does not authorize then the
procedure for such alteration has o be carried out.
Once the AOA has been altered the board meeting has to be
called by the company. Every member, legal representative or
the assignee, the auditor(s) and every director of the company
has to be given a notice of 21 days prior to the actual date of
the meeting. The notice shall be written or in an electric form.
The general meeting can also be convened at a shorter notice
if 95 percent of the members who are allowed to vote at the
meeting give their consent in the manner prescribed written or
electronic.
The place of the meeting, the date of the meeting and the hour
of the meeting shall be specified in the notice along with the
business agenda of the meeting which is mentioned under
Section 101 of the Companies Act. Along with the notice a
statement should be attached therewith specifying the
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particulars and objects regarding every point of extraordinary
business to be carried on at the general meeting, concerning
the financial or any other kind of interest related to all the
directors and the managers and people related to the key
managerial persons according to section 102 of the CA, 2013.
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Shares of INR 10 each. The minimum paid up share
capital of the company is INR 1,00,000.
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Stamp duty can be paid electronically through the MCA portal
and the following documents are to be attached
The copy of all the decision taken with respect to the matters
which are specified under subsection 3 along with the
explanations under section 102 shall be attached therewith to
the notice convening the EGM in which the proposed resolution
shall be passed should be filed with registrar not exceeding
thirty days along with the stipulated fees which has to be paid
as specified under Section 403 of the Companies Act.
Attachments
3. Altered AOA
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Alteration in the share capital can be done only if it is so
authorized by its Articles of Association to alter the capital
clause of its Memorandum of Association.
Thus, the right to alter share capital must be given in the article
of association of the company.
Authorized by article
By resolution
Notice to registrar
Notice To Registrar
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Generally, ordinary resolution is enough to alter the capital
clause, thus notice of alteration to be given to the ROC, when
share capital automatically stands increased. Loan taken from
central government also increases the capital of a company.
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necessarily required to be given to every shareholder and
concerned person
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The company wants to smooth its capital structure by
simplifying it.
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Ratio
In this case law, powers are given to the members to alter its
share capital only if it is authorized by its article of association
Ratio
Conclusion
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capital beyond the amount of its authorised capital, it must
increase its authorised capital by the amount of new shares.
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Share Capital Alteration Way # 5. Cancel unissued share
capital (not taken or agreed to be taken by any person) and
thereby diminish the amount of share capital. No journal entry
is required for this purpose. Only the details of authorised
capital are to be incorporated in the next Balance Sheet. It
should be remembered that if reduction results in a decrease of
paid-up capital, it requires the approval of Court which are
discussed subsequently under the head ‘Capital Reduction’.
(ii) It may consolidate and divide all or part of its share capital
into shares of a large amount.
(iii) It may convert all or any of its fully paid-up shares into stock
or reconvert that stock into fully paid-up shares of any
denomination.
(v) It may cancel those shares which have not been taken by
any person and reduce the amount of its share capital.
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Procedure:
The right to alter the share capital must be given in the Articles
of Association of the company.
The Registrar will record the above notice and make necessary
alterations in the memorandum and articles of the company.
(ii) Cancel:
(iv) By Court:
Procedure:
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The following procedure is to be followed for effecting a
reduction in share capital:
Interest of Creditors:
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(ii) Payment to the shareholder of any paid up share capital;
and
The court should settle the list of creditors entitled to object and
issue public notices fixing a day or days within which creditors
who are entered on such list are to claim to be so entered or to
be excluded from the right of objecting to the reduction.
Interest of Shareholders:
The court may also order the company to add the words ‘and
reduced’ to the name of the company for such period as may
be specified in the order, and these words will be deemed to be
part of the company’s name for such specified time [Sec. 102].
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The order of the court confirming the reduction must be
produced before the Registrar and a certified copy thereof,
along with minutes should be filed with him for registration. On
such registration by the Registrar, the resolution for reduction of
share capital as confirmed by the court takes place. Notice of
the registration shall be published in such a manner as the
court may direct.
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Reasons for Reduction in Share Capital:
Reduction under item (1) and (2) will reduce the funds available
to the creditors. Reduction under item (3) affects the rights of
different classes of shareholders as well as the interest of the
members of the public who may be induced to take shares in
the company.
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The share capital is divided into different classes of shares
which may have different rights attached to them, generally
provided from the Articles of Association of the company. If the
company wants to change the rights of any class of
shareholders, the following procedure has to be followed.
(ii) The written consent of the holders of not less than three-
fourths of the issued shares of that class should be obtained or
the variation should be sanctioned by special resolution at a
separate meeting of the holders of shares of that class [Sec.
106].
Company must file a copy of the order of the court with the
Registrar within thirty days. If default is made a fine of upto Rs.
50 may be imposed. [Sec. 107].
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3. The issue of shares at a discount must be sanctioned by the
Company Law Board (CLB).
5. One year must have passed since the date at which the
company was entitled to commence business.
6. Shares are issued within two months after the date on which
the issue is sanctioned by the Company Law Board unless the
time is further extended.
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The total premium amount shall be transferred to Share
Premium Account which may be applied only for the
following purpose and not for others:
1. To pass a resolution:
The further issue of share capital can take place after two years
from the date of formation of the company and one year after
allotment whichever is earlier. [Sec. 81(1)].
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The increase in the share capital must be of subscribed capital
and not of authorised.
Right Shares:
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emption, and the shares which are meant for existing
shareholders are known as Right Shares.
The issue of right shares can be made at any time after the
expiry of two years from the formation of the company or after
the expiry of one year from the first allotment of shares after its
formation (Whichever is earlier).
Bonus Shares:
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5. A resolution in the general meeting should be passed. If it is
a special resolution, a copy of it should be filed with the
Registrar within 30 days.
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Power of Central Government to Convert Loans into Equity
Capital:
(iii) It reserves,
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(i) By any company (public or private) for the purchase of
shares in any of its subsidiary companies, except to the extent
restricted by Section 195 and 369 of the Act; and
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mentioned in the application. The allotment should be
unbiased, and not according to the caste, creed, religion. It is
not that rich shareholders pay more on the shares and the poor
share holders pay less on the shares. All have to pay the same
price on the shares.
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the documents issued which include the prospectus and the
application form. The provisions made in the Memorandum of
Association and the Articles of Association must also be given
due consideration.
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has to sign the application and allotment lists.
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(11) Arrangement relating to splitting of allotment
letters: Splitting means putting the shares in one or more
names. In case any allottee requests for a split of the allotment
letter, the secretary places such a request before the Board for
approval. Once the Board approves the splitting of the
allotment letter, the secretary has to enter the details of the split
in a separate list of split allotments and issue the necessary
'split' letters.
Allotment
What is 'Allotment'
An allotment commonly refers to the allocation of shares
granted to a participating underwriting firm during an initial
public offering (IPO). Remaining surpluses go to other firms
that have won the bid for the right to sell the remaining IPO
shares. There are more unique situations of allotment that arise
when new shares are issued and allocated to either a new or
existing shareholder.
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BREAKING DOWN 'Allotment'
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example, is a dividend that gives equity holders some new
shares proportional to the value of what they would have
received if the dividend was cash.
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pro-rata basis etc. Conditions for acceptance is practically
invalid.
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Sec. 69(3), however, lays down that the amount payable on
each share with the application form must not be less than 5%
of the nominal value of the shares.
Sec. 69(4) states that money received from the applicants must
be deposited in a Scheduled Bank until the certificate to
commence business has been obtained or until the entire
amount payable on applications for shares in respect of the
minimum subscription has been received by the company.
Sec. 69(5) states that if the minimum subscription has not been
raised or if the allotment could not be made within 120 days
from the date of publication of the prospectus, the directors
must return the money received from the applicants. If the
money is refunded within 130 days no interest is payable,
beyond which the directors are liable to pay interest @ 6% p.a.
from the 130th day to the day of repayment.
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Application for shares cannot be revoked until after the
expiration of the 5th day after the time of opening of the
subscription list except in one case, i.e. if any responsible
person gives public notice of withdrawal of the consent to the
issue of the prospectus, any applicant can revoke his
application.
(i) Option:
See. 71(1) and (2) states that the allotment becomes voidable
at the option of the shareholders. The option to avoid the
contract must be exercised within 2 months of holding the
statutory meeting or where no statutory meeting is held or
where the allotment is made after the holding of the statutory
meeting, within 2 months after the date of allotment.
(ii) Compensation:
(iii) Fine:
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company, a fid every officer of the company who is in default,
shall be punishable with fine which may extend to Rs. 5,000.
(iv) Void:
(i) The number and the nominal amount of the shares allotted;
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allotment together with a copy of the resolution authorising the
issues of such shares.
Allotment of shares
Introduction
Book Building
What is 'Book Building'
Book building is the process by which an underwriter attempts
to determine the price to place an initial public offering (IPO)
based on demand from institutional investors. An underwriter
builds a book by accepting orders from fund managers,
indicating the number of shares they desire and the price they
are willing to pay.
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predetermined time period before the book is considered to be
closed.
The book is open for a fixed period of time, during which the
bidder can revise the price offered. After five days, the book is
closed and the aggregated demand for the issue can be
evaluated so that a value is placed on the security. Once
closed, the underwriter analyzes the information to determine
the initial selling price, also known as the issue price, for the
particular offering. The final price chosen in simply the weighted
average of all the bids that have been received by the
investment banker.
During the IPO or FPO, the company offers its shares to the
public either at fixed price or offers a price range, so that the
investors can decide on the right price. The method of offering
shares by providing a price range is called book building
method. This method provides an opportunity to the market to
discover price for the securities which are on offer.
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Book Building may be defined as a process used by companies
raising capital through Public Offerings-both Initial Public Offers
(IPOs) and Follow-on Public Offers (FPOs) to aid price and
demand discovery. It is a mechanism where, during the period
for which the book for the offer is open, the bids are collected
from investors at various prices, which are within the price band
specified by the issuer. The process is directed towards both
the institutional investors as well as the retail investors. The
issue price is determined after the bid closure based on the
demand generated in the process.
The main difference between the book building method and the
fixed price method is that in the former, the issue price to not
decided initially. The investors have to bid for the shares within
the price range given. The issue price is fixed on the basis of
demand and supply of the shares.
9. The book runners and the Issuer decide the final price at
which the securities shall be issued.
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10. Generally, the number of shares is fixed; the issue size gets
frozen based on the final price per share.
All the applications received till the last dates are analyzed and
a final offer price, known as the cutoff price is arrived at. The
final price is the equilibrium price or the highest price at which
all the shares on offer can be sold smoothly. If the price quoted
by an investor is less than the final price, he will not get
allotment.
Example:
The lowest price (Rs. 80) is known as the floor price and the
highest price (Rs. 100) is known as cap price. The price at
which the shares are allotted is known as cut off price. The
entire process begins with the selection of the lead manager,
an investment banker whose job is to bring the issue to the
public.
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Both the lead manager and the issuing company fix the price
range and the issue size. Next, syndicate members are hired to
obtain bids from the investors. Normally, the issue is kept open
for 5 days. Once the offer period is over, the lead manager and
issuing company fix the price at which the shares are sold to
the investors.
If the issue price is less than the cap price, the investors who
bid at the cap price will get a refund and those who bid at the
floor price will end up paying the additional money. For
example, if the cut off in the above example is fixed at Rs. 90,
those who bid at Rs. 80, will have to pay Rs. 10 per share and
those who bid at Rs. 100, will end up getting the refund of Rs.
10 per share. Once each investor pays the actual issue price,
the share are allotted.
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On the completion of book building process, the final price is
determined by Issuer Company in consultation with the BRLM.
Then the BRLM files final offer document with the Registrar of
Companies before allotment of shares. The final offer
document mentions the issue size and the offer price
discovered through book building process.
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investors who participated in the bidding process. Balance
25% is offered to the public through prospectus and shall
be reserved for allocation to individual investors who had
not participated in the bidding process. The price for 25%
offer is the price as determined through book building.
First, the book building portion remains open for 3 to 7
days and on discovery of issue price after the completion
of book building process, the fixed price portion opens for
subscription.
2. 90% Book Building, 10% Fixed Price Offer: Here issuer
company offers 90% of the issue through book building
and the balance 10% through fixed price offer at a price
discovered through book building. This option was
available to the issuers during 1999-2000 and 2000-01
and later on discontinued by SEBI.
3. 100% Book Building Offer: In this type of offer, the whole
issue is offered through book building route. Issue opens
and closes on the same dates for all categories of
investors. Different categories of bidders bid at the point of
time. This type of issue takes minimum number of days for
the completion of the process of issue and allotment of
shares. Generally, the issue is listed on a Recognized
Stock Exchange after 3 weeks from the closure of the
issue (2 weeks for completion of allotment +1 week for
completion of listing formalities).
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Another advantage is an increased public awareness of
the company because IPOs often generate publicity by
making their products known to a new group of potential
customers. Subsequently, this may lead to an increase in
market share for the company.
An IPO also may be used by founding individuals as
an exit strategy. Many venture capitalists have used
IPOs to cash in on successful companies that they helped
start-up.
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IPO or stay private?
222
The price of the instrument is the weighted average at which
the majority of investors are willing to buy the instrument. The
price is investor driven and based on market forces of demand
and supply. Book building refers to the collection of bids from
investors, which is based on an indicative price range, the offer
price being fixed after the bid closing date.
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(n) Upgraded information flow of issues, lead managers,
syndicate members and investors is made possible.
225
Transferring shares
Transfer of shares
226
Under the law of England and Wales, Scotland and Northern
Ireland, s hares are items of property and, like any other
property, can be sold or given away. The sale or gift will require
a transfer of the shares. Shares were developed as a means of
allowing a group of people to invest in a business project by
buying shares of it. To be an attractive investment, the shares
had to be transferable, so that the investor could sell the shares
to retrieve their value. So shares are presumed to be capable
of transfer, even in a private company, unless the company has
restricted the right to transfer them by a provision in its articles,
or the shareholder has entered into a contract, such as a
shareholders' agreement, not to transfer the shares.
Transfer procedure
Stamp duty
Restrictions on transfer
Model Articles provisions
Table A provisions
New statutory provisions under CA 2006
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the Stock Transfer Act 1982. This applies notwithstanding
anything in the company's articles.
The company keeps the stock transfer form and the old share
certificate (which should have 'Cancelled' stamped or written
across it so that it cannot be re-issued inadvertently). No form
or notice is sent to Companies House.
The transfer may affect the the identity or details of one or more
people who have significant control of the company. Typically,
this is where someone become, or ceases to be, the holder of
more than 25% of the voting shares, but the rules are much
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more complicated than that. If there is a change, the details
must be entered on the company's PSC register and
Companies House must be notified. See further Register of
people who have significant control (PSC register).
Stamp duty
Restriction on transfer
Share transfers
26. (1) Shares may be transferred by means of an instrument of
transfer in any usual form or any other form approved by the
directors, which is executed by or on behalf of the transferor.
(2) No fee may be charged for registering any instrument of
transfer or other document relating to or affecting the title to any
share.
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(3) The company may retain any instrument of transfer which is
registered.
(4) The transferor remains the holder of a share until the
transferee's name is entered in the register of members as
holder of it.
(5) The directors may refuse to register the transfer of a share,
and if they do so, the instrument of transfer must be returned to
the transferee with the notice of refusal unless they suspect
that the proposed transfer may be fraudulent.
Table A provisions
Transfer of shares
23. The instrument of transfer of a share may be in any usual
form or in any other form which the directors may approve and
shall be executed by or on behalf of the transferor and, unless
the share is fully paid, by or on behalf of the transferee.
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sec561-577 apply only to allotments of shares. (See related
topic: What are pre-emptive rights?)
Transferring shares
The process
232
Existing inniAccounts clients
233
Complete a stock transfer form
Having agreed your share structure, you will need to issue new
share certificates detailing the shareholdings – these will render
any previous share certificates as effectively cancelled. If you
are an inniAccounts client, we will send you a template share
certificate to be signed and dated.
Don’t forget
If a shareholder has over a 25% holding in the company, you
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will need to add them to the PSC register as part of your
confirmation statement.
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This section is mandatory and unless all the pre-requisites
mentioned in the section are complied with, the transfer will be
void. The Central Government have prescribed the form for
transfer which should be used in the case of all transfers of
shares in or debentures of a company including a private
company.
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transfer of shares on the release of the security, the Central
Government have reduced the stamp duty.
238
11. Where transfer of shares are duly approved, endorsements
in favor of the transferees will be made on the share certificates
and the secretary or the officer authorized by the board certifies
the same. Then the share certificates are returned to the
sender together with a covering letter. New certificates are to
be issued as per companies rules.
Provided that
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intimation of transmission of any right to securities by
operation of law from any person to whom such right has
been transmitted.
3. In case application related to the partly paid shares made
by the transferor then transfer shall not be registered
unless the company gives notice to the transferee and the
transferee gives no objection to transfer to the company
within two weeks from the date of receipt of the notice.
4. The transfer of shares or other interest of a deceased
person made by his legal representative shall be valid as if
he had been the holder at the time of the execution of the
instrument of transfer.
5. Every company shall deliver the certificates of all
securities allotted, transferred or transmitted unless
prohibited by any provision of law or by the order of Court,
Tribunal or other authority—
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2. Before registering a transfer of partly paid shares, the
company has to give notice in form SH-5 to the transferee
and within two weeks from the date of receipt of the
notice, transferor has to give no objection to the transfer.
241
According to Section 2(58) provides that the article of
association of a private company shall restrict the right to
transfer the company’s shares.
Penalty
242
In the case of non-compliance with the provisions of transfer of
securities then the company shall be punishable by the fine
which shall not be less than Rs. 25000, which may extend to
Rs. 500000 an officer in default shall be punishable by the fine
of not less than Rs.10000 and which may extend to Rs.
100000.
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different types of transfer such as transfer of share by gifts, in
case of joint holdings and transfer in private companies. [8]
Chapter one
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share are always subject to provisions in Articles of
Association. [13] Upon incorporation a company acquires its
own independent legal personality and distinct entity, and its
shareholders acquire the right to hold and transfer shares. A
Company limited by guarantee and having no share capital, no
transfer of share is involved as there are no shares to transfer.
A member of such a company may transfer his 'interest' as per
section 82 that allows for transfer of shares or 'other
interest.' [14]
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is not in conformity with these provisions shall not be accepted
by the company. In cases of hardship the Central Government
may extend the period of time. The transferee becomes a
member of a company only when the transfer is registered by
the company [18] .
1.3Demat Shares
In the case of fresh issue (IPO), the investor would indicate his
choice in the application form, if he opts to hold the security in
the depository mode, commonly known as 'demat' mode. An
investor, who opts for a depository mode may at any time, opt
to choose out of it and claim share certificate from the company
by substituting his name as the registered owner in the place of
the depository. Ownership changes in the depository system
will be made automatically on the basis of delivery vs. payment.
The provisions of section 108 are inapplicable to transfer where
transferee and transferor are entered as beneficial owners in
records of depository [23] .
