NATURE AND KINDS OF COMPANIES Company: In a voluntary association of persons formed for the purpose of doing business, having a distinct distinct name and limited limited liability. liability. It is a juristic juristic person having having a separate separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession (Soloman vs saloman & co Ltd [1897]) AC 22. Salient Features of a Company: 1.
Separate Separate Legal Entity: A compa company ny is a dis distin tinct ct legal legal entity entity differen differentt from from its members or shareholders. The company may hold property, employ persons, sue or be sued in its own name.
2.
Limited Liability of Members: The Members: The liability of the members of a company is limited to the amount remaining unpaid on the shares unpaid by them. Thus, in case of fully paid up shares, the members cannot be asked to pay any further, if the company goes into liquidation. liquidation. 3.
Perpetual Succession: A company company enjoys enjoys continuous continuous existence, existence, members members may come and go, the shareholder may change on account of transfer or transmission of shares, but the company survives, till wounded up.
4.
Common Common Seal: Seal: A comp compan any y has has a comm common on seal seal whic which h is the the sign signat atur ure e of that that company. The company’s seal is affixed on all documents executed for and on its behalf.
5.
Separate Property Ownership: Ownership : A company may own and dispose its property on its own name. The property of the company is not the property of the shareholders; shareholders shareholders are not co-owners of the company. Shares: Shares held in a company are movable property and are 6. Transferable Shares: freely transferable. transferable. A private company may impose certain restrictions on the transfer of its shares. 7.
Capacity To Sue and Being Sued : A company is capable of entering into contracts and enforcing its rights under the contracts. It can sue and be sued in its own name.
TYPES OF COMPANIES: Private Company: A private company is one which by its Articles: 1. Restrict Restricts s the right right to transf transfer er its its shares. shares. 2. Limits Limits the number number of members to fifty, fifty, excludin excluding g the employees employees and ex employe employees, es, 3. Restricts the subscription of shares shares or debentures debentures from general public [sec-3 [iii]]. Public Company: Company : A public company is one, which is not a private company. Thus, if the articles do not provide the aforesaid three restrictions, it shall be a public company. A public company requires a minimum seven number and there is no limit on the maximum members. The shares and debentures of a public company are quoted on a stack exchange and are freely transferable. transferable.
Other Types Of Companies Under The Act Within the private and public categories, there are certain types of companies which are either public or private companies for example there are Government companies, Charitable companies companies,, Finance Finance companies companies,, Companie Companies s without without share share capital, capital, Guarant Guarantee ee companie companies, s, Holding/Subsidiary Holding/Subsidiary companies etc. 1. Holding and subsidiary subsidiary companies. 2. Group and associate companies. 3. Deemed Deemed public public companie companies s (Sec 43 a company). company). 4. Governme Government nt and and Publi Public c Sector Sector companie companies. s. 5. Charitab Charitable le and non-pr non-profit ofit makin making g organisa organisations tions.. 6. Nidh Nidhii Com Compa pany ny.. 7. Compan Company y Limite Limited d by Guar Guarant antee. ee. 8. Inve Invest stme ment nt Com Compa pany ny.. 9. Unlimi Unlimited ted Liab Liabili ility ty Compa Company ny.. 10. Statutory Statutory Company Company 11. FERA Company. Company. 12. Foreign Company. 13. Non Banking Financial Financial Company. Company. Companies Under The Income Tax Act A} Domestic Company. B} Company in which public is substantially interested. C} Foreign Company. Basicall Basically y companie companies s act provides for registra registration tion of two types of companies companies-- private private & public. Within this broad classification, the act provides for the variety of companies that may be registered under the act. What kind of setup will be most suitable for the project is difficult to decide. A person will have to study the pros and cons of every form of enterprise and should take an informed decision accordingly.