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shareholders to hold securities in dematerialized form no stamp
duty is charged. [26]
1.4Time Limit
1.6rights of transferees
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Till the company has registered the transfer, the name of the
transferor continues to appear in the register of members and
thus he continues to be the lawful owner but transferee is the
beneficial owner (cestui que trust). In order to protect the
interest of the transferees; section 206A was added by the
Amendment Act, 1988 which provides that where any
instrument of transfer of shares has been delivered to the
company for registration and transfer has not been registered,
the right to dividend, rights shares and bonus shares will be
kept on hold. This dividend would be kept in an “Unpaid
Dividend Account" [44] unless the company is authorized by the
registered holder of such shares in writing to pay dividend to
the transferee. [45]
1.7Blank Transfer
1.8Right to Pre-emption
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It is a common practice to provide in the articles that any
member intending to transfer his shares must offer the shares
first to other members of the company. Such restrictions are not
invalid. The conditions imposed and the formalities prescribed
by the articles are mandatory. [49] The pre-emption clause
does not, however, completely bar transfers to outsiders [50] .
I General grounds
II Special circumstances
Chapter Two
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has held that the Depositories Act, 1996 has introduced
important changes in the CLB’s jurisdiction regarding transfer of
shares and debentures, namely, the entire provisions as
contained in Section 111 are now made applicable only to
private companies which also include a private company which
has become a public company by virtue of Section 43-A.
Chapter Three
Transmission of Shares
3.1Transmission v Transfer
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Transfer is by the act of the parties. Transmission is by
devolution of law, i.e. death or bankruptcy. In transmission of
shares no procedures are required to be followed unlike in
transfer of shares. [73]
The Indian Companies Bill, 2009 paved the way for modern
legislation to ensure growth and regulation of corporate sector
in India. In view of various reformatory and contemporary
provisions proposed coupled with omission of existing obsolete
compliance requirements, the companies in the country would
be able to comply with the requirements of the proposed
Companies Act in a better and more effective manner [76] . The
Companies Bill, 2009 contains the words ‘as may be
prescribed’ many times which consequently permit the
Government to make discretionary rules. Quantity rather than
substance floods the situation in a highly litigious country like
India. If the Companies Bill, 2009 is passed as it is into Law,
the intensity of Company Law and of corporate governance
regulation would be noticeably diluted [77] .
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Tribunal within two months from the date of registration of
transfer, have been omitted [78] . These are very significant
lacunae, which can create a lot of corporate litigation.
1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
255
BASIS FOR TRANSFER OF TRANSMISSION OF
COMPARISON SHARES SHARES
party to another.
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shares which is initiated by the legal representative of the
concerned member.
4. Transferee pays an adequate consideration to the
transferor for the transfer of shares. In the case of
transmission of shares, no consideration shall be paid.
5. Execution of valid transfer deed is necessary when there
is the transfer of shares, but not in the transmission of
shares.
6. When the transfer is completed, the liability of the
transferor is over. On the other hand, the original liability
of shares exists.
7. Stamp duty is payable on the market value of shares in
case of transfer while in the transmission of shares no
stamp duty is to be paid.
Conclusion
Dividend
Definition of 'Dividend'
Dividend
What is a 'Dividend'
258
special dividends either individually or simultaneously with a
scheduled dividend.
260
portion of its capital budget and any residual profits are
then paid out to shareholders.
Dividend Irrelevance
261
Similar to stocks, mutual funds and ETFs pay out interest and
dividend income received from their portfolio holdings as
dividends to fund shareholders. In addition, realized capital
gains from the portfolio's trading activities are generally paid out
(capital gains distribution) as a year-end dividend.
(f) If profits are not distributed regularly and are retained, the
shareholders may have to pay a higher rate of tax in the year
when accumulated profits are distributed.
263
The term ‘stability of dividends’ means consistency or lack of
variability in the stream of dividend payments. In more precise
terms, it means payment of certain minimum amount of
dividend regularly.
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Dividend Law and Legal Definition
Additional Definitions
Dividends
Dividends and stock repurchases are the two major ways that
corporations can distribute cash to shareholders. Dividends
may also be distributed in the form of stock (stock dividends
and stock splits), scrip (a promise to pay at a future date), or
property (typically commodities or goods from inventory). By
law, dividends must be paid from profits; dividends may not be
265
paid from a corporation's capital. This law, which is designed to
protect the corporation's creditors, is known as the impairment
of capital rule. The law stipulates that dividend payments may
not exceed the corporation's retained earnings as shown on its
balance sheet.
Companies usually pay dividends on a quarterly basis. When
the company is about to pay a dividend, the company's board
of directors makes a dividend announcement that includes the
amount of the dividend, the date of record, and the date of
payment. The date on which the dividend announcement is
made is known as the declaration date.
The date of record is significant for the company's
shareholders. All shareholders on the date of record are
entitled to receive the dividend. The ex-dividend date is the first
day on which the stock is traded without the right to receive the
declared dividend. All shares traded before the ex-dividend
date are bought and sold with rights to receive the dividend
(also known as the cum dividend). Since it usually takes a few
business days to settle a stock transaction, the ex-dividend
date is usually a few business days before the record date. On
the ex-dividend date the trading price of the stock usually falls
to account for the fact that the seller rather than the purchaser
is entitled to the declared dividend.
Corporate dividend policy is a sometimes under-appreciated
element of overall company strategy and financial planning. "It's
difficult to generalize about dividend policy because it is usually
very company-specific or industry-specific, [but] some general
observations are possible," wrote Frederic Escherich
in Directors and Boards. "Dividend policy's most important uses
are to: 1) return excess cash to shareholders; 2) effectively
manage the company's cash needs and capital structure; and
3) credibly signal shareholders about future earnings
prospects." Indeed, when a company puts together its dividend
policy, it must decide whether to distribute a certain amount of
earnings to the company's shareholders or retain those
earnings for reinvestment. Dividend policy is influenced by a
266
number of factors that include various legal constraints on
declaring dividends (bond indentures, impairment of capital
rule, availability of cash, and penalty tax on accumulated
earnings) as well as the nature of the company's investment
opportunities and the effect of dividend policy on the cost of
capital of common stock. Most firms have chosen to follow a
dividend policy of issuing a stable or continuously increasing
dividend. Relatively few firms issue a low regular dividend and
declare special dividends when annual earnings are sufficient.
Opinions vary regarding the relationship between dividend
policy and corporate taxation. "The usual argument is that since
dividends are taxed as income, they have a tax disadvantage
with respect to capital gains in a relatively light capital gains tax
regime, especially for recipients in high tax brackets," wrote
Francesca Cornelli in The Complete MBA Companion.
"Therefore, other things being equal, companies that pay out
high dividends should be valued less than companies that pay
out low dividends. In response to this argument, however,
economists have argued that the increasing domination of the
market by tax-exempt institutions, the reduction of personal
marginal income tax rates, the moves in both the UK and US to
tax dividends and capital gains at the same rate and the
abundance of tax shelters have all combined largely to
neutralize the potential tax disadvantage of dividend
payments."
What is a dividend?
267
A dividend’s value is determined on a per share basis and is to
be paid equally to all shareholders of the same class (i.e.
common, preferred, etc.). The payment of a dividend must be
approved by the by the board of directors.
Dividend example
Types of dividends
Types include:
268
Cash – this is the payment of actual cash from the
company directly to the shareholders and is the most
common type of payment. The payment is usually made
electronically (wire transfer), but may also be paid by a
check or cash (in rare cases).
Stock – stock dividends are paid out to shareholders by
issuing new shares in the company. Just as with cash
dividends, these are paid out pro rata based on the
number of shares the invesor owns.
Assets – a company is not limited to paying distributions
to its shareholders in the form of cash or shares. A
company may also payout other assets such as
investment securities, physical assets, property, real
estate and others.
Special – a special dividend is one that’s paid outside of a
company regular policy (i.e. quarterly, annual, etc.) and is
usually the result of an excess cash build up.
Common – this refers to the class the shareholders (i.e.
common shareholders), not what’s actually being received
as payment.
Preferred – this also refers to the class of shareholder
receiving the payment.
Other – other, less common, types of financial assets can
be paid out such as options, warrants, shares in a new
spin-out company, etc.
Dividend vs buyback
269
The reason to perform share buybacks as an alternative means
of returning capital to shareholders is that it can help boost a
company’s EPS. By reducing the number of shares
outstanding, the denominator in EPS (net earnings / shares
outstanding) is reduced and thus EPS increases. Manager of
corporations are frequently evaluated on their ability to grow
earnings per share, so they may be incentivized to use this
strategy.
Dividends Types
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Property dividend. A company may issue a non-monetary
dividend to investors, rather than making a cash or stock
payment. Record this distribution at the fair market value
of the assets distributed. Since the fair market value is
likely to vary somewhat from the book value of the assets,
the company will likely record the variance as a gain or
loss. This accounting rule can sometimes lead a business
to deliberately issue property dividends in order to alter
their taxable and/or reported income.
Scrip dividend. A company may not have sufficient funds
to issue dividends in the near future, so instead it issues a
scrip dividend, which is essentially a promissory
note (which may or may not include interest) to pay
shareholders at a later date. This dividend creates a note
payable.
Liquidating dividend. When the board of directors wishes
to return the capital originally contributed by shareholders
as a dividend, it is called a liquidating dividend, and may
be a precursor to shutting down the business. The
accounting for a liquidating dividend is similar to the
entries for a cash dividend, except that the funds are
considered to come from the additional paid-in capital
account.
Types of Dividend:
There are three common types of dividend that you may
hear of; cash, stock and extraordinary.
A cash dividend is what is explained above, a regular
payment of your share of a company’s profits, paid in
cash. Unless otherwise specified, we will deal here with
cash dividends.
A stock dividend is when, rather than pay cash, the board
decides to reward investors by granting them whole or
partial shares in the company for each share held.
An extraordinary dividend is when a board decides to
distribute cash previously held back to shareholders. This
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was quite common at the end of 2012, when it was
forecast that capital gains tax would rise steeply in 2013.
Directors at many companies felt that it was in the
interests of shareholders to distribute cash before tax
liabilities increased.
Payment Options: If you hold your shares in a
brokerage account, you have 2 options: 1) You can be
paid each dividend in cash in your account 2) You can
opt for automatic dividend re-investment. In this case,
any cash paid is used to purchase shares, or partial
shares, in the company that paid the dividend. Option 1 is
best if you own dividend paying stock to generate
income, option 2 if your objective is long term growth of
capital.
If you hold the shares yourself, a check will be sent to the
address of record for each payment unless the company
has a Dividend Reinvestment Plan, or DRIP. In that case
you have the option of receiving a check or having the
payment used to buy shares or partial shares in the
company.
The Importance of Dividends: For those seeking
income, the importance of dividends is self-evident. It is
less obvious when seeking growth, but dividends are an
important part of total returns over time. Indeed, since
1930, 40% of the total returns in the US stock market are
attributable to dividends.
Record Date& Ex-Dividend: When a dividend is
declared by a board, they also say when it will be paid.
The important date for the investor is the “record date” .
The dividend will be paid to the owner of the shares on
that day. The next day, when the stock will be trade after
(or ex) the dividend is known as the ex-date and the
stock is said to be “ex-dividend”. On that day the stock
will usually open lower by the amount of the dividend, all
things being equal.
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Advantages of Dividend Paying Stock: The most
obvious advantage is that you get paid to own the stock.
As explained above, these payments, usually quarterly,
can be used for income or reinvested. Dividend income is
currently taxed at a lower rate in the US than other forms,
so there can be significant benefits for high rate tax
payers. Less obviously, the ability of a company to
consistently declare and pay a dividend can be a good
sign for conservative investors. It means that the
company is making money and expects to continue to do
so.
Risks of Dividend Paying Stock: As dividends are often
seen as an alternative to interest paying securities, such
as bonds or CDs, the underlying price of the stock is
sensitive to changes in interest rates. In a rising rate
environment, stocks with good dividends can lose value
dramatically.
When a company starts to pay a dividend it can mean
that the board can see no other use for the cash. This
means that growth through acquisition or expansion is
less likely.
Calculating Yield: The yield of an asset is the percent
return paid over 1 year. Thus, for dividend stocks, the
yield is the sum of the last four quarterly dividends
divided by the price of the stock x100. For example, let’s
say you buy GE at $24.00 per share. At the time of
writing the last four quarterly dividends have been $0.19,
$0.19, $0.19 and $0.17, giving a total of $0.74 per share.
0.74/24.00 = 0.0308. Multiply that by 100 for a 3.08%
yield.
When evaluating the suitability of stock for your portfolio,
dividends are an important consideration. As with most
things in life, they can be as complicated as you wish to
make them, but with just a little basic knowledge, your
stock selection will be much more informed.
273
Bonus Issue
What is a 'Bonus Issue'
A bonus issue, also known as a scrip issue or a capitalization
issue, is an offer of free additional shares to existing
shareholders. A company may decide to distribute further
shares as an alternative to increasing the dividend payout. For
example, a company may give one bonus share for every five
shares held.
274
future, which shareholders may not view favorably. In addition,
shareholders selling bonus shares to meet liquidity needs
lowers shareholders' percentage stake in the company, giving
them less control over how the company is managed.
(a) Issue of bonus share does not invite liquidity crisis like
payment of cash dividends. As no cash payment is made,
liquidity position remains unaffected.
276
(b) Since total numbers of shares are increased as a result of
bonus issue, dividend per share may be less.
(a) Shareholders need not pay tax on the bonus shares but
they are to pay them on the dividend so received in cash.
(c) If partly paid shares are converted into fully paid by issuing
bonus, the shareholders need not pay a further sum for the
purpose. On the other hand, their shares become fully paid-up.
277
Disadvantages of issuing Bonus Shares:
(b) If the rate of profit is not increased, the rate of dividend may
be decreased.
279
(iii) Value of fixed assets far exceeds the amount of
capital:
When the value of fixed assets for exceeds the amount of
capital.
(i) Inexpensive:
280
Issue of bonus shares reduces the market price of the shares,
thus rendering them more marketable.
281
(v) General reserve
Note:
282
17 main reasons given for the issue of bonus shares
(2) When there is a big gap between the paid-up capital and the
capital actually employed in the business of account of huge
reserves, it is thought proper to issue Bonus Shares and, thus
to fill up the gap.
284
4. The Bonus Shares can be issued out of the reserves built
out of genuine profits or the share premium collected in cash
only.
Example of a Buyback
288
directly. In recent decades, share buybacks have overtaken
dividends as a preferred way to
return cash to shareholders. Though smaller companies may
choose to exercise buybacks, blue-chip companies are much
more likely to do so because of the cost involved.
289
of equity capital on the balance sheet becomes more of a
burden than a blessing.
One of the hardest hit banks during the Great Recession was
Bank of America Corporation (BAC). The bank has recovered
nicely since then, but still has some work to do in getting back
to its former glory. However, as of the end of 2017, Bank of
America had bought back 509 million shares over the prior 12-
month period and the bank plans to return over $17 billion to
shareholders through share repurchases in 2018. Although the
dividend has increased over the same period, the bank's
290
executive management has consistently allocated more cash to
share repurchases rather than dividends.
291
hoping to capitalize when share prices finally began to reflect
new, improved economic realities.
292
Buying back stock can also be an easy way to make a business
look more attractive to investors. By reducing the number of
outstanding shares, a company's earnings per share (EPS)
ratio is automatically increased – because its
annual earnings are now divided by a lower number of
outstanding shares. For example, a company that earns $10
million in a year with 100,000 outstanding shares has an EPS
of $100. If it repurchases 10,000 of those shares, reducing its
total outstanding shares to 90,000, its EPS increases to
$111.11 without any actual increase in earnings.
Downside of Buybacks
293
A stock buyback affects a company's credit rating if it has to
borrow money to repurchase the shares. Many companies
to finance stock buybacks because the loan interest is tax-
deductible. However, debt obligations drain cash reserves,
which are frequently needed when economic winds shift
against a company. For this reason, credit reporting
agenciesview such-financed stock buybacks in a negative light:
They do not see boosting EPS or capitalizing on undervalued
shares as good justification for taking on debt. A downgrade in
credit rating often follows such a maneuver.
294
the household balance sheetenhance chances they leverage
up to borrow to buy a house or start a business.
What is a buyback?
295
How can a company execute a buyback?
296
Buy Back of Shares of a Company
Role of Buy-Back
Methods of Buy-Back
297
Pre-requisites
299
9. File with the ROC a return in Form No. SH. 11 within a
period of about thirty days of the completion of Buy-back.
Specified securities
1. •free reserves
301
A private company and an unlisted public company may buy
back the securities:
Stamp Duty
303
than the market price of such share. It is a strategy of re-
structuring of capital of the company by which excess paid up
share capital can be extinguished.
304
(c) the proceeds of the issue of any shares or other specified
securities.
Prohibitions on Buy-Back:-
The Company shall not buy-back its shares If the company has
not complied with the provisions of 92 (Annual Return), 123
305
(Declaration of Dividend), 127 (punishment for failure to
distribute dividend) and section 129 (Financial Statement)
306
2. by purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.
vii. Offer Period:- The offer for buy back shall remain open for
a minimum period of 15 days but not more than 30 days from
the date of dispatch of letter of offer (Period may be less than
15 days if all members agreed)
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x. Time limits:- Buy-back shall be completed within a period of
1 (one) year from the date of passing of SR or Board
Resolution, as the case may be. No offer of buy-back shall be
made within a period of one year from the date of the closure of
the preceding offer of buy-back, if any.
308
ii. Return the share certificates to those shareholders whose
shares are not accepted at all or the balance of shares, if partly
accepted.
Company Fine not less than one lakh rupees but which may
extend to three lakh rupees
310
Buy-back of shares is a method of financial engineering. It can
be described as a procedure which enables a company to go
back to the holders of its shares and offer to purchase the
shares held by them.
1. Internal sources
314
1. Firms whose profitability was below their industry average
enjoy greater share price growth after shares are repurchased
than firms whose profitability was above their industry average.
315
2. It opens up possibilities for share price manipulation.
317
of Securities) Regulations, 1998, a company shall not issue any
specified securities including by way of bonus till the date of
closure of the offers for buy-back made under the regulations.
318
14. Listed companies are required to intimate the stoke
exchange of general meeting and resolution passed thereof.
319
20. The securities offered for buy back, if already
dematerialized, should be extinguished and destroyed in the
manner specified under SEBI (Depositories and Participants)
Regulations, 1996 and the bye-laws framed thereunder.
23. A company should not keep the offer for buy-back open for
a period exceeding 30 days.
320
Suppose, the company closes its accounts on December 31
and prepares the Profit and Loss Account for the year ended
December 31, 1984, any Profit earned by the company from
January 1, 1984, to April 30, 1984 (i.e., Prior to incorporation) is
known as profit prior to incorporation and treated as capital
profit and transferred to the Capital Reserve Account.
321
(3) All fixed expenses such as rent, rates, salaries, insurance,
audit fees, etc., are allocated on a time basis as these
expenses are related to the time factor.
Buy-Back of shares
323
Advantages of Buy Back:
It's hard to argue with Apple's strategy. Shares of the tech giant
gained more than 46% last year as it continues to sell iPhones
at scale. For the quarter ending Sept. 30, 2017, Apple
recorded earnings per share (EPS) of $2.07 on revenue of
$52.6 billion. However, Apple certainly isn't the norm on Wall
Street, and analysts continue to ask the question: Are corporate
stock buybacks a good thing? (For more, see "Are Share
Buybacks Propping up the Market?")
Buyback Nation
325
Prior to 1980, buybacks weren't all that common. More recently,
they have become far more frequent: Between 2003 and 2012,
the 449 publicly listed companies on the S&P 500 allocated
$2.4 trillion—some 54% of their earnings—to buybacks,
according to a Harvard Business Review report. And it's not just
giants like Apple and Amazon.com Inc. (AMZN); even smaller
companies are getting into the buyback game. For example,
SolarWinds Inc. (SWI) in 2015 agreed to buy back almost 10%
of its shares—just six years after its initial public offering.
All that said, buybacks can be done for perfectly legitimate and
constructive reasons.
327
The theory behind share buybacks is that they reduce the
number of shares available in the market and – all things being
equal – thus increase EPS on the remaining shares, benefiting
shareholders. For companies flush with cash, the prospect of
bumping up EPS can be tempting, especially in an environment
where the average yield on corporate cash investments is
barely more than 1%.
328
Buybacks can also be a way for a company to protect itself
from a hostile takeover, or signal that the company plans on
going private.
329
The impact on earnings per share can give an artificial lift
to the stock and mask financial problems that would be
revealed by a closer look at the company’s ratios.
Criticism of Buybacks
330
own corporate stock for the sole purpose of giving manipulative
boosts to their stock prices," the report said. "Incentivizing
these buybacks is stock-based compensation that rewards
senior executives for stock-price performance."
331
premium from the company. And if the stock price then rises,
those that sell their shares in the open market will see a
tangible benefit. Other shareholders who do not sell their
shares now may see the price drop and not realize the benefit
when they ultimately sell their shares at some point in the
future.
333
extended period of time as a large block of shares needs to be
bought. The company is under no obligation to conduct the
repurchase program after the announcement. The company
has the option to cancel it. Also, it can make changes in the
repurchase program according to company’s situations and
needs. If this method is effectively implemented, it can prove to
be very cost effective.
334
DUTCH AUCTION TENDER OFFER
FLEXIBILITY
TAX BENEFIT
336
and its purpose to understand where the company is heading
to. The idea here is that actions speak louder than words.
Share buyback boosts some ratios like EPS, ROA, ROE etc.
This increase in ratios is not because of the increase in
profitability but due to a decrease in outstanding shares. It is
not an organic growth in profit. Hence, the buyback will show
an optimistic picture which is away from the economic reality of
the company.
337
shares as and when it is required. As a result, the company has
to take the recourse of public loans.
Normally, most companies are empowered by their articles to
borrow money for the purpose of their business. It has been
held in the case of General Auction Estate Co. v. Smith that
even if it is not explicit in a trading company’s articles, every
company has the right to borrow money and to charge its
assets by way of security for the amount borrowed. So far as
non trading companies are concerned, they cannot seek any
public loan unless it is expressly stated in their memorandum
and articles that they are authorized to do so. A company’s
memorandum defines the maximum limit to which the company
may take loans whereas their article defines the procedure for
taking such loans. Where the memorandum of a company has
stated the limit of a company’s right to borrow money, any
borrowing beyond such limit is beyond the authority of the
company. In such a case any guarantee given the loan is
invalid, and the loan is not deemed to be a debt against the
company. Any such contract is void ab initio and cannot be
implemented even if all members of the company confirm the
contract.
338
profit.[2] Whereas in some cases external resources are also
sources.[4]
II. POWER OF A COMPANY TO BORROW
Under the power of a company exercise by its directors who
cannot borrow more than the sum authorised. Under these two
company directors can only be exercised for borrowing money
by issuing debentures. Under section 179 (3) (c)[5] and (d)[6],
directors[7] have the power to pass a resolution to borrow
money.[8] However, the power to borrow money can only be
delegated by passing resolution. Under the resolution the total
amount of money which can be bothered must be
written.[9] Under section 180[10], the board of directors of the
company are restricted from borrowing a sum of money which
is obtained from temporary loans that are obtained from the
company’s banker.[11] According to Section 180, temporary
loans are the loans which are re-payable on the demand within
6 months from the date.
339
cannot sue the company.[12] The securities which are given for
these unauthorised borrowing are void and inoperative.
V. TYPES OF BORROWING
There are various types of borrowing which can be categorised
as
Under the long term the funds are borrowed from a period
ranging from 5 years or more.[15]
These are the borrowing under which the funds world from a
period of 2 to 5 years.[18]
340
4. Secured borrowing
5. Unsecured borrowing
6. Syndicated borrowing
7. Bilateral borrowing
8. Private borrowing
9. Public borrowing
341
Public borrowing consists of all the financial institutions that are
freely tradable on a public exchange.
180(1)(c) |
342
resources of arranging capital i.e. External Commercial
within six months from the date of the loan such as short-
345
without knowledge of the limit imposed by Sub-section (1)
being exceeded.
lender cannot sue the company for the return of the loan.
346
ratified by a resolution passed by the company in general
meeting.
fails to do so. If the lender has parted with his money to the
and any property which the company has bought with it.
Subrogation:
347
subrogated to the position of the creditor paid off and to that
extent would have the right to recover his loan from the
when a lawful debt has been paid off with an ultra vires loan,
increased.
which he has lent to it, but he will also be able to enforce his
following:
d. Issuing Bonds;
349
k. A charge on a ship or any share in a ship;
351
However, if the lender has acted in good faith that is without
any knowledge that the company borrowed the money
beyond its powers, he may have the following remedies
1.Injunction- If the company has not spent the money so
borrowed, the lender may obtain an injunction order against
the company restraining it from spending the amount and
recover the same.
2.Restitution- If the money has been invested in some
particular asset, he may claim that asset, or if such asset
cannot be ascertained he may claim that any increase in the
assets as a result of such borrowing be restored to him in the
even of a winding up.
3.Subrogation- If the money has been applied in paying off
some debts of the company, he is entitled to step into the
shoes of the creditors so paid off and can rank as a creditor
of the company to the extent of the money so applied.
4.Suit for breach of warranty- The lender may sue the
directors personally for breach of implied warranty of
authority and claim damages for the same.
5.Ratification of borrowing- If the borrowing power exercised
by the company is ultra vires the Memorandum, that is
beyond the powers given to its by the Memorandum, such
borrowing cannot be ratified afterwards in any way, even by
a unanimous resolution of the shareholders in a general
meeting.
But if the borrowing is ultra vires the Articles, but intra views
the Memorandum the act of borrowing can be ratified by the
shareholders in general meeting by altering the Articles or by
passing a resolution as per Articles.
If the borrowing is ultra vires the directors but intra vires the
Memorandum, that is within the powers given by the
Memorandum but beyond the authority of the directos, the
company in general meeting may ratify such act of the
352
directors. In that case the debt will be valid and binding on
the company.
BORROWINGS & CHARGES
Even if the borrowing is not ratified by the company, the
lender in good faith will be protected since the directors in
borrowing the money had acted as agent of the company.
However in that case the directors will be liable to indemnify
the company against the loss incurred thereby.
• Even in the case of unauthorized borrowings, the company
will be liable to repay, I it is shown that the money had gone
into company’s pocket [Lakshmi Ratan Cotton Mills Co. Ltd
v. J K Jute Mills Co; Ltd (1957) 27 Comp. Cas. 660 (All).]
CHARGES
• Borrowing has become an equally important method along
with share capital of financing projects. Corporate borrowing
has its own peculiarities. No single individual may in normal
circumstances be in a position to meet the loan requirements
of a company. Loan-money has, therefore, to be raised from
a large number of individuals very much in the same way as
share capital. Loans may have to be obtained in a sequence
one after the other.
• The problem was solved by the evolution, on the one hand,
of debentures and, on the other, of the concept of floating
charge, both being reserved only for the corporate sector.
The same assets are charged to several lenders and also to
several lenders in a series. That raises a question as to who
shall have priority. This gave rise to the concept of pari
passu ranking. Since other trade creditors have also to seek
payment only out of the company's assets, the problem had
to be tackled as to how they should know, before supplying
more credit, what assets would be available as security for
their payments?
353
• The Act prescribes for registration of charges with the
Registrar of Companies, and also gives a list of assets a
charge on which must be registered. Registration of charges
identifies the assets, which are subject to the charge. It
becomes a source of knowledge, and, therefore, operates as
constructive notice and a protection, to "all classes of
persons interested in knowing the assets position of the
company. It makes the charge effective against all quarters
including the liquidator.
Types of charges
1. Fixed charge - a charge is fixed when it is made
specifically to cover definite an ascertained assets of
permanent nature such as land, building, o heavy machinery.
A fixed charge passes legal title to certain specific assets
and the company loses the right to dispose of the property
unencumbered, though the company retains possession of
the property.
2. Floating charge – it is a charge on the current assets of
the company, present or future which
changes from time to time in the ordinary course of business
e.g. stock in trade, bills receivable, cash in hand, work in
progress, goods in transit, inventory etc.
(i) When the company goes into liquidation;
(ii) When the company ceases to carry on the business;
(iii) When the creditors or the debenture holders take steps
to enforce this security e.g. by appointing receiver to take
possession of the property charged;
(iv) On the happening of the even specified in the deed.
Registration of charges[Section 125]
• The security created and charged for the following
purposes must be registered with the ROC within 30 days
354
(or further period of 30 days with additional fees) after the
date of their creation:
(i) Securing any issue of debentures;
(ii) Uncalled share capital of the company;
(iii) Any immovable property;
(iv) Book debts, stock in trade or other current assets of the
company;
(v) Any movable property (not being a pledge);
(vi) Calls made but not paid;
(vii) IPRs of the company.
•The ROC shall with respect to each company maintain a
Register of charges containing all the specified particulars.
Upon registration of charge by the company, ROC shall
issue a Certificate of charges, which shall be conclusive
evidence.
Memorandum of satisfaction[Section 138-140]
• On payment or satisfaction of any charge in full, the
company must notify the fact to the ROC within 30 days from
the date of such payment or satisfaction. The ROC shall on
receipt thereof, shall record the same after send due notice
to the concerned creditor and on receipt on him being
satisfied (the creditor may issue NOC to the satisfaction)
shall register the satisfaction of the charge. A memorandum
of satisfaction shall be entered in the Register by the ROC.
The Central Government has been empowered to extend
time for registration of charge or satisfaction of charge of
issue of debenture of a series and to order that the omission
or mis-statement in the Register of Charges be rectified.
355
BRROWING POWER OF COMPANY DEBENTURE
AND CHARGE
356
analogous to loan stocks of govts, local and public
authorities.
Imp= while debenture may or may not be fully paid,
debenture stock must be fully paid.
Debenture- Kinds
ü Registered Debentures: These are those debentures
which are registered in the register of the company. the
names, addresses and particulars of holdings of debenture
holders are entered in a register kept by the company. Such
debentures are treated as non-negotiable instruments and
interest on such debentures are payable only to registered
holders of debentures. Registered debentures are also called
as Debentures payable to registered holders.
ü Bearer Debentures: These are those debentures which
are not registered in the register of the company. Bearer
debentures are like a bearer check. They are payable to the
bearer and are deemed to be negotiable instruments. They
are transferable by mere delivery. No formality of executing a
transfer deed is necessary. When bearer documents are
transferred, stamp duty need not be paid. A person
transferring a bearer debenture need not give any notice to
the company to this effect. The transferee who acquires such
a debenture in due course bonafide and for available
consideration gets good title not withstanding any defect in
the title of the transfer-or. Interest coupons are attached to
each debenture and are payable to bearer.
ü Secured Debentures: These are those debentures which
are secured against the assets of the company which means
if the company is closing down its business, the assets will
be sold and the debenture holders will be paid their money.
The charge or the mortgage may be fixed or floating and
they may be fixed mortgage debentures or floating mortgage
depending upon the nature of charge under the category of
357
secured debentures. In case of fixed charge, the charge is
created on a particular asset such as plant, machinery etc.
These assets can be utilized for payment in case of default.
In case of floating charge, the charge is created on the
general assets of the company.
ü The assets which are available with the company at
present as well as the assets in future are charged for the
purpose. A mortgage deed is executed by the company. The
deed includes the term of repayment, rate of interest, nature
and value of security, dates of payment of interest, right of
debenture holders in case of default in payment by the
company. The deed may give a right to the debenture holder
to nominate a director as one of the Board of Directors. If the
company fails to pay the principal amount and the interest
thereon, they have the right to recover the same from the
assets mortgaged.
ü Unsecured Debentures: These are those debentures
which are not secured against the assets of the company
which means when the company is closing down its
business, the assets will not be sold to pay off the debenture
holders. These debentures do not create any charge on the
assets of the company. There is no security for repayment of
principal amount and payment of interest. The only security
available to such debenture holders is the general solvency
of the company. Therefore the position of these debenture
holders at the times of winding up of the company will be like
that of unsecured debentures. That is they are considered
with the ordinary creditors of the company.
ü Convertible Debentures: These are those debentures
which can be converted into equity shares. These
debentures have an option to convert them into equity or
preference shares at the stated rate of exchange after a
certain period. If the holders exercises the right of
conversion, they cease to be the lender to the company and
become the members. Thus convertible debentures may be
referred as debentures which are convertible into shares at
358
the option of the holders after a specified period. The rate of
exchange of debentures into shares is also decided at the
time of issue of debentures. Interest is paid on such
debentures till its conversion. Prior approval of the
shareholders is necessary for the issue of convertible
debentures. It also requires sanction of the Central
Government.
ü Non-Convertible Debentures: These are those
debentures which cannot be converted either into equity
shares or preference shares. They may be secured or
unsecured. Non-convertible debentures are normally
redeemed on maturity period which may be 10 or 20 years.
ü Redeemable Debentures: These debentures are issued
by the company for a specific period only. On the expiry of
period, debenture capital is redeemed or paid back.
Generally the company creates a special reserve account
known as "Debenture Redemption Reserve Fund" for the
redemption of such debentures. The company makes the
payment of interest regularly. Under section 121 of the Indian
Companies Act, 1956, redeemed debentures can be re-
issued.
ü Irredeemable Debentures: These debentures are issued
for an indefinite period which are also known as perpetual
debentures. The debenture capital is repaid either at the
option of the company by giving prior notice to that effect or
at the winding up of the company. The interest is regularly
paid on these debentures. The principal amount is repayable
only at the time of winding up of the company. however, the
company may decide to repay the principal amount during its
lifetime.
CHARGE
S. 124 For the purposes of registration, ‘charge includes
mortgage’
359
· Fixed Charge: A fixed charge is created on certain
specified assets generally immovable such as land and
building, plant and machinery, long term investments and the
like. So it is equivalent to mortgage. When the charge is
fixed, the company can only deal with the property subject to
the charge, that is, a fixed charge allows the company to
retain possession of the assets but prevents the company
from selling, leasing etc., of the assets without the consent of
the charge holders. The property identified remains so
identified during the period for which the charge is created.
· Floating Charge : Such a charge is available only to
companies as borrower. A Floating charge does attach to
any definite property but covers the property of a circulating
and fluctuating nature such as stock-in-trade, debtors, etc. It
attaches to the property charged in the varying conditions in
which happens to be from time to time. A floating charge on
crystallization becomes a fixed charge.
Charges requiring registration : S.125
360
v. A charge on any immovable property
vi. A charge on ship
vii. A charge on book debts of the company
viii. A charge on goodwill or on patent or on license
under the patent or on trademark or copyright or on the
license under the copyright
ix. A charge other than a pledge on any movable
property of the company.
Effects of Registration :
362
BORROWING POWERS. The board of directors may,
from time to time, at its sole discretion, borrow or
secure any amount or amounts of money for the
Company's objects. The Company's board of directors
will be entitled to obtain or secure payment of any such
amount or amounts in such manner, on such dates and
under such conditions as it deems fit, and in particular
by the issuance of guaranties, fixed or redeemable
bonds, bond stock or any mortgage, pledge or floating
charge or any other security on the Company's
property, in whole or in part, whether in the present or
the future, including the uncalled share capital and the
share capital called up but unpaid.
Introduction
Companies borrow money from various sources, including their
directors and shareholders, personal contacts, banks,
institutional investors, debentures and through the Stock
Exchange.
Borrowing Power
The powers of a company are determined by the memorandum
and the articles of association.
The Managing Director may from time to time with the approval
of the Board of Directors may borrow from any source either
from any commercial or schedule banks, or financing
institutions or firms any sum of money required for the purpose
of the company and secure the payment or repayment of such
money so borrowed in such manner and upon such terms and
conditions in all respects duly approved by the Board of
Directors deemed fit in particular by hypothecation or charge on
all or any part of the property of the company (both present and
future) including its uncalled capital for the time being.
363
Methods of Borrowing
Companies borrow money from various sources, including their
directors and shareholders, personal contacts, banks,
institutional investors and (PLCs only) through the Stock
Exchange.
In most cases of borrowing a debenture is issued. A
debenture is the traditional name given to a loan
agreement where the borrower is a company.
Debentures
-A debenture is a document which shows on the face of it, that
the company has borrowed a certain sum of money from the
holder thereof upon certain terms and conditions.
-The Company Act states that a debenture, "includes debenture
stock, bonds and any other securities of a company, whether
constituting a charge on the assets of the company or not.”
Characteristics :
Each debenture is numbered.
Each contains a printed statement of the terms and
conditions,
A debenture usually creates a floating charge on the
assets of the companies,
A debenture may create a fixed charge instead of a
floating charge.
No debenture holder is to have any voting rights in
company meetings.
Full particulars regarding the issue of debentures in series
must be sent to the Registrar.
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Sometimes debenture holders are given the right to
appoint a receiver in case of non-fulfillment of the terms of
the debenture by the company.
Sometimes a series of debentures are issued with a trust
deed by which trustees are appointed to whom some or all
the properties of the company are transferred by way of
security for the debenture holders.
Rights and remedies of debenture holders.
If the company fails to pay interest or principal on the due
date or fails to comply with any of the terms and
conditions under which the debenture was issued, the
debenture holder can adopt any of the following remedial
measures.
1. He may file a suit for the recovery of money
2. He may file an application for the appointment of a
receiver by the court.
3. He may himself appoint a receiver if the terms of the
debenture entitled him to do so.
4. The trustees may sell the properties charged,
5. He may apply to the court for the foreclosure of the
company right to redeem the properties charged for the
payment of the money.
6. He may present petition for the winding up of the
company.
Fixed Charge
A fixed charge is a charge or mortgage secured on
particular property, e.g. land and buildings, a ship, piece of
machinery, shares, intellectual property such as copyrights,
patents, trademarks, etc.
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Floating charge
A floating charge is a particular type of security, available
only to companies. It is an equitable charge on (usually) all
the company's assets both present and future, on terms that
the company may deal with the assets in the ordinary course
of business.
- A floating charge is mortgage on an asset that changes in
quantity or value from time to time (such as an inventory), to
secure the repayment of a loan.
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Conclusion
Money or fund is very important for running a business
properly. Capital is not enough for running a business that’s
why a business requires borrowing to invest in the firm.
Availability and choice of alternative lender(s) will be
governed by the unique variables inherent in the needs,
capacities and credit history of the borrowing business or
individual.
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However, the law requires that any finance provider (like a
bank or lender), with the appropriate security, is contacted
and the aims of the administration be discussed and
approved. The finance provider must have a fixed and
floating charge (usually under a debenture) and the charge
holder will need to give permission for the process to go
ahead. Five days clear notice is required.
How long does going into administration last?
It depends very much on the circumstances. The
administrators take on the employment contracts of the
company after 14 days so it is desirable that the business is
sold out of administration before that date. The insolvency
practitioners are not allowed to run the business at a loss
and so making the creditors position worse off. If there are
large amounts of money to collect in or substantial
realiseable assets then they may trade for longer periods.
During this time they will need to report to the creditors at
regular intervals.
Between January and March 2018, there were 367
administrations. For more insolvency statistics, please see
the latest Government statistics.
What is a pre-pack administration or administration pre-
pack sale?
The pre packaged administration sale is currently a very
popular method,However, there is increasing media
coverage of creditors' dismay at seeing their "debt dumped"
by a former customer.
The company prepares itself to enter administration and sell
its assets to a new company ("newco") or to an existing 3rd
party company. This is a very powerful, far reaching process
that can protect the BUSINESS, but usually the old company
(oldco) is liquidated afterwards.
What is administration followed by CVA
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Basically the company enters administration to get protection
from creditors. The administrator then works with the
company's directors to produce his/her administration
proposals. Once these are accepted the administrator hands
control back to the company's board. This is powerful tool
despite the fact that it is expensive and directors are not in
control during the administration period. We have a more
detailed page on the administration process. It is less
common than the Government would like to see.
What are the Different Forms of
Administration for Insolvent Companies?
While there is often the conception that there are various types
of company administrations, in reality, there is only one process
that can be used in different ways depending on the
circumstances.
The Basics of Administration
Administration is a formal process that aims to turn around
an insolvent company. An administrator will be appointed to
manage the affairs of the company, mostly with a goal to put
the company back into a solvent position and restore it to
profitability. It is best-suited to companies that are currently
insolvent but have a good prospect of being restored to
solvency if managed in the correct manner.
It can be a very effective way of rescuing an insolvent
company because a moratorium is placed on the company
for a period. This effectively means that the company’s
creditors are not able to take legal action against the
company or file a winding up petition with the courts (which
would lead to the company being wound up) for the period.
The Company Will be Temporarily Run by an Administrator
An administrator will be appointed to the company. This marks
a significant shift within the company as they effectively take
over the running of the business from the company’s directors.
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They will be a licensed insolvency practitioner and will have
experience in turning failing companies around.
After their appointment, they will spend up to eight weeks
investigating the current position of the company and formulate
a plan for the future of the company. While the main purpose is
to promote the recovery of the company, it may be that they do
not think that this is possible and decides that it will be more
appropriate to wind the company up. Whatever their decision,
thy need to make a written statement within eight weeks of their
appointment stating what their intentions towards the company
are.
Other Types
Pre-packaged (“Pre-pack”) Administrations
These use the same process, but it is structured differently to
allow the quick sale of a company’s business after the
appointment.
During this process, the negotiations for the sale of the
business take place before the appointment of the
administrator, with the sale occurring almost immediately after
the administrator’s appointment.
While the sale of the company’s business will be to a third
party, this third party may be a new company formed
specifically as a purchased vehicle by the existing company’s
directors. It can be an effective way of saving the profitable
parts of that company before the whole business has to be
wound up.
Company Administration
1. What is company administration?
What is a Company Administration as opposed to any other
form of insolvency process? Company administration is
essentially designed to rehabilitate a company that is
experiencing some financial difficulty. A company placed into
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administration obtains a moratorium which means that action
cannot be taken against the company whilst the moratorium is
in place which gives the company time to reach some form of
settlement with its creditors.
2. What is the definition of a company administration
order?
What is the definition of a company administration order? A
company administration order is an order made by the court
either by making an application to court or by filing a Notice of
Appointment of an Administrator which is known as the out of
court process.
3. What are advantages and disadvantages of company
administration?
It is useful for a company experiencing financial difficulty to
know what the advantages and disadvantages of a company
going into administration.
Here are 3 examples of advantages and disadvantages which
an insolvent company may experience as a result of entering
administration.
4. What happens if a company goes into administration?
It is helpful for directors of a company to know what happens if
a company goes into administration. If a company is unable to
pay its debts, the company may be placed into administration. If
a company is placed into administration an insolvency
practitioner is appointed as an administrator of the company to
deal with and sell the business, assets, or certain parts of the
company for the benefit of the creditors of the company.
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9. What is the difference between insolvency and winding
up?
Insolvency is the generic term that refers to either a company, a
legal entity, a partnership or an individual who is unable to pay
their debts as and when they fall due. In addition, in the case of
a company and pursuant to section 123 of the Insolvency Act
1986, it can also mean that the value of the company’s assets
is less than the amount of its liabilities (taking into account its
contingent and prospective liabilities).
Winding up a company is a form of company insolvency, most
commonly used to describe ending the business affairs of the
company and terminating company obligations before
liquidation. However, there are other forms of company
insolvency procedures including, a Company Voluntary
Arrangement, an Administration and a Receivership.
Board of Directors (B of D)
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A board of directors (B of D) is a group of individuals, elected to
represent shareholders. A board’s mandate is to establish
policies for corporate management and oversight,
making decisions on major company issues. Every public
company must have a board of directors. Some private
and nonprofit organizations also have a board of directors.
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reimbursed and usually get additional pay for attending
meetings. Ideally, an outside director brings an objective,
independent view to goal-setting and settling any company
disputes. It is considered critical to strike a balance of internal
and external directors on a board.
Board structure can differ slightly in international settings. In
some countries in the E.U. and Asia, corporate governance is
split into two tiers: an executive board and a supervisory board.
The executive board consists of insiders elected by employees
and shareholders and is headed by the CEO or managing
officer. This board is in charge of the daily business operations
of the company. The supervisory board is chaired by someone
other than the presiding executive officer and concerns itself
with issues closer to what a U.S. board would.
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Making deals with third parties to sway a vote at a board
meeting
Engaging in transactions with the corporation that result in
a conflict of interest
In addition, some corporate boards have fitness-to-serve
protocols.
Inside directors
Outside directors
A chairperson
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the board and executives at the company, such as the chief
executive officer (CEO). They have a dual role, serving as
members of the governing body and working as managers at
the company.
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Section 164 of the Companies Act 2013 deals with
disqualification of Directors. According to the Companies Act
2013, the following conditions can be reasons for disqualifying
a Director.
378
As mentioned in point 8, a person can be disqualified from
being a Director, if a company on which the person is a Director
has not filed MCA annual return for a continuous period of three
years. Hence, its important for all private limited company, one
person company and limited company to file MCA annual
return on time and maintain compliance under Companies Act,
2013.
Until recently, the MCA has not strictly enforced this provision
of the Companies Act. However, from September 2017 the
MCA has began strictly enforcing these provisions of the
Companies Act and has published names of disqualified
Directors on its website.
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Types of Directors, Qualifications and
Disqualifications of Directors
Types of Directors
380
5. Professional Directors: Any director possessing
professional qualifications and do not have any pecuniary
interest in the company are called as “professional directors”.
Qualifications of a Director:
Disqualifications of a director:
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1) A person shall not be capable of being appointed director of
a company, if the director is
(e) Has not paid any call in respect of 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; or
(a) Has not filed the annual accounts and annual returns for
any continuous three financial years commencing on and after
the first day of April, 1999; or
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years from the date on which such public company, in which he
is a director, failed to file annual accounts and annual returns
under sub-clause (A) or has failed to repay its deposit or
interest or redeem its debentures on due date or paid dividend
referred to in clause (B).
383
How to Appoint Directors in the Company? (6 Ways)
First appointment:
Reappointment:
If the place of the retiring director is not filled up, and the
meeting has not expressly resolved not to fill the vacancy,
the meeting shall stand adjourned till the same day in the
next week at the same time and place.
(v) When the meeting has expressly resolved not to fill up the
vacancy. [Sec. 256(4)]
387
Appointment of directors of a public company must be voted
individually by separate ordinary resolution, unless the
company has in general meeting unanimously so resolved.
In other words, each director shall be appointed by a
separate resolution unless it is unanimously decided at the
general meeting that more than one director may be
appointed by a single resolution.
388
This Board may appoint the alternate director if the article
authorises. The Board is empowered to appoint the alternate
director if the original director remains absent for more than
three months from the date on which the meeting is ordinarily
held. Such alternate director shall hold office only for the
period till the original director returns. [Sec. 313]
The articles may permit the third parties for the appointment
of director as their nominee, but the number of directors so
appointed should not exceed one- third of the total number of
directors and they are not liable to retire by rotation. The third
party means the Vendor, Banking Company, Finance
Corporation and Debenture holders.
The idea behind the appointment is that they may have the
watch that money advanced to the company has been
utilised for same purpose for which it was lent.
389
According to Sec. 408, the Central Government may appoint
the directors but not more than two in number and for the
period not exceeding 3 years.
390
Resident Director: The new Act has made certain important
changes in the earlier regime, particularly in respect of the
appointment of directors. For instance, as per Section 149 of
the New Act, Board of Directors of a company, must have at
least one resident director, i.e. a person who has lived not
less than 182 days in India in the previous calendar
year. The second proviso added to section 149 in the New
Act requires all companies to comply with section 149 within
a year.
391
promoters or directors, amounting to two percent in the
preceding two years of his appointment
5. Neither he, nor any of his relatives have held 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 in which he is proposed to be appointed.
6. Neither he nor any of his relatives have been an employee
or proprietor or a partner, in any of the three financial
years immediately preceding the financial year in which he
is proposed to be appointed, of (a) a firm of auditors or
company secretaries in practice or cost auditors of the
company or its holding, subsidiary or associate company;
or (b) any legal or a consulting firm that has or had any
transaction with the company, its holding, subsidiary or
associate company amounting to ten per cent. or more of
the gross turnover of such firm;
7. Neither he nor any of his relatives hold together with his
relatives two per cent. or more of the total voting power of
the company; or
8. Neither he nor any of his relatives is a Chief Executive or
director, by whatever name called, of any nonprofit
organization that receives twenty-five per cent. or more of
its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company
or that holds two per cent. or more of the total voting
power of the company; or
9. who possesses such other qualifications as may be
prescribed.
Number of Directors
The New Act, by adding 149 (1) (b), has also increased the
maximum number of directors that a company can have from
twelve to fifteen. The number can be further increased by
passing a special resolution instead of requiring approval
from Central Government as was under the Old Act.
Appointment of Directors
393
the shareholders, who are individuals shall be deemed to
be the first directors of the company until the directors are
duly appointed;
Director to be appointed in a general meeting. If it is so
done, an explanatory statement for such appointment,
annexed to the notice for the general meeting, shall
include a statement that in the opinion of the Board, he
fulfills the conditions specified in this Act for such an
appointment;
The proposed Director has to furnish his DIN (Director
Identification Number) mandatorily. DIN is allotted by the
Central Government on application by a person intending
to be the Director of a company. DIN can be obtained in
pursuance of section 153 and 154;
The proposed Director has to also furnish a declaration
stating that he is not disqualified to be a director.
Furthermore, such appointment should be with his
consent. Earlier such consent was not mandatory for
private companies.Consent implies that being appointed a
director and taking the charge of the office are two
different things;
Consent has to be filed with the Registrar of Companies
within 30 days of appointment
394
Discuss the powers of directors. Are there any
restriction on their powers?
396
Broach Borough Municipality and others, A.I.R. 1968
Gujarat 124].
397
(i) sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking;
(ii) remit or give time for the re-payment of, any debt due by
a director except in the case of renewal or continuance made
by a Banking company to its director in the ordinary course
of business;
(iv) borrow moneys that will exceed the aggregate of the paid
up vital and the free reserves of the company;
As per Sec. 291 of the Act, the Board is entitled to exercise all
such powers and to do all such acts and things as the company
is authorized to do. The exceptions are the acts, which can be
398
done by the company only in the general meetings of the
members as required by law.
1. to make calls,
2. to issue debentures,
3. to borrow moneys by other means,
4. to invest the funds of the company, and
5. to make loans.
3. As per Sec. 295, the Board, only with the previous approval
of the Central Government, can make any loan or give any
guarantee or provide any security in connection with a loan
made by any other person to
400
directions or instructions of any director or directors of the
leading company.
From this point of view, directors are not the trustees of the
company, because they are not the legal owners of the
properties of the company.
402
(h) The power of issuing the unissued shares of the company
and making allotments thereof.
(i) They are not trustees in the legal sense of the term.
403
The company being an artificial person cannot manage its
affairs itself but the management of the company is entrusted to
some human agency known as directors. They are the selected
representatives of the shareholders. They run the business on
behalf of the shareholders and may be termed as the agent of
the company.
The directors must act in the name of the company and within
the scope of their authority. If the directors enter into a contract
which is beyond their powers but within the powers of the
company, the company, like any other principal, may ratify it.
Where the directors enter into a contract which is ultra virus the
company, the company cannot ratify it and neither the company
nor the directors are liable on it. However the directors may be
held liable for breach of implied warranty of authority.
404
Directors have been described as the managing partners
because, on the one hand, they are entrusted with
management and control of the affairs of the company, and on
the other hand, they are usually important shareholders of the
company.
Under Sec. 2 (30) of the Companies Act, the directors are the
officers of the company. As officers, they may by held liable if
the provisions of the Companies Act have not been fully
complied with by them.
405
Considering the above discussion, Gessel said: “Directors are
described as trustees, agents or managing partners, not as
exhausting their powers or responsibilities, but as
indicating useful points of view.”
406
vice-president of a company who is on the board is not an
independent director.
407
What is a legal position?
408
management planning data for predicting resource needs and
developing long range plans. . Conducts and assists with the
development of long- and short-range goals.
This depends very much on the size of the company. You can
be a managing director of your own company that just employs
you, so not as much pay as, say, the managing director of ICI.
This depends on the house and it also varies. For example, the
Royal. Opera House, Covent Garden has a 'board of directors'
but also has a 'Musical Director'. Most opera houses /
companies have a 'Musical Director' who is usually a
conductor.
409
Not usually no. But it depends on the prior actions of the
director. If there is some negligence, unprofessional or illegal
activity on the part of a director in relation to the liability, then
there could be directors liability.
410
The payment you would get for being the director of a company
would vary from each company. While many companies can
afford to pay large salaries, other smaller companies cannot.
The director of a company would be paid fairly based upon the
income the company has.
411
Disqualifications for Appointment as Director
Is of unsound mind
Has been declared insolvent or has applied to be
adjudicated as an insolvent
Has been convicted of any offense involving moral
turpitude or otherwise, and sentenced in respect thereof to
imprisonment for six months or more by a court and a
period of five years has not elapsed from the date of
expiry of a sentence. However, a person is ineligible to be
appointed to any company if, has been convicted of any
offense and was sentenced to imprisonment for a period
of seven years or more.
Has been disqualified from appointment as a director by
any court or Tribunal
Has failed to pay any call money in respect of any shares
of the company held by him and a period of six months
has elapsed from the day on which the call money was to
be paid;
Has been convicted of the offense dealing with related
party transactions under section 188 in the preceding five
years;
Does not have a DIN.
Duties of Director
Removal of Directors
413
representation in writing to the company and requests its
notification to members of the company, the company shall do
so, if the time permits –
The director who is appointed shall hold office until the date to
which his predecessor would have held office had he not been
removed.
414
Types of Directors
Duties of a Director
415
A director should see that he is not being negligent in any
of his work and his judgement should not be based on the
judgements of others. It should be independent.
Liabilities of a Director
416
When a director does something which is against the interests
of the company and towards the benefit of a particular
employee, it is held to be a wrongful act of a director on
account of fiduciary trust.
Ultra vires
Negligence
417
mismanagement or a director appointed proportional
representation.
418
o Mention in the notice of resolution that the fact of the
representation has been received at the annual
general meeting.
o Send a copy of the representation to every member
of the meeting if the representation has been
received before the notice of the meeting.
11. If the writing is not able to reach the members of the
company because it has been received too late or the
company itself made some default in sending it then the
representation must be read at the annual general
meeting, it is at the discretion of the director. In addition,
he can also make oral representation.
Conclusion
419
Removal of directors
1.A company may, by ordinary resolution, remove a
director, not being a director appointed by the Tribunal
under section 242, before the expiry of the period of his
office after giving him a reasonable opportunity of being
heard:
Provided that nothing contained in this sub-section shall
apply where the company has availed itself of the option
given to it under section 163 to appoint not less than two-
thirds of the total number of directors according to the
principle of proportional representation.
420
to be heard orally require that the representation
shall be read out at the meeting:
Provided that copy of the representation need not be
sent out and the representation need not be read out
at the meeting if, on the application either of the
company or of any other person who claims to be
aggrieved, the Tribunal is satisfied that the rights
conferred by this sub-section are being abused to
secure needless publicity for defamatory matter; and
the Tribunal may order the company‘s costs on the
application to be paid in whole or in part by the
director notwithstanding that he is not a party to it.
4. A vacancy created by the removal of a director under this
section may, if he had been appointed by the company in
general meeting or by the Board, be filled by the
appointment of another director in his place at the meeting
at which he is removed, provided special notice of the
intended appointment has been given under sub-section
(2).
5. A director so appointed shall hold office till the date up to
which his predecessor would have held office if he had not
been removed.
6. If the vacancy is not filled under sub-section (5), it may be
filled as a casual vacancy in accordance with the
provisions of this Act:
Provided that the director who was removed from office
shall not be re-appointed as a director by the Board of
Directors
7. Nothing in this section shall be ta
a. as depriving a person removed under this section of
any compensation or damages payable to him in
respect of the termination of his appointment as
director as per the terms of contract or terms of his
appointment as director, or of any other appointment
terminating with that as director; or
b. as derogating from any power to remove a director
under other provisions of this Act.
421
PROCEDURE OF REMOVAL OF DIRECTOR
UNDER COMPANIES ACT 2013
Provisions related to removal of a director from a Company has
been prescribed under Section 169 of Companies Act 2013
specifically provides for removal of directors of a company.
422
3. Director of a private company holding office for life on April
1, 1952 by virtue of Articles or otherwise
4. Where company availed an option to appoint not less than
2/3rd of the total number of directors under Section 265.
Procedure
SECTION 115
APPLICABLE RULES
424
(3) The company shall immediately after receipt of the notice,
give its members notice of the resolution at least seven days
before the meeting, exclusive of the day of dispatch of notice
and day of the meeting, in the same manner as it gives notice
of any general meetings.
(5) The notice shall be published at least seven days before the
meeting, exclusive of the day of publication of the notice and
day of the meeting.
REMOVAL OF DIRECTORS:
425
(3) On receipt of notice of a resolution to remove a director
under this section, the company shall forthwith send a copy
thereof to the director concerned, and the director, whether or
not he is a member of the company, shall be entitled to be
heard on the resolution at the meeting.
Provided that the director who was removed from office shall
not be re-appointed as a director by the Board of Directors.
427
Where the director sought to be removed is not given the
opportunity for making a representation which is his statutory
right under Section 284 the resolution passed for removal
would be of no effect. (Copy of the same is enclosed for your
kind perusal)
Applicability
428
becoming a Director of a company to be aware of Managerial
Renumeration, as per Companies Act, 2013.
Managerial Renumeration
429
A company can pay any renumeration by way of salary,
dearness allowance, perquisites, commission and other
allowances not exceeding 5% of its net profit for one
managerial person. If there are more than one managerial
person, then managerial renumeration cannot exceed 10% of
net profit for all of the managerial persons together.
Remuneration of directors.
430
on that basis for a period of two years after such
commencement or for the remainder of the term of office of
such director, whichever is less, but no longer.
either
or
431
Provided further that the company in general meeting may,
with the approval of the Central Government, authorise the
payment of such remuneration at a rate exceeding one per cent
or, as the case may be, three per cent of its net profits.]
(5) The net profits referred to in sub-sections (3) and (4) shall
be computed in the manner referred to in , sub-section (1).
(5B) The company shall not waive the recovery of any sum
refundable to it under sub-section (5A) unless permitted by the
Central Government.]
432
(9) The provisions of this section shall not apply to a private
company unless it is a subsidiary of a public company.
Applicability
Managerial Remuneration
433
Expenditure incurred on any obligation or service, for any
of the company’s director or manager and paid by the
company will be included.
Pay to effect any insurance on the life of, or to provide any
pension, annuity or gratuity for, any of the company’s
director and manager or his/her spouse and/or child,
Expenditure incurred on it will be included.
Expenditure incurred by the company on behalf of its
managerial person for indemnifying them against any
liability in respect of any negligence, default, misfeasance,
breach of duty or breach of trust for which they may be
guilty in relation to the company and if such a person is
proved to be guilty, the premium paid on such insurance
would be treated as part of its remuneration.
Pay for maintenance of vehicles pertaining to personal
use by the director or manager, expenditure on it will be
included.
435
accordance with the provisions of this section. Either by Articles
of the company of the company, or by a resolution or, if the
articles so require, by a special resolution, passed by the
company in general meeting. And the remuneration payable to
a director determined shall be inclusive of the remuneration
payable to him for the services rendered by him in any other
capacity.
438
THREE WAYS TO MANAGERIAL REMUNERATION:
439
MAXIMUM REMUNERATION PAYABLE BY A COMPANY
TO ITS MANAGERIAL PERSONNEL: If a Company wants
to pay remuneration in excess of the above limit payable
then a Company shall have to follow Schedule V of the
Companies Act, 2013.
442
• Long term loans and deposits repayable after one year, as
reduced by –
• The aggregate of investments (except investments made by
an investment company whose principal business is dealing in
shares, stocks, debentures or any other securities),
• Accumulated losses, and • Preliminary expenses not written
off
444
According to Departmental Clarification regarding amendments
made by the Companies (Amendment) Act, 1988 as revised
w.e.f. 1993, the Approval of Central Government shall not be
required in case of loss or inadequacy of profit during the
tenure of Managerial Person were the appointment was made
and minimum remuneration paid was strictly in accordance with
Schedule XIII of the 1956 Act.
DEVALUATION AND MANAGERIAL
REMUNERATION:
A non-resident Indian may occupy the position of managerial
person in certain companies, it has been examined by foreign
exchange, taxation, Company Law and other aspects and was
accordingly decided as a matter of policy that, in case of
devaluation of currency there was a need to compensate such
non-resident managerial persons to maintain these remittances
at the pre-devaluation level and such increase in remuneration
is allowed even if the resultant increased remuneration exceeds
the statutory limits imposed by the Companies Act.
REMUNERATION PAYABLE TO A MANAGERIAL PERSON
IN TWO COMPANIES:
PENALTY CLAUSES:
If any person contravenes the provisions of section 197, he
shall be punishable with fine which shall not be less than one
lakh rupees and may extend to five lakhs rupees If a company
or any officer of a company or any other person contravenes
any of the provisions of this Act or the rules made thereunder,
the company and every officer of the company who is in default
or such other person shall be punishable with fine which may
445
extend to ten thousand rupees, and where the contravention is
continuing one, with a further fine which may extend to one
thousand rupees for every day after the first during which the
contravention continues.
446
Corporate
Legal
Environment
PART -2
Contents
SEBI: Objectives, Status, Powers, Guidelines issued by
SEBI Regarding Disclosure and Investor Protection with
Reference to Pre-issue Obligations. IP: Limited Liability
Partnership-Incorporation, Conversion, winding up
447
Securities And Exchange Board Of India - SEBI
SEBI
449
orderly and healthy growth of securities and to provide
protection to the investors.
450
(i) To the Issuers:
Objectives of SEBI:
1. Protection:
3. Prevention of Malpractices:
To prevent trading malpractices.
4. Balancing:
Functions of SEBI
1. Regulatory Functions:
452
SEBI prohibits fraudulent and unfair trade practices.
2. Development Functions:
(c) Research:
3. Protective Functions:
453
(b) Prohibits Fraudulent and Unfair Trade Practices:
Organization Structure
Functions
455
The protection of the interests of the investors means
protecting them from the wrong information given by the
companies in their prospectus, reducing the risk of delivery
and payment, etc. Hence, the foremost objective of the SEBI
is to provide security to the investors.
(3) Checking the Insider Trading:
Insider trading means the buying and selling of securities by
those people’s directors Promoters, etc. who have some
secret information about the company and who wish to take
advantage of this secret information.
This hurts the interests of the general investors. It was very
essential to check this tendency. Many steps have been
taken to check inside trading through the medium of the
SEBI.
(4) Control over Brokers:
It is important to keep an eye on the activities of the brokers
and other middlemen in order to control the capital market.
To have a control over them, it was necessary to establish
the SEBI.
Objectives of SEBI
SEBI (Securities And Exchange Board of India) is the
regulator for the securities market in India. The
key objective of SEBI is to encourage healthy and
organised growth of the securities market in India and to
provide investor protection. It was formally set up by The
Government of India in 1988 and given statutory powers in
1992.
What are the Main Objectives of SEBI?
Investor Protection
Without active investors, the capital market is worthless. For
that reason, it is essential to safeguard the interests of the
investors. The protection of the interests of investors implies
shielding them from erroneous information provided by the
businesses, lowering the likelihood of default, etc. Thus, the
456
top objective of the SEBI (Securities And Exchange Board of
India) is to offer security to the investors.
Regulation of Stock Markets
SEBI regulates the stock markets to ensure that effective
services are offered to all the parties involved like brokers,
merchant bankers, and other intermediaries to promote
professionalism. Moreover, it also has to ensure fair
practices.
Checking for Insider Trading
Insider trading means the trading of a company’s securities
by individuals (like directors, promoters, etc) with access to
non-public information about the company. These people
have access to secret information about the company. This
harms the interests of the common investors. In a number of
countries insider trading is illegal. The reason being that it is
unfair to other investors who do not have access to the
information. Quite a few steps have already been taken to
check insider trading by SEBI.
Control over Financial Intermediaries
It is essential to keep close track of the activities of the
brokers and other intermediaries in order to regulate the
capital markets.
Since its creation, SEBI (Securities And Exchange Board
of India) has been working towards the achievement of its
objectives with commendable zeal. The advancements in the
securities markets like capitalization
requirements, margining, establishment of clearing
organizations etc. has decreased the risk of default.
In a nutshell, we can say that the objectives of SEBI are to
protect the investors, regulate stock exchanges & financial
intermediaries and encourage healthy growth and
development of capital market in India.
SEBI is identical to the U.S. SEC and is an important
element in strengthening the quality of the stock markets in
457
India. SEBI has relished good results as a regulator by
driving organized reforms. It is acknowledged for fast
movement towards making the stock markets electronic and
paperless. It has additionally been a key player in taking fast
and useful steps in light of the international turmoil and the
Satyam disaster.
In October 2011, it improved the level and amount of
disclosures to be made by Indian businesses. Considering
the worldwide crisis, it liberalised the takeover code to aid
investments. It has raised the application limit for retail
individuals to Rs 2 lakh, from Rs 1 lakh at the moment.
Functions of SEBI:
We can classify the functions of SEBI into three categories:-
1. Protective functions
2. Developmental functions
3. Regulatory functions
1. Protective Functions:
As the name suggests, the main focus of this function of SEBI
is to protect the interest of investor and security of their
investment
458
(i) SEBI checks Price Rigging:
Price Rigging means some people manipulate the prices of
securities for inflation or depressing the market price of
securities. SEBI prohibits such practice to avoid fraud and
cheating which can happen to any investor.
459
(iv) SEBI sometimes educate the investors so that become able
to evaluate the securities and always invest in profitable
securities.
2. Developmental Functions:
Under developmental categories following functions are
performed by SEBI:
460
brokers.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the
business in stock exchange. To regulate the activities of stock
exchange following functions are performed:
461
(vi) SEBI conducts inquiries and audit of stock exchanges.
Other Functions
1. Registering and regulating the working of stock brokers, sub-
brokers, share transfer agents, bankers to issue, trustees of the
trust deed, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment adviser and such
other intermediaries who may be associated with securities
markets in any manner.
6. Calling for information and record from any bank or any other
authority or boars or corporation established or constituted by
or under any Central, State or Provincial Act in respect of any
transaction in securities which are under investigation or inquiry
by the Board.
462
7. Conduct research on any matter described if any.
What is SEBI?
In 1980’s there were huge malpractices and frauds emerging in
the stock market of India. This was due to huge sudden cash
flow in the market. Everyone wanted to get rich very quickly by
finding loopholes in the system. Most prominent of these frauds
was price rigging. Insult to the injury was that there was no
authority to listen to grievances of traders and investors. This
situation created a grey-area and forced many traders and
investors shirk from the stock market. Union Government of
India noticed this decrease of figures and decided to form an
organization which can help recover the decrease in the
financial market of India.
463
Objectives of SEBI
1. Issuers of securities
2. Investor
These are the ones who keep the financial market alive. They
earn from these markets thus it is the responsibility of SEBI to
ensure that investors don’t fall prey to any manipulation or
fraud in the market.
3. Financial Intermediaries
SEBI Functions
1. Protective functions
465
defined circuit (threshold), a circuit breaker comes into action
and trading on that security is halted for some time or the
whole day.
i. SEBI guidelines
466
2.Developmental functions
3.Regulatory functions
467
Powers of Central Government (SEBI) over
Stock exchanges
1. Periodical Returns: All recognized stock exchanges have to
submit periodical returns with regard to its activities to SEBI.
468
10. When a stock exchange fails to comply with the orders of
SEBI, then the government may stipulate time for
complying with the conditions.
Powers of SEBI
470
releases its annual guidelines for the all participants of the
security market so that fair and smooth functioning of the
security market can be ensured.
Powers of SEBI
471
Chennai and Ahmedabad. SEBI has also opened local
offices in Jaipur, Bangalore, Guwahati, Bhubaneswar, Patna,
Kochi and Chandigarh.
SEBI has also commenced regulating the commodity
derivatives market under the Securities Contract Regulation
Act (SCRA) 1956 with effect from September 28 2015, and
the Forward Contracts Regulation Act (FCRA) 1952 got
replaced with effect from September 29 2015.
472
SEBI has to be responsive to 3 groups which constitute the
market:
The investor
Powers of SEBI:
473
Corporate Governance: SEBI has made a constant effort
to improve the standards of Corporate Governance in
India.
Settlement Systems
Dematerialization of securities
474
SEBI has wide powers regarding the stock exchanges and
intermediaries dealing in securities. It can ask information from
the stock exchanges and intermediaries regarding
their business transactions for inspection or scrutiny and other
purpose.
POWERS OF SEBI :
(1) Powers relating to stock exchanges and intermediaries:
SEBI has wide powers
regarding the stock exchanges and intermediaries dealing in
securities. It can ask
information from the stock exchanges and intermediaries
regarding their business
transactions for inspection/scrutiny and other purposes.
(2) Powers relating to monetary penalties: SEBI’ has been
empowered to impose
monetary penalties on capital market intermediaries and other
participants for a
range of violations. It can even impose suspension of their
registration for a short
period.
(3) Powers to initiate actions relating to functions assigned:
SEBI has a power to
initiate actions in regard to functions assigned. For example, it
can issue guidelines to
different intermediaries or can introduce specific rules for the
protection of interests of
investors.
(4) Powers relating to insider trading: SEBI has power to
regulate insider trading or
can regulate the functions of merchant bankers.
(5) Powers under Securities Contracts (Regulation) Act : For
effective regulation of
stock exchanges, the Ministry of Finance issued a Notification
on 13 September,
1994 delegating several of its powers under the Securities
Contracts (Regulation) Act
to SEBI. SEBI is also empowered by the Finance Ministry to
476
nominate three
members on the Governing Body of every stock exchange
instead of earlier practice
of government making such nominations.
(6) Powers to regulate business of stock exchanges : SEBI is
empowered to regulate
the business of stock exchanges, intermediaries associated
with the securities
market as well as mutual funds, fraudulent and unfair trade
practices relating to
securities and regulation of acquisition of shares and takeovers
of companies.
477
SEBI is managed by six members—one chairman (nominated
by Central Government), two members, (officers of Central
Ministries), one member (from RBI) and remaining two
members are nominated by Central Government. The office of
SEBI is situated at Mumbai with its regional offices at Kolkata,
Delhi and Chennai.
In 1988 the initial capital of SEBI was Rs. 7.5 crore which was
provided by its promoters (IDBI, ICICI, and IECI). This amount
was invested and with its interest amount, the day-to-day
expenses of SEBI are managed. All statutory power for
regulating Indian Capital Market are vested with SEBI itself.
Functions of SEBI:
478
(vi) Prohibiting fraudulent and unfair trade practices relating to
securities market.
SEBI Regulations:
Under the new rules every broker and sub-broker has to obtain
registration with SEBI and any stock exchange in India.
479
invests, purchased from banks, with their shares application. If
the investor is allotted shares/debentures, the required amount
is transferred in concerned company’s account by the bank
issuing ‘stock invest’.
4. Underwriters:
7. Insider Trading:
480
market and will develop a feeling of faith among investors to
promote investments in capital market in the long-run.
481
the organization. For this purpose, there are four credit
rating agencies. They are:
CRISIL
ICRA
CARE and
Duff and Phelps Credit Rating India Pvt. Ltd.
3. SEBI has taken the responsibility of disclosing fair and
adequate information for investors for the purpose
of investment decisions.
4. For the benefit of the investors, company has to disclose
its capacity utilization, adverse events and material
changes of key personnel.
5. Disclosure on market prices for listed company.
6. Arrangement for disclosing investors grievances and
redressal system.
7. Compulsory disclosure in the prospectus.
8. Contribution by promoters whose name figure in the
prospectus.
9. In case of over subscription of any company issue, SEBI
representatives will be present there to look into the
allotment process.
10. Setting up of investors grievances cell for handling
complaints of investors.
11. SEBI has right to cancel registration of any
underwriter who fails to furnish business details to SEBI.
12. SEBI has made it mandatory for Merchant bankers to
attach diligence certificate with the prospectus for
extending their accountability to the investors. The
diligence certificate gives a detailed position of the issue
of shares. Only by such a certificate, the investor can file a
case of incorrect statement in the prospectus on erring
companies.
13. There is an advertisement code by SEBI which has
to be followed by companies or investors.
14. To avoid any malpractice in allotment process, SEBI
has appointed its representatives to look into allotment
482
process which boosts the confidence of individual
investors.
15. Underwriters, registrar to issue and share transfer
agent and portfolio managers have been brought under
SEBI for the first time.
16. Even the mutual funds have been brought under
SEBI and they have to disclose NPV (Net present value)
of units every day which benefits investors.
17. For the benefit of the individual investors, a new
scheme called stock invest account has been introduced
in banks. From this stock invest account, the new issue of
shares will be applied. In that, the investor will intimate the
stock invest account to the company issuing the shares.
18. In case of allotment, the company will inform the
banker as per SEBI guidelines, and funds will be released
from the stock invest account to the bank.
483
The Primary function of Securities and Exchange Board of
India under the SEBI Act, 1992 is the protection of the
investors’ interest and the healthy development of Indian
financial markets. No doubt, it is very difficult and
herculean task for the regulators to prevent the scams in
the markets considering the great difficulty in regulating
and monitoring each and every segment of the financial
markets and the same is true for the Indian regulator also.
But what are the responsibilities of the regulators to set
the system right once the scam has taken place,
especially the responsibility of redressing the grievances
of the investors so that their confidence is restored? The
redressal of investors’ grievances, after the scam, is the
most challenging task before the regulators all over the
world and the Indian regulator is not an exception. One of
the weapons in the hand of the regulators is the collection
and distribution of disgorged money to the aggrieved
investors. SEBI had issued guidelines for the protection of
the investors through the Securities and Exchange Board
of India (Disclosure and Investor Protection) Guidelines,
2000. These Guidelines have been issued by the
Securities and Exchange Board of India under Section 11
of the Securities and Exchange Board of India Act, 1992.
485
„«Pricing By Companies Issuing Securities:-
486
of offering, veracity and adequacy of disclosure in the offer
documents.
• The liability of the merchant banker shall continue even
after the completion of issue process.
No company shall make an issue of security through a
public or rights issue unless a Memorandum of
Understanding has been entered into between a lead
merchant banker and the issuer company specifying their
mutual rights, liabilities and obligations relating to the
issue.
487
issuer company, any other direction which the Board may
deem fit and proper in the circumstances of the case.
488
been in favour of a separate regulatory agency for the
protection of small investors. The regulator had earlier
submitted a proposal to the Finance Ministry, outlining the
need for a new Act. The setting up of a comprehensive
fund for the protection of investors has also been
recommended by Mr. Mitra which we see in reality to have
been already existing today. In fact, the report has
suggested that the existing Investor Protection Fund, the
corpus of which is to come from unclaimed dividends,
should be merged with the new fund.
Conclusion
SEBI, if not 100%, than for sure it has been near to 100%
success as far as the protections of the investors are
concerned. As we have seen that via different guidelines it
had made it sure that no stone remains unturned in the
path of the mission of protecting the investors. But at
present the two greatest challenges are the scams relating
to mutual fund and the disgorgement of money.
490
for merchant bankers which bring out the requirements for
Registration of issue managers apart from prescribing the
conduct rules for them. In terms of these regulations,
issue managers are required to mainly comply with the
following requirements for registration: l Issue manager
should be a corporate body, not being a Non Banking
Financial Company (as per RBI). l He should have
necessary infrastructure like adequate office space,
equipments and manpower to effectively discharge his
activities. l He should have minimum two persons who
have the experience to conduct the business of Merchant
Banking. l He should fulfill capital adequacy requirements
i.e. should have a minimum net worth of Rs.5 crores. l He
should have professional qualification from an institute
recognized by government in Law, Finance or Business
Management. Under SEBI guidelines, a public/rights issue
cannot be floated without the association of a Merchant
Banker. Merchant banker, like pilots of air-crafts are
repositories of special skills required to execute the
management of issues. Thus, Issue manager is an
indispensable pilot. He is a financial architect as one of
the important areas of Issue Management relates to
capital structuring, capital gearing and financial planning
for the company. While performing these activities,
Merchant Bankers act as Financial Architects. He is an
Investors as well as an underwriter since Merchant
Bankers also underwrite (Annexure 1) and invest in the
Issues lead managed by them. Companies consider the
issue managers as their Co-traveller, as Merchant bankers
also sometimes act as market makers in the Issues lead
managed by them. They invest, continue to hold and offer,
buy and sell quotes for the scrips of the companyafter
listing. Thus, as market makers, their association is not
merely restricted to management of issue but continues
like co-traveller with the company. Under SEBI guidelines,
every Merchant Banker while managing a Capital Issue is
expected to perform Due Diligence (Annexure 2) and
491
furnish a Due Diligence Certificate to SEBI in a prescribed
format. Association of Merchant Bankers of India (AMBI)
has prescribed detailed due diligence guide to its
members to facilitate their performance of due diligence.
While managing issues they are required to interact and
file offer documents with SEBI. They are also required to
file a number of reports related to Issues being managed
by them, with SEBI. In a nut shell, merchant banker
necessarily revolves around SEBI while managing an
Issue and thus can be called as a satellite of SEBI.
494
Allocation of responsibilities accompanying the Due Diligence
Certificate must specifically indicate the name of the lead
manager responsible for this. 5) Preparing Prospectus Lead
manager should ensure proper disclosures to the investors,
keeping in mind their responsibilities as per Merchant Bankers
Rules and Regulations. The lead manager should, therefore,
not only furnish adequate disclosures but also ensure due
compliance with the Guidelines for Disclosure and Investor
Protection issued by SEBI which also specifies the contents of
prospectus as well as application form. The application form
should contain necessary details and instructions to applicants
to mention the: l number of application form on the reverse of
the instruments to avoid misuse of instruments submitted along
with the applications for share/debentures in public issues. l
particulars relating to savings bank/current account number and
the name of the bank with whom such account is held, to
enable the Registrars to print the said details in the refund
orders after the names of the payees. Suitable Instructions to
investors in this behalf in the application form under the head
“How to apply” should be incorporated. 6) Submission of Draft
Offer Documents The Lead Manager shall hand over not less
than 25 copies of the draft offer document to SEBI and also to
the Stock Exchange(s) where the issue is proposed to be listed.
The Lead Manager shall submit to SEBI the Draft Prospectus in
a computer floppy. Copies of the Draft Prospectus will be made
available by the LeadManagers/Stock Exchange to prospective
investors. After a period of 21 days from the date the draft
prospectus was made public, the Lead Manager shall file with
SEBI a statement giving a list of complaints received by it form
SEBI and any amendment done in the document. The Lead
Manager responsible for drafting of the offer documents shall
ensure that the terms of the issue and the offer documents,
namely, prospectus or letter of offer are in conformity with the
SEBI Guidelines for Disclosure and Investor Protection. Due
Diligence Certificate as specified by SEBI accompanies each
draft offer document submitted to SEBI. It is to be ensured that
the format of prospectus conforms to the format prescribed by
495
the Department Company Affairs. A ‘letter of offer’ is also
submitted. The format of letter of offer should conform to
disclosures prescribed in the Memorandum 2A under section
56(3) of the Companies Act, 1956, and the Guidelines issued
by the Stock Exchange Division of Ministry of Finance.
7) Launching of a Public Issue Once the legal formalities and
statutory permission for Issue of Capital are complete, the
process of marketing the Issue starts. Lead Manager has to
arrange for distribution of public issue stationery to various
collecting banks, brokers, investors, etc. Public Issue is
launched formally by conducting Press Conference, Brokers
Meets, issuing advertisements in various newspapers and
mobilising Brokers and SubBrokers. The announcement
regarding opening of Issue in the newspapers is also required
to be made by advertising (Annexure 4) in newspapers 10 days
before the Issue opens. A certificate to the effect that the
required contribution of the promoters has been raised before
opening of the Issue obtained from a Chartered Accountant is
also required to be filed with SEBI. During the currency of the
Issue, collection figures are also obtained on daily basis from
Bankers to the issue. Another announcement through the
newspapers is also made regarding the closure of the Issue. B)
Post-Issue Activities After the closure of the Issue, Lead
Manager has to manage the Post-Issue activities pertaining to
the Issue. He is to ensure the submission of the post issue
monitoring report as desired by SEBI. Finalisation of Basis of
Allotment (BOA): In case of a public offering, besides post-
issue lead-manager, registrar to the issue and regional stock-
exchange officials, association of public representative is
required to participate in the finalisation of Basis of Allotment
(Annexure 5). Data of accepted applications is finalised and
Regional Stock Exchanges are approached for finalisation of
BOA. Despatch of Share Certificates, etc.: Then follows
despatch of share certificates to the successful allottees, demat
credit, cancelled stock-invest and refund orders to unsuccessful
applicants. Issue of Advertisement in Newspapers: An
announcement in the newspaper is also made regarding BOA,
496
number of applications received and the date of despatch of
share certificates and refund orders, etc.
5.1.1 The standard of due diligence shall be such that the merchant banker shall
satisfy himself about all the aspects of offering, veracity and adequacy of
disclosure in the offer documents.
5.1.2 The liability of the merchant banker as referred to clause 5.1.1 shall continue
even after the completion of issue process.
5.2 The lead merchant banker, shall pay requisite fee in accordance with
regulation 24A of Securities and Exchange Board of India (Merchant Bankers)
Rules and Regulations, 1992 along with draft offer document filed with the Board.
5.3.1.2 The MOU shall contain such clauses as are specified at Schedule I and
such other clauses as considered necessary by the lead merchant banker and the
issuer company.
Provided that the MOU shall not contain any clause whereby the liabilities and
obligations of the lead merchant banker and issuer company under the Companies
Act, 1956 and Securities and Exchange Board of India (Merchant Bankers) Rules
and Regulations, 1992 are diminished in any way. .
5.3.1.3 The Lead Merchant Banker responsible for drafting of the offer documents
shall ensure that a copy of the MOU entered into with the issuer company is
submitted to the Board along with the draft offer document.
497
5.3.2.1 In case a public or rights issue is managed by more than one merchant
bankers the rights, obligations and responsibilities of each merchant banker shall
be demarcated as specified in Schedule II.
5.3.3.1 The Lead Merchant Banker, shall furnish to the Board a due diligence
certificate as specified in Schedule III along with the draft prospectus.
5.3.3.2 In addition to the due diligence certificate furnished alongwith the draft
offer document, the Lead Merchant Banker shall also:
i) certify that all amendments suggestion or observations made by Board have been
incorporated in the offer document;
ii) furnish a fresh "due diligence" certificate at the time of filing the prospectus
with the Registrar of Companies as per the format specified at Schedule IV.
iii) furnish a fresh certificate immediately before the opening of the issue that no
corrective action on its part is needed as per the format specified at Schedule V.
iv) furnish a fresh certificate after the issue has opened but before it closes for
subscription as per the format specified at Schedule VI.
5.3.4.1 The Lead Merchant Banker shall furnish the following certificates duly
signed by Company Secretaries or Chartered Accountants along with the draft
offer documents:
a. all refund orders of the previous issues were despatched within the
prescribed time and in the prescribed manner;
498
c the securities were listed on the Stock Exchanges as specified in the offer
documents.
5.3.5 Undertaking
5.3.5.1 The issuer shall submit an undertaking to the Board to the effect that
transactions in securities by the `promoter' the 'promoter group' and the immediate
relatives of the `promoters during the period between the date of filing the offer
documents with the Registrar of Companies or Stock Exchange as the case may be
and the date of closure of the issue shall be reported to the Stock exchanges
concerned within 24 hours of the transaction(s).
5.3.6.1 The issuer shall submit to the Board a list of persons who constitute the
Promoters� Group and their individual shareholdings.
5.4.1.1 Merchant Banker who is associated with the issuer company as a promoter
or a director shall not to lead manage the issue of the company.
Provide that the lead merchant banker holding the securities of the issuer company
may lead manage the issue;
5.4.2.1 Lead Merchant Bankers shall ensure that the number of co-managers to an
issue does not exceed the number of Lead Merchant Bankers to the said issue and
there is only one advisor to the issue.
5.4.3.1 Lead Merchant Banker shall ensure that the other intermediaries being
appointed are duly registered with the Board, wherever applicable.
499
5.4.3.1.1 Before advising the issuer on the appointment of other intermediaries, the
Lead Merchant Banker shall independently assess the capability and the capacity
of the various intermediaries to carry out assignment.
5.4.3.1.2 The Lead Merchant Banker shall ensure that issuer companies enters into
a Memorandum of Understanding with the intermediary(ies) concerned whenever
required.
5.4.3.2 The Lead Merchant Banker shall ensure that Bankers to the Issue are
appointed in all the mandatory collection centres as specified in clause 5.9.
5.4.3.3 The Lead Merchant Banker shall not act as a Registrar to an issue in which
it is also handling the post issue responsibilities.
a the Registrars to Issue registered with the Board are appointed in all public
issues and rights issues;
b in case where the issuer company is a registered Registrar to an Issue, the
issuer shall appoint an independent outside Registrar to process its issue.
The lead merchant banker shall ensure that Registrar to an issue which is
associated with the issuer company as a promoter or a director shall not act as
Registrar for the issuer company.
The designated Registrar to the Issue shall, be primarily and solely responsible
for all the activities as assigned to them for the issue management.
5.5 Underwriting
5.5.1 The Lead merchant banker shall satisfy themselves about the ability of the
underwriters to discharge their underwriting obligations.
a incorporate a statement in the offer document to the effect that in the opinion of
the lead merchant banker, the underwriters' assets are adequate to meet their
underwriting obligations;
500
b obtain Underwriters� written consent before including their names as
underwriters in the final offer document.
5.5.3 In respect of every underwritten issue, the lead merchant banker(s) shall
undertake a minimum underwriting obligation of 5% of the total underwriting
commitment or Rs.25 lacs whichever is less.
5.5.5 In respect of an underwritten issue, the lead merchant banker shall ensure that
the relevant details of underwriters are included in the offer document.
5.6.1 The draft offer document filed with the Board shall be made public for a
period of 21 days from the date of filing the offer document with the Board.
a. simultaneously file copies of the draft offer document with the stock
exchanges where the securities offered through the issue are proposed to
be listed.
5.6.3 Lead merchant banker or stock exchanges may charge an appropriate sum to
the person requesting for the copy of offer document.
5.7.1 The lead merchant banker shall ensure that for public issues offer documents
and other issue materials are dispatched to the various stock exchanges, brokers,
underwriters, bankers to the issue, investors associations, etc. in advance as agreed
upon.
5.7.2 In the case of rights issues, lead merchant banker shall ensure that the letters
of offer are dispatched to all shareholders at least one week before the date of
opening of the issue.
5.7.34 [Deleted]
5.8 No Complaints Certificate
5.8.1 After a period of 21 days from the date the draft offer document was made
public, the Lead Merchant Banker shall file a statement with the Board :
501
i) giving a list of complaints received by it,
ii) a statement by it whether it is proposed to amend the draft offer document or
not, and;
iii) highlight those amendments.
5.9.1 The minimum number of collection centres for an issue of capital shall be-
a) the four metropolitan centres situated at Mumbai, Delhi, Calcutta and Chennai
b) all such centres where the stock exchanges are located in the region in which
the registered office of the company is situated.
5.9.2 The issuer company shall be free to appoint as many collection centres as it
may deem fit in addition to the above minimum requirement.
5.10.1 The issuer company can also appoint authorised collection agents in
consultation with the Lead Merchant Banker subject to necessary disclosures
including the names and addresses of such agents made in the offer document.
5.10.3 The lead merchant banker shall ensure that the collection agents so selected
are properly equipped for the purpose, both in terms of infrastructure and
manpower requirements.
5.10.4 The collection agents may collect such applications as are accompanied by
payment of application moneys paid by cheques, drafts and stock invests.
5.10.5 The authorised collection agent shall not collect application moneys in cash.
5.10.6 The applications collected by the collection agents shall be deposited in the
special share application account with designated scheduled bank either on the
same date or latest by the next working day.
5.10.7 The application forms along with duly reconciled schedules shall be
forwarded by the collection agent to the Registrars to the Issue after realisation of
cheques and after weeding out the applications in respect of cheques return cases,
within a period of 2 weeks from the date of closure of the public issue.
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5.10.8 The applications accompanied by stockinvests shall be sent directly by the
collection agent to the Registrars to the Issue along with the schedules within one
week from the date of closure of the issue.
5.10.9 The offer documents and application forms shall specifically indicate that
the acknowledgement of receipt of application moneys given by the collection
agents shall be valid and binding on the issuer company and other persons
connected with the issue.
5.10.10 The investors from the places other than from the places where the
mandatory collection centres and authorised collection agents are located, can
forward their applications along with stockinvests to the Registrars to the Issue
directly by Registered Post with Acknowledgement Due.
5.10.11 The applications received through the registered post shall be dealt with by
the Registrars to the Issue in the normal course.
5.11.1 The Lead Merchant Banker shall ensure that in case of a rights issue, an
advertisement giving the date of completion of despatch of letters of offer, shall be
released in at least in an English National Daily with wide circulation, one Hindi
National Paper and a Regional language daily circulated at the place where
registered office of the issuer company is situated at least 7 days before the date of
opening of the issue.
5.11.2 The advertisement referred to in clause 5.11.1 shall indicate the centres
other than registered office of the company where the shareholders or the persons
entitled to rights may obtain duplicate copies of composite application forms in
case they do not receive the original application form within a reasonable time
even after opening of the rights issue.
5.11.3 Where the shareholders have neither received the original composite
application forms nor are they in a position to obtain the duplicate forms, they may
make applications to subscribe to the rights on a plain paper.
5.11.4 The advertisement shall also contain a format to enable the shareholders to
make the application on a plain paper containing necessary particulars like name,
address, ratio of right issue, issue price, number of shares held, ledger folio
numbers, number of shares entitled and applied for, additional shares if any,
amount to be paid along with application, particulars of cheque, etc. to be drawn in
favour of the company Account - Rights issues.
5.11.5 The advertisement shall further mention that applications can be directly
sent by the shareholder through Registered Post together with the application
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moneys to the company's designated official at the address given in the
advertisement.
5.11.6 The advertisement may also invite attention of the shareholders to the fact
that the shareholders making the applications otherwise than on the standard form
shall not be entitled to renounce their rights and shall not utilise the standard form
for any purpose including renunciation even if it is received subsequently.
5.11.7 If the shareholder makes an application on plain paper and also in standard
form, he may face the risk of rejection of both the applications.
5.12.1 An issuer company shall appoint a compliance officer who shall directly
liaise with the Board with regard to compliance with various laws, rules,
regulations and other directives issued by the Board and investors complaints
related matter.
5.12.2 The name of the compliance officer so appointed shall be intimated to the
Board.
ii) The application form may be stapled to form part of the Abridged Prospectus.
Alternatively, it may be a perforated part of the Abridged Prospectus.
iii) The Abridged Prospectus shall not contain matters which are extraneous to
the contents of the prospectus.
iv) The Abridged Prospectus shall be printed at least in point 7 size with proper
spacing.
v) Enough space shall be provided in the application form to enable the investors
to file in various details like name, address, etc.
5
5.14 Agreements with depositories
5.14.1 The lead manager shall ensure that the issuer company has entered into
agreements with all the depositories for dematerialisation of securities. He shall
also ensure that an option be given to the investors to receive allotment of
securities in dematerialised form through any of the depositories."
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Limited liability partnership
A limited liability partnership (LLP) is a partnership in which
some or all partners (depending on the jurisdiction) have limited
liabilities. It therefore can exhibit elements
of partnerships and corporations. In an LLP, each partner is not
responsible or liable for another partner's misconduct or
negligence. This is an important difference from the traditional
partnership under the UK Partnership Act 1890, in which each
partner has joint and several liability. In an LLP, some or all
partners have a form of limited liability similar to that of the
shareholders of a corporation. Unlike corporate shareholders,
the partners have the right to manage the business directly.[1]In
contrast, corporate shareholders must elect a board of directors
under the laws of various state charters.[1] The board organizes
itself (also under the laws of the various state charters) and
hires corporate officers who then have as "corporate"
individuals the legal responsibility to manage the corporation in
the corporation's best interest. A LLP also contains a different
level of tax liability from that of a corporation.
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LLP is, despite its name, specifically legislated as a corporate
body rather than as a partnership.
506
There are no general partners in a limited liability partnership,
but an LLP is similar to a general partnership. Each limited
liability partner contributes to the everyday business operations.
However, each partner enjoys limited personal liability for the
other partners' acts. All states allow some form of LLP, though
state laws vary. Note that some states only allow LLP status for
professional partnerships, like accountants, lawyers or
architects. In all states, limited liability partnerships can only be
formed by registering with the appropriate state office.
Let's use an example. Let's say that Ben, Bob and Brandi are
all lawyers. They decide to form a law firm as partners. They
each contribute $50,000 to form a limited liability partnership.
They will each work at the law firm and earn money for the firm.
508
or negligence. This is an important difference from that of
an unlimited partnership. In an LLP, some partners have a
form of limited liability similar to that of the shareholders of
a corporation. In some countries, an LLP must also have
at least one "General Partner" with unlimited liability.
Origin The Limited Liability Partnership was formed in the
early 1990s in United States in the consequence of the
collapse of real estate and energy prices in Texas in the
1980s. This collapse led to a large wave of bank and
savings and loan failures. Because the amounts
recoverable from the banks were small, efforts were made
to recover assets from the lawyers and accountants who
had advised the banks in the early 1980s. The reason was
that partners in law and accounting firms were subject to
the possibility of huge claims which would bankrupt them
personally, and the first LLP laws were passed to shield
innocent members of these partnerships from liability.
Apart from India Many Countries like Canada, China
Germany, Greece, Japan, Kazakhstan, Poland, Romania,
and Singapore have felt the need to recognize LLPs in
their country. Limited Liability Partnership in India Preface
In India, The Limited Liability Partnership Act, 2008 was
published in the official Gazette of India on January 9,
2009 and has been notified with effect from 31 March
2009. The first LLP was incorporated in the first week of
April 2009. Some sections relating to conversion of
existing partnership firms and private as well as public
unlisted companies into LLP have been brought into force
on 31-5-2009 At present, there are about 10,000 LLPs
formed and registered under the Limited Liability
Partnership Act. Salient features of an LLP a. An LLP is a
body corporate and legal entity separate from its partners.
It has perpetual succession. b. Being the separate
legislation (i.e. LLP Act, 2008), the provisions of Indian
Partnership Act, 1932 are not applicable to an LLP and it
is regulated by the contractual agreement between the
partners. c. Every Limited Liability Partnership shall use
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the words “Limited Liability Partnership” or its acronym
“LLP” as the last words of its name. d. It contains
elements of both ‘a corporate structure’ as well as ‘a
partnership firm structure’. e. Every LLP shall have at least
two designated partners being individuals, at least one of
them being resident in India and all the partners shall be
the agent of the Limited Liability Partnership but not of
other partners. f. LLP agreement is not mandatory but in
the absence of LLP agreement, mutual rights and
liabilities of partners shall be determined as provided
under Schedule I to the LLP Act. Advantages of forming
an LLP a. LLP form is a form of business model which is
organized and operates on the basis of an agreement. b.
Liability of partners is limited to their agreed contribution in
the LLP and no partner is liable on account of the
independent or un-authorized actions of other partners,
thus individual partners are protected from joint liability
created by another partner’s wrongful business decisions
or misconduct. c. LLP has more flexibility and lesser
compliance requirements as compared to a company. d.
Simple registration procedure, no requirement of minimum
capital, no restrictions on maximum limit of partners. e. It
is easy to become a partner or leave the LLP or otherwise.
f. It is easier to transfer the ownership in accordance with
the terms of the LLP Agreement. g. As a juristic legal
person, an LLP can sue in its name and be sued by
others. The partners are not liable to be sued for dues
against the LLP. h. No restriction on limit of the
remuneration to be paid to the partners like companies,
but the remuneration must be authorized by the LLP
agreement and it cannot exceed the limit prescribed under
the agreement. i. The Act also provides for conversion of
existing partnership firm, private limited Company and
unlisted public Company into an LLP by registering the
same with the Registrar of Companies (ROC). j. No
exposure to personal assets of the partners except in case
of fraud. Disadvantages of forming an LLP a. Any act of
510
the partner without the consent of other partners, can bind
the LLP. b. Under some cases, liability may extend to
personal assets of the partners. c. An LLP are not allowed
to raise money from Public. d. Because of the hybrid form
of the business, it is required to comply with various rules
& regulations and legal formalities. e. It is very difficult to
wind up the business in case of exigency as there are a lot
of legal compliances under Limited Liability Partnership
(Winding Up and Dissolution) Rules and it is very lengthy
and expensive procedure. How to Form of an LLP?
Any two or more persons can form an LLP. Even a limited
Company, a foreign Company, a LLP, a foreign LLP or a
non-resident can be a partner in LLP. Although, there is
no specific mention, a HUF represented by its Karta and a
Minor can also be partner in LLP. An Incorporation
document (similar to memorandum) and LLP agreement
(similar to articles of association) is required to be filed
electronically. The Registrar of Companies (ROC) shall
register and control LLPs.
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The partner’s liability in the LLP is limited to their capital
contribution.
The partners can decide the terms of partnership just like
partnership firm.
The compliances and cost of maintenance are much lower
than a Private Limited Company.
Related:6 Steps to Incorporate a Private Limited
Company
Step by Step Procedure to Register a Limited Liability
Partnership
Step 1 – Obtain Directors’ Identification Number (DIN)
Every applicant who would become the designated
partner of the LLP must have a DIN. Application for DIN
can be made online through Ministry of Corporate Affairs
(MCA) website. The applicant can submit E-form DIR-3 to
apply for DIN. A nominal fee of Rs. 100/- has to be paid
for each application. There is no physical submission, and
the entire process is online. Following are some important
points in this regard –
Proof of Identity – In case of Indian Nationals – PAN card,
while in case of Foreign Nationals – Passport
Proof of Residence – Passport, Election (Voter identity)
card, Ration card, Driving license, Electricity bill,
Telephone bill or Bank account statement. The telephone
bill, electricity bill or bank account statement should not
older than two months in the case of Indian Nationals and
one year in the case of Foreign Nationals.
Affidavit as per Annexure 1 of DIN Rules has to be made
by applicants on Stamp Papers, which shall also be
notarized.
Step 2 – Register Digital Signature of Designated
Partners
The applicants whose signatures would be placed on the
application forms must have a Class 2 or a Class 3 Digital
Signature Certificate (DSC) from an authorized certifying
agency. This DSC has to be registered on the MCA
website.
512
Step 3 – File Form 1 for Name Availability
Form 1 has to be filled for applying for Name availability.
The applicants can place 6 choices for names in the form
which should be unique. On MCA portal, one can freely
search the names of existing companies or LLPs. Details
of at least 2 proposed designated partners are required
while filing this form. This form has a nominal fee of Rs.
200/- To upload this form, one has to register on the MCA
Website. Once the approval for reservation of name is
obtained, one may proceed to next steps.
Step 4 – File Form 2 for Incorporation of LLP
This form requires details of the partners, the monetary
value of their contribution, details of nominees, details of
witnesses, their signatures, address proof of registered
office of LLP, etc. Consent letter from each individual
becoming partner in the LLP has to be attached along with
Form 2. The fee for this form is dependent on the
monetary value of contribution being made by the
partners. In case, the business belongs to a regulated
sector, then appropriate approval from the concerned
regulatory body is also required to be attached along with
this form.
Step 5 – Drafting LLP agreement
LLP agreement has to be drafted in consonance with LLP
Act. It is not mandatory to file LLP agreement immediately
at the time of registration, and it can also be filed within 30
days from the date of registration. The designated
partners will be responsible for acts of the LLP, and so it is
important to draft LLP agreement carefully. The following
are the relevant clauses that are generally added in an
LLP agreement –
Name & Object of the LLP
Registered office of the LLP
Initial contribution by the partners
Method adopted to value Non-monetary contribution
Ratio of sharing Profits and Losses
Details of the Designated Partners
513
Remuneration payable to partners
Interest, if any, payable on Capital contributed.
Maintenance of Accounts
Rights & duties of the partners
Rights & functions of the designated partners
Goodwill and indemnity clause
Procedure for change in name
Procedure for appointment of auditor
Procedure for admission of New Partner, Meetings,
Cessation of existing Partners.
Process for winding up of LLP, amending the LLP
agreement, etc.
The extent of liability of LLP and of partners in LLP.
Step 6 – File Form 3 for LLP Agreement
The LLP agreement has to be uploaded. On approval of
the same, the LLP is legally incorporated, and the
registration procedure is completed.
Incorporation of an LLP
The LLP Act, 2008 inter area, provides for incorporation
of LLP's as a business vehicle. Two or more individuals
or organizations, by subscribing their names to an
"Incorporation document" and by giving details
pertaining to the name of LLP, proposed business,
address of the registered office, name, address &
photographs of the proposed partners of the LLP, and
name and address of the persons who are named as
"Designated Partners" for compliance with the legal
provision of the Act. Such an LLP can be formed to
carry on any lawful business and to make profits.
514
The incorporation document together with the
partnership agreement, if any, between the partners
should be delivered to the Registrar of Companies
(ROC). A statement of compliance with the LLP Act
duly signed by an Advocate or Company Secretary or
Chartered Accountant, who is in whole time practice is
also required to be delivered to the ROC.
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LLP is one of the easiest form of business to incorporate and
manage in India. With an easy incorporation process and
simple compliance formalities, LLP is preferred by
Professionals, Micro and Small businesses that are family
owned or closely-held. Since, LLPs are not capable of issuing
equity shares, LLP should be used for any business that has
plans for raising equity funds during its lifecycle.
IndiaFilings is the market leader in LLP registration services in
India. In addition to LLP registration, IndiaFilings also offers a
variety of business registration services like private limited
company registration, one person company registration, Nidhi
Company Registration, Section 8 Company Registration,
Producer Company Registration and Indian Subsidiary
registration. The average time taken to complete a LLP
registration is about 15 - 20 working days, subject to
government processing time and client document submission.
Get a free consultation on LLP registration and business setup
in India by scheduling an appointment with an IndiaFilings
Advisor.
Reasons to Register a Limited Liability Partnership
516
The ownership of a LLP can be easily transferred to another
person by inducting them as a Partner of the LLP. LLP is a
separate legal entity separate from its Partners, so by changing
the Partners, the ownership of the LLP can be changed.
Incorporation of an LLP
517
Limited Liability Partnerships have gotten quite popular in the
last few years. In this article, we will focus on the process and
steps along with the elements essential for the incorporation of
an LLP (limited liability partnership). The guidelines are
provided by the Limited Liability Partnership Act (LLP Act),
2008.
Elements Essential for the Incorporation of an LLP
According to the LLP Act, 2008, the following elements are
essential for the incorporation of an LLP in India:
Complete and submit the Incorporation document in the
prescribed form, with the Registrar electronically.
Have at least two partners, either individual or body
corporate
Have a registered office in India for sending and receiving
communication
Appoint at least two individuals as designated partners.
They will be responsible for doing all acts, matters, and
things as required to be done by the LLP. Also, the
designated partners should be resident in India.
Each designated partner should hold a Designated
Partner Identification Number (DPIN) allotted by the
Ministry of Corporate Affairs (MCA).
Execute the agreement between the partners or between
the LLP and its partners. Further, if an agreement is not
present, the provisions in the First Schedule of the LLP
Act, 2008 are applied.
Name of the LLP. It is important to note that the name
should be distinct. The LLP cannot have a name which
another LLP or Partnership firm or Company is currently
using.
Process for the Incorporation of an LLP
The following things need to be ensured for the
incorporation of LLP:
Appoint/nominate partners and designated partners.
518
Obtain the DPINs and Digital Signature Certificates
(DSCs)
Register a unique LLP name (applicant can indicate up to
6 choices)
Draft the LLP Agreement
File the required documents, electronically
Apply for the Certificate of Incorporation along with LLPIN
(Limited Liability Partnership Identification Number)
The contents of an LLP agreement
Name of the LLP
Names and addresses of the partners and designated
partners
The form of contribution and interest on contribution
Profit sharing ratio
Remuneration of partners
Rights and duties of partners
The proposed business
Rules for governing the LLP
Steps for the Incorporation of an LLP
Reserve the name of the LLP. Applicant files e-Form 1 to
ascertain the availability and register the name of the LLP.
Once the Ministry approves the name, it reserves it for the
applicant for a period of 90 days. Also, if the LLP is not
incorporated within that time frame, the reservation is
removed and the name is made available to other
applicants.
Incorporation of a new LLP. Applicant files e-Form 2 which
contains the details of the proposed LLP along with details
of the partners and designated partners
Consent of the partners and designated partners to act in
the said role.
File the LLP Agreement with the Registrar within 30 days
of incorporation of the LLP. Applicant files e-Form 3.
519
According to Section 23 of the LLP Act, 2008, execution of
LLP Agreement is mandatory.
On obtaining an approval of the LLP Agreement, the
process of Incorporation of LLP is complete.
Solved Question for You
Q1. What is the mandatory requirement with respect to
designated partners for the incorporation of LLP?
Answer: The applicant has to appoint at least two
individuals as designated partners. They should be
resident in India. Also, they are responsible for doing all
acts, matters, and things as per the requirements of an
LLP.
520
To register a LLP in India, the following documents are
required:
PAN Card of the Partners
Address Proof of the Partners
Utility Bill of the proposed Registered Office of the LLP
No-Objection Certificate from the Landlord
Rental Agreement Copy between the LLP and the
Landlord
The PAN Card of the Partners and the Address Proof the
the Partners is required to start the LLP formation
procedure. The documents pertaining to the Registered
Office of the LLP can be submitted after obtaining name
approval for the LLP from the Registrar of Companies.
Step #1: Obtain Digital Signature Certificate (DSC) for
the Partners
For obtaining DIN (Director Identification Number or
Designated Partner Identification Number) for the Partners
of the LLP, a Digital Signature Certificate (DSC) is
required. Therefore, a Digital Signature Certificate for the
proposed Partner must first be obtained. The DSC can be
obtained within one day of filing of the DSC Application
with IndiaFilings. Digital Signatures usually have a validity
of one or two years and can be used during that time for
filing of Income Tax documents online or Ministry of
Corporate Affairs (MCA) documents online.
Step #2: Obtaining Director Identification Number for
the Partners
Once, Digital Signatures are obtained for the Partners,
application for Director Identification Number (DIN) can be
made. DIN registration usually happens immediately and
in rare cases, additional documents must be submitted to
the DIN Cell for approval of the DIN application. DIN and
DPIN are synonymous and can be used interchangeably.
521
Further, once a DIN is obtained, there are no renewals
required and each person can have only one DIN.
Step #3: Obtaining Name Approval
Once two DIN’s are available, application for reservation
of name can be made to the MCA. It is important for the
promoters to keep in mind the LLP Naming
Guidelines and suggest appropriate names for the LLP in
the application, to ensure a speedy approval. Once,
the application for reservation of name is submitted to the
MCA, it will be processed by the Registrar of Companies
(ROC) in the State of Incorporation. The processing time
for name approval application differ from ROC to ROC
based on the workload.
Step #4: Filing for Incorporation
Once the name approval application is accepted by the
MCA, a LLP name approval letter will be issued to the
proposed Partners. The Partners then have 60 days to file
the required incorporation documents and register
the LLP. In case the LLP is not formed within 60 days of
name approval letter, the approval for name for the LLP
would have to be re-obtained.
While filing for formation of LLP, the documents showing
possession of the registered office would be required.
Once prepared, the registered office related documents
along with the signed subscribers sheet must be filed with
the MCA for registration of the LLP.
If the application for LLP Registration is acceptable, the
Registrar would issue the incorporation certificate. Once,
the incorporation certificate is issued, the LLP will be
considered to be registered and application for PAN for
the LLP can be made. The Partners of the LLP then have
30 days time to file the Partnership Deed of the LLP with
the MCA. In case, the LLP Partnership Deed is not filed
within 30 days, a fine will be applicable.
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Limited Liability Partnership (LLP) Registration in
India
Updated on Oct 01, 2018 - 05:08:25 PM
Limited Liability Partnership (LLP) has become a
preferable form of organization among entrepreneurs as it
incorporates the benefits of both partnership firm and
company into a single form of organization.
Features of LLP
Process of Registration as LLP
Documents required to register as LLP
Cost Involved in Registration Process
Time Involved In Registration Process
Features of LLP
It has a separate legal entity just like companies
The liability of each partner is limited to the contribution
made by partner
The cost of forming an LLP is low
Less compliance and regulations
No requirement of minimum capital contribution
The minimum number of partners to incorporate an LLP is
2. There is no upper limit on the maximum number of
partners of LLP. Among the partners, there should be
minimum two designated partners who shall be
individuals, and at least one of them should be resident in
India. The rights and duties of designated partners are
governed by the LLP agreement. They are directly
responsible for the compliance of all the provisions of LLP
Act 2008 and provisions specified in LLP agreement.
If you want to start your business with Limited Liability
Partnership, then you must get it registered under Limited
liability Partnership Act, 2008.
Form name Form purpose
523
RUN – LLP (Reserve Form for reserving a name for the
Unique Name-Limited LLP
Liability Partnership
524
Limited Liability Partnership company registration with
ClearTax, up to 2 DINs are covered in the plan & there is
no need to apply for DIN separately.
Step 2: Director Identification Number (DIN)
You have to apply for the DIN of all the designated
partners or those intending to be designated partner of the
proposed LLP.
The application for allotment of DIN has to be made in
Form DIR- 3. You have to attach the scanned copy of
documents (usually Aadhaar and PAN) to the form. The
form shall be signed by a Company Secretary in full- time
employment of the company or by the Managing
Director/Director/CEO/CFO of the existing company in
which the applicant shall be appointed as a director.
Step 3: Reservation of Name
LLP-RUN(Limited Liability Partnership-Reserve Unique
Name) is filed for the reservation of name of proposed
LLP which shall be processed by the Central Registration
Centre under Non-STP. But before quoting the name in
the form, it is recommended that you use the free name
search facility on MCA portal. The system will provide the
list of closely resembling names of existing
companies/LLPs based on the search criteria filled up.
This will help you in choosing names not similar to already
existing names. The registrar will approve the name only if
the name is not undesirable in the opinion of the Central
Government and does not resemble any existing
partnership firm or an LLP or a body corporate or a
trademark. The form RUN-LLP has to be accompanied
with fees as per Annexure ‘A’ which may be either
approved/rejected by the registrar. A re-submission of the
form shall be allowed to be made within 15 days for
rectifying the defects. There is a provision to provide for 2
proposed names of the LLP.
Step 4: Incorporation of LLP
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1. The form used for incorporation is FiLLiP(Form for
incorporation of Limited Liability Partnership) which shall
be filed with the Registrar who has a jurisdiction over the
state in which the registered office of the LLP is situated.
The form will be an integrated form.
2. Fees as per Annexure ‘A’ shall be paid.
3. This form also provides for applying for allotment of DPIN,
if an individual who is to be appointed as a designated
partner does not have a DPIN or DIN.
4. The application for allotment shall be allowed to be made
by two individuals only.
5. The application for reservation may be made through
FiLLiP too.
6. If the name that is applied for is approved, then this
approved and reserved name shall be filled as the
proposed name of the LLP
Get your business registered under LLP
◉ Registration done in 15 working days ◉ Completely
online process
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Step 5: File Limited Liability Partnership Agreement
LLP agreement governs the mutual rights and duties
amongst the partners and also between the LLP and its
partners.
LLP agreement must be filed in form 3 online on MCA
Portal.
Form 3 for LLP agreement has to be filed within 30 days
of the date of incorporation.
The LLP Agreement has to be printed on Stamp Paper.
The value of Stamp Paper is different for every state.
Documents required to register as LLP
Here is a list of documents required for registration:
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Documents of Partners:
PAN Card/ ID Proof of the Partners
Address Proof of the partners
Residence Proof of Partners
Photograph
Passport (in case of Foreign Nationals/ NRIs)
Documents of LLP:
Proof of Registered Office Address
Digital Signature Certificate
A. Documents of Partners
1. PAN Card/ ID Proof of Partners – All the partners are
required to provide their PAN at the time of registering
LLP. PAN card acts as a primary ID proof.
2. Address Proof of Partners – Partner can submit
anyone document out of Voter’s ID, Passport, Driver’s
license or Aadhar Card. Name and other details as per
address proof and PAN card should be exactly same. If
spelling of own name or father’s name or date of birth is
different in address proof and PAN card, it should be
corrected before submitting to RoC.
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3. Residence Proof of Partners – Latest bank statement,
telephone bill, mobile bill, electricity bill or gas bill should
be submitted as a residence proof. Such bill or statement
shouldn’t be more than 2-3 months old and must contain
the name of partner as mentioned in PAN card.
4. Photograph – Partners should also provide their
passport size photograph, preferably on white
background.
5. Passport (in case of Foreign Nationals/ NRIs) – For
becoming a partner in Indian LLP, foreign nationals and
NRIs have to submit their passport compulsorily. Passport
has to be notarized or apostilled by the relevant authorities
in the country of such foreign nationals and NRI, else
Indian Embassy situated in that country can also sign the
documents.
Foreign Nationals or NRIs have to submit a proof of
address also which will be a driving license, bank
statement, residence card or any government issued
identity proof containing the address.
If the documents are in other than the English language, a
notarized or apostilled translation copy will be also be
attached.
B. Documents of LLP
1. Proof of Registered Office Address
Proof of registered office has to be submitted during
registration, or within 30 days of its incorporation.
If the registered office is taken on rent, rent agreement
and a no objection certificate from the landlord has to be
submitted. No objection certificate will be the consent of
the landlord to allow the LLP to use the place as
‘registered office’.
Besides, anyone document out of utility bills like gas,
electricity, or telephone bill must be submitted. The bill
should contain complete address of the premise and
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owner’s name and the document shouldn’t be older than 2
months.
2. Digital Signature Certificate
One of the designated partners needs to opt for a digital
signature certificate also since all documents and
applications will be digitally signed by the authorized
signatory.
Cost Involved in Registration Process
Below is the government fees for filing forms:
Step Cost
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LLP formation starting from obtaining DSC to Filing Form
3 takes approximately 15 days subject to availability of all
the documents.
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530
List of certified liabilities and assets.
After the successful filing of all the documents along with
prescribed fees, verification will take place. After which, a
certificate will be issued to you. Hence, completing the
conversion of your partnership into a Limited Liability
Partnership successfully.
Conversion of Partnership into a Private Limited
Company:
When you want to convert your Partnership
registration into a Pvt limited company you need to
ensure that you have:
A minimum of seven partners.
A minimum share capital of Rupees one lakh.
The authorized capital should be divided into units or
shares.
Object Clause of your Memorandum of Association (which
will be drafted while conversion) should permit the
company to be formed to acquire the assets and liabilities
of the existing firm.
Other than that, you will again require DSC (Digital
Signature Certificate) for the directors as well as DIN
(Director Identification Number).
Memorandum of Association and Articles of
Association has to be drafted. And the application for
name approval is to be filed. The name will bear Private
Limited Company at the end.
Filing of form 18, 37, 32, 39, 40 and 41 along with identity
proof, address proof of registered office and a No-
objection certificate from the landlord.
All these documents are filed along with prescribed fees,
upon which a certificate is issued. Hence, completing the
conversion successfully.
Conversion to an LLP
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This is a unique feature of the LLP Act. It provides for
conversion of a firm, a private company and unlisted
public company into a LLP, in accordance with the
procedure laid down in the Second, Third & the Fourth
schedules to the LLP Act. The advantages of
conversion, lies in the organisation flexibility for each of
it partners to carry on the business of LLP as its agent
and not the agent of other partners. The equation of
partners with LLP is on one to one basis
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The effects of registration into an LLP are as under:-
Other matters
Conclusion
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In the company form of business organisation, members
can transfer their shares only through court order once it is
decided that the company is to be wound up whereas, in
an LLP, transfer of shares is possible.
In companies, it is essential that during the stage of
incorporation, the minimum capital contribution is Rs.
1,00,000 in the case of private companies and Rs.
5,00,000 in the case of public companies. Whereas, in the
case of LLP, there is no minimum capital requirement for
incorporating a limited partnership.
According to the Companies Act, 2013 companies are
bound by the obligation of maintaining a statutory record.
There is no such obligation or requirement of maintenance
of statutory records. Moreover, at the end of financial
periods, it is compulsory to conduct audits. Whereas LLPs
have to conduct audits only if their contribution exceeds
40 lakhs or their contribution is above 25 lakhs.
Other benefits in the Income tax include no payment of
taxes like dividend distribution tax, MAT tax and income
tax which is due to interests and remuneration payable to
partners as salary payable to directors.
Cost to be incurred in case the company gets
converted into an LLP
In case if a company gets converted into an LLP, then
following are the cost that the company shall have to bear:
1. If any of the conditions mentioned under (i) to (vi) of
clause (xiiib) of section 47 are not met then the
Unabsorbed Depreciation and Accumulated Loss will not
be carried over;
2. Payment of stamp duty, if any, in case of transfer of
immovable assets;
3. Cost related to transfer of brand name, patent, trademark;
4. Cost of formation of LLP;
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5. Since LLPs do not have a concept of MAT, therefore, the
amount of the credit of MAT will have to be given up. The
succeeding LLP shall not be entitled to hold the preceding
company’s credit of MAT.
Points to be ensured before getting converted into
LLP
1. The company that wishes to be converted into an LLP
shall have its shareholders as its partners and no one
else.
2. Income tax returns have to be up to date as per the
provisions of Income Tax Act, 1961
3. Every designated partner shall have to obtain a DIN from
the Central Government.
4. Since all the forms that need to be filled up for the purpose
of establishing an LLP are to be filled electronically, it
becomes impossible to sign them manually. In such a
case, the designated partners are required to obtain a
Digital Signature Certificate from government recognised
DSAs
5. There should be no proceeding against the company in
any court or tribunal;
6. In cases where the company has certain creditors, then
obtaining an NOC from all unsecured creditors;
7. Subsistence of any conviction, rule or order by a court or
tribunal should be checked.
Process of Conversion of a Company into an LLP
Following are the steps that need to be followed for
converting a company into LLP:
1. Obtain DIN – DIN acronyms for Director Identification
number. Earlier instead of DIN, DPIN was to be obtained.
Nowadays DIN is required to be obtained by those
designated partners who do not possess one.
2. Board Meeting – The second step for conversion of a
company into LLP is that a meeting of all board of
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directors is to be called for. In the meeting, a resolution for
the conversion of the company into LLP is to be passed.
Apart from this, another resolution that needs to be
passed is for authorising any director to apply for the
name of LLP. After passing of such a resolution, an
application for name availability is to be filled i.e. e-form
LLP- 1 with the Registrar of Companies. Along with such
application, the board resolution regarding conversion also
needs to be attached.
3. After submission of such an application, the approval
certificate needs to be obtained from the Registrar of
Companies.
4. Drafting the LLP agreement – An LLP agreement needs
to be drafted. A basis contents in each LLP agreement
contain Name of the LLP, Name of the partners and
designated partners, form of contribution, profit sharing
ratio, rights, duties and liability of each of the partners,
proposed business activity that the partners would carry
on and the rules that the shall govern the LLP. All these
details need to be filled in e-form 3 within 30 days of
incorporation. It is desirable that all the partners sign this
agreement in order to avoid disputes.
5. Filling of Incorporation Documents – For the purposes
of incorporation, e-form 2 is to be filled up by attaching
documents like proof of address of registered office of
LLP, subscription sheet signed by the partners, notice of
consent and appointment of designated partners along
with their personal details and the detail of LLP.
6. Filling of application for Conversion – E-Form 18 needs
to be filled with the registrar of companies. Following
attachments need to be put with this form:
Statement of shareholders.
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Statement of Assets and Liabilities of the company duly
certified as true and correct by the auditor.
List of all the Secured creditors along with their consent to
the conversion.
Approval of the governing council (In case of
professional private limited companies)
NOC from Income Tax authorities and Copy of
acknowledgement of latest income tax return.
Approval from any other body/authority as may be
required.
Particulars of pending proceedings from any
court/Tribunal etc
7. After filling of all the above documents and approval of the
same from the registrar and ministry, the registrar would
issue a certificate of registration in form no. 19 for the
conversion. This certificate shall be the conclusive
evidence of conversion into LLP.
8. Filling of e-form 14 – After receiving the certificate of
conversion, within 15 days of the date of registration, the
partners need to intimate the registrar of companies about
the acceptance. The attachments to be made with e- form
14 are a copy of the certificate of incorporation of
formation of LLP and copy of incorporation.
How to Close a LLP – Winding Up of LLP
LLP or Limited Liability Partnership is a new form of
business entity introduced in India through the LLP Act,
2008. LLP enjoys audit exemption, if the annual turnover
of the LLP is less than Rs.40 lakhs and/or the capital
contribution is less than Rs.25 lakhs. This feature has
made LLP popular amongst many entrepreneurs.
However, due to a number of reasons, it may be
necessary to close a LLP or windup a LLP. In this article,
we cover the procedure for voluntary wingding up of LLP
in India.
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LLP Winding up Overview
A LLP winding up can be initiated voluntarily or by a
Tribunal. If a LLP is to initiate winding up voluntarily, then
the LLP must pass a resolution to wind up the LLP with
approval of at least three-fourths of the total number of
Partners. If the LLP has lenders, secured or unsecured,
then the approval of the lenders would also be required for
winding up of the LLP.
Winding up of LLP by Tribunal
Winding up of LLP can be initiated by a Tribunal for the
following reasons:
1. The LLP wants to be wound up.
2. There are less than two Partners in the LLP for a period of
more than 6 months.
3. The LLP is not in a position to pay its debts.
4. The LLP has acted against the interests of the sovereignty
and integrity of India, the security of State or public order.
5. The LLP has not filed with the Registrar Statement of
Accounts and Solvency or LLP Annual Returns for any
five consecutive financial years.
6. The Tribunal is of the opinion that it is just and equitable
that the LLP should be wound up.
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Once, the affairs of the LLP is fully wound up, the LLP
Liquidator would prepare a report stating the manner in
which the winding up of LLP has been conducted and
property of the LLP has been disposed off. If two thirds of
the number of Partners and Creditors in value are satisfied
with the winding up report prepared by the LLP Liquidator,
then a resolution for winding up of accounts and
explanation for dissolution must be passed by the
Partners.
The LLP Liquidator must then send the LLP winding up
report along with the resolution to the Registrar and file an
application with the Tribunal.
Dissolution of the LLP
If the Tribunal is satisfied that procedures have been
followed in winding up of the LLP, then the Tribunal would
pass an order that the LLP shall stand dissolved. The LLP
Liquidator is required to file the copy of the order from the
Tribunal with the Registrar for winding up of LLP. The
Registrar on receiving the copy of the order passed by the
Tribunal for winding up of LLP would publish a notice in
the Official Gazette that the LLP stands dissolved.
For more information about Private Limited Company
Registration, LLP Registration or LLP Winding Up,
visit IndiaFilings.com or talk to an IndiaFilings
Business Advisor.
LLP Winding Up
A LLP winding up can be initiated voluntarily or by striking
off or by a Tribunal. If a LLP is to initiate winding up
voluntarily, then the LLP must pass a resolution to wind up
the LLP with approval of at least three-fourths of the total
number of Partners. If the LLP has lender's, secured or
unsecured, then the approval of the lenders would also be
required for winding up of the LLP.
To begin the process for winding up of LLP, a resolution
for winding up of LLP must be passed and filed with the
542
Registrar within 30 days of passing of the resolution. On
the date of passing of resolution of winding up of LLP, the
voluntary winding up shall be deemed to commence.
IndiaFilings can help you wind up your LLP quickly and
easily.
Voluntary Winding Up
LLPs can also be wound-up easily with the approval of
3/4th of the partners. To start the liquidation process for a
LLP, a greater part of the designated partners, will have to
make a declaration that the LLP has no debt or that it will
be competent to pay the debts in full within a period of not
more than 1 year from the start of winding up. Further, the
LLP partners must declare that the LLP is not being
wound up to defraud any person or persons. This
declaration for winding up of the LLP must be prepared
along with a statement of assets and liabilities until the
most recent practicable date right before the making of
declaration for winding up. A valuation of the assets
related to the LLP prepared by a valued must also be
submitted, if there are assets in LLP. Voluntary winding up
will be deemed to start on the date of passing of resolution
for the reason of voluntary winding up. (Know more)
Striking Off
The Ministry of Corporate Affairs has recently amended
Limited Liability Partnership Rules, 2009 by introducing
the Limited Liability Partnership (Amendment) Rules, 2017
with effect from 20th May, 2017. With this amendment,
LLP Form 24 has been introduced by the MCA and it is
now possible to easily close a LLP by making an
application to the Registrar for striking off name of LLP.
Before the introduction of the Limited Liability Partnership
(Amendment) Rules, 2017, the procedure for winding up a
LLP used to be long and cumbersome. However, with the
introduction of LLP Form 24, the procedure has been
made easy and simple. (Know more)
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Winding Up by Tribunal
Winding up of LLP can be initiated by a Tribunal for the
following reasons:
1. The LLP wants to be wound up.
2. There are less than two Partners in the LLP for a period of
more than 6 months.
3. The LLP is not in a position to pay its debts.
4. The LLP has acted against the interests of the sovereignty
and integrity of India, the security of State or public order.
5. The LLP has not filed with the Registrar Statement of
Accounts and Solvency or LLP Annual Returns for any
five consecutive financial years.
6. The Tribunal is of the opinion that it is just and equitable
that the LLP should be wound up.
(Know more)
Reasons to Wind Up LLP
Avoid Compliance
A LLP is a legal entity and a juristic person requiring
regular maintenance of compliance throughout its
lifecycle. LLP winding up can be used close a LLP that is
not active and avoid compliance responsibilities.
Avoid Fines
A LLP that doesn't file its compliance on time incurs fines
and penalty, including debarment of the Partners from
starting another LLP or Company.
Low Cost
LLPs can be wound up easily through IndiaFilings for just
Rs.15899. On the other hand, a dormant LLP or non-
compliant LLP could potentially acquire more penalty, if
compliance is not maintained every year.
Easy to Close
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The formalities for winding up of a dormant LLP are
relatively simple and easy to complete. Hence, its best to
close an inactive LLP at the earliest.
Easy Process
The Ministry of Corporate Affairs has simplified the
process for liquidation or winding up of LLP through
various initiatives. Hence, akin to incorporation, a LLP can
be wound up easily with minimal procedural requirement.
546
5. Tribunal is of the opinion that it is just and equitable that
the LLP be wound up.
LLP Winding-up Procedure
1. The petition or an application for winding up of an LLP
could be filed with the tribunal by the LLP itself or by any
of its partner(s) or creditor(s) or by the Registrar or by
Central Government or by a person authorized by Central
Government.
2. The tribunal is empowered with the special powers that
can be exercised by the Tribunal as per his discretion on
presentation of the petition.
3. Once the petition for winding up of the LLP, has been
received by the Tribunal, it fixes a date for its hearing and
issued notice to the LLP to appear and justify its position
and the Tribunal gives a public notice in order to inform
everybody, particularly, the creditors and the partners,
about winding up so that their concerns or objections
could also be considered.
4. Once the Tribunal passes and communicates the
Winding-up order to the firm, the following consequences
will follow:
a) The petitioner and the LLP shall ensure that a certified copy
of the winding up order has been filed with the ROC so that the
Registrar could notify the fact in the Official Gazette.
b) The winding-up order serves as a notice of discharge to all
the employees and officers of the concerned Limited Liability
Partnership.
c) No suit or legal proceedings can be commenced against the
LLP without the leave of the court. Even a suit, which is
pending against the LLP at the date of winding up the order,
cannot be preceded unless the permission of Tribunal is
obtained.
Effect of Winding Up of LLP
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Once the winding up process has begun, a company can no
longer pursue its business, except in order to complete the
liquidation and distribution of its assets. At the end of the
process, the company will be dissolved and will effectively
cease to exist.
Declaration of Dissolution of the LLP by the Registrar
The Registrar may, by notice in writing, declare that the
LLP is dissolved if:
1. There is no objection received from any partner or creditor
of the LLP;
2. The objection to the proposed dissolution of LLP was
subsequently withdrawn; or
3. The Registrar is the view that the objection to the
proposed dissolution is without justification.
The declaration of dissolution of the LLP shall only take effect
upon such notification is given to the Registrar and the LLP
cannot be used by the court after liquidation.
Winding up or closing a limited liability partnership (LLP)
company in India is to be made strictly as per the provisions
given in the Sections 63-65 of the Indian LLP Act of 2008.
Again, this winding up of an LLP may be voluntarily or
compulsorily (by a Tribunal or Court).
In the voluntary winding up, the partners of the LLP themselves
decide that the business operations of their firm should be
stopped, closing the LLP formally. On the other hand, an LLP
may be wound up compulsorily under certain circumstances by
the order of a tribunal (an institution with the authority to judge
and intervene or determine claims) or court. The forced winding
up of an LLP may be caused by any of the following reasons:
The LLP desires to be wound up
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Failure of the LLP in filing the Statement of Accounts and
Solvency or the Annual Returns with the Registrar for any
Five consecutive Financial Years.
The LLP being against the integrity and sovereignty of
India, or the security of State or Public Order.
Rigorous order of a tribunal that the LLP must be wound
up based on the specified just and equitable reasons.
What Documents are Required to Close a Limited Liability
Partnership
The various documents required to close a limited liability
partnership firm in India, are the following in general:
A Board Resolution in favor of winding up
Indemnity Bonds
549
has no debts, or if there are some debts, the LLP is able
to pay off those in full through sale of its assets, in a
maximum of one year period, counted from the date of the
commencement of winding up. A copy of the resolution for
winding up is to be submitted to the Registrar within 30
Days of passing the same.
Within Two Weeks of the receipt of the consent of
sufficient creditors in favor of the resolution of winding up,
the LLP is required to advertise its notice of resolution in a
newspaper which is widely read in the region where the
registered office of the LLP is located.
Within 30 days of receiving creditors' consent, the
designated partners are then required to appoint a
Liquidator to carry out the necessary processes of winding
up, along with maintaining proper books of accounts.
Then, the Liquidator is required to submit the report
together with the resolution to the Registrar, and file an
application for winding up to the Tribunal. Submission of
other documents mentioned above, is also to be made.
In case the Tribunal gets satisfied with the processing of
winding up and necessary accounts, then it will pass the
permission for dissolution of the LLP. Then, the liquidator
needs to file the order of Tribunal with the Registrar along
with an application requesting winding up. Finally, the
Registrar will publish a notice in the Official Gazette
regarding the dissolution of the said LLP.
LLP Form 24 – Easily Close a LLP
The Ministry of Corporate Affairs has recently amended Limited
Liability Partnership Rules, 2009 by introducing the Limited
Liability Partnership (Amendment) Rules, 2017 with effect from
20th May, 2017. With this amendment, LLP Form 24 has been
introduced by the MCA and it is now possible to easily close a
LLP by making an application to the Registrar for striking off
name of LLP. In this article, we look at LLP Form 24 and the
procedure for striking off name of LLP in detail.
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Winding Up a LLP
The penalty for LLPs defaulting in filing of any statutory return
is Rs.100 per day, without any maximum limit. Hence, its is
often best to windup dormant LLPs so that there is no
requirement to file LLP Form 11, LLP Form 8 and Income Tax
Return for the LLP each financial year to maintain compliance
and avoid penalty.
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account in the name of the LLP must be obtained from the
Bank.
Further, the LLP Partners must also declare that the LLP has
no liabilities and indemnify any liability that may arise even after
striking off its name from the Register. The liability of the
Partners would not be extinguished even after closure of a LLP
while using Form LLP 24.
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