FORMATION RMATI ON OF O F A COMPANY COMPA NY It is very easy to start a company. All that you need is two persons to start a private company and minimum minimum of seven seven persons persons to start a public company. company. It is important to note that even existing ‘companies’ can join others in starting a company, because a company is also a ‘person’ for all practical purpose. The persons who start a comp compan any y are are call called ed ‘pro ‘promo mote ters rs’’ and and the the proc proces ess s of star starti ting ng a comp compan any y is call called ed ‘incorporation’. Steps for Incorporation Of A Company 1. NAME Every Every body body is known known by a name. name. There Therefor fore, e, the first first step step towar towards ds incorp incorpora oratio tion n of a company is to select a suitable name for the proposed company. The Central Government has made certain guidelines on availability of names. As per these guidelin guidelines, es, certain names cannot be allowed. allowed. For example, example, a name name resembl resembling ing with an existing company will not be allowed. Similarly, the names of national leaders like Gandhiji or Nehru will not be allowed. Further, a name shall be deemed to be undesirable if words like ‘National’ or ‘Union’ of ‘President’ are used. Therefore, it will be necessary to see these guidelines before deciding on the name of the company. 2. MEMORANDUM & ARTICLES OF ASSOCIATION
After the name of the proposed company has been approved by the Registrar of companies, the second step is to draft Memorandum and Articles of association of the company. Out Out of these these two document documents, s, Memor Memorand andum um is the most most import important ant document document,, as it will will contain the ‘Object’ for which the proposed company is being incorporated. In addition to the ‘Objects’ Memorandum will also contain details of name, registered office and capital structure of the company. The Articles of Association, on the other hand, are regulations for the internal management of a company. The Articles will generally contain information on topics like share capital, transfer of shares, divided, forfeiture of shares, conduct of Annual General meeting, Chairman’s role etc. It is important to note that since the articles of a company are internal regulations, these cannot contravene the provisions of the companies Act Act or any any othe otherr law law in forc force e in Indi India. a. Thes These e Arti Articl cles es are are alwa always ys subo subord rdin inat ate e to the the Memorandum of Association and the companies Act. The matters covered by the Memorandum of Association of a company. a) Name: Name: ex:ex:- Godr Godrej ej Stee Steell Furni Furnitur ture e Pvt. Pvt. Ltd. Ltd. b) Registered Office. Office . The The Memora Memorandu ndum m of Ass Associ ociati ation on must must give give inform informat ation ion on the regist registere ered d office office of the company and the state in which such a registered office will be located. The location of the registered office is important for the following reasons: i) A company company’s ’s AGM is requi required red to be held held at a place place where where regis register tered ed office office of the the company is located. ii) Secondly, Secondly, all meetings meetings of Board Board of Directors Directors are general generally ly held at the place place where Registered office of the company is situated, though legally a company can hold its Board Meeting wherever it wants. iii) iii) Thirdl Thirdly, y, all-i all-impo mporta rtant nt docume documents nts etc., etc., of a compa company ny like like Regist Register er of member members, s, register of changes, register of directors; books of account etc. are required by law to be kept at the registered office. iv) Finall Finally, y, for all the legal legal matter matters, s, the locatio location n of the compan companies ies regis register tered ed offic office e becomes important. All the notices, letters, correspondence has to be addressed to registered office of a company.
c)
Object Objects s of the compan company: y: A compa company ny will will always always be formed formed for some some specif specific ic purpose, which is called the objects of the company. A company must always be formed for those objects, which are lawful, and not for-bidden by law. The objects of the company are required to be stated under three headings:
i)
ii) ii)
iii)
d)
The The ma main obj objects ects – Pr Princip ncipa al Act Actiiviti vitie es of of th the com compa pan ny, wh which ich wi will be ta taken ken up up immediately upon incorporation. Generally, Generally, one four or five main objects are allowed. For example, a company proposing to manufacture all kinds of vehicles may have main objects as manufacture of Car, Scooter, Van, Truck, and Cycle etc. Ancil ncilllary or or inc incid iden enta tall ob objec jects – und under er this this,, a com comp pany any ca can tta ake up up onl only y th those ose activities which will enable a company to achieve its main objects or those activities which can conveniently be taken up for the benefit of the company as a whole. Other objects – under ‘ot ‘other obj objects’ a company may mention all those activities, which may not be directly connected with its main objects. For example, ‘of a manufacturing company may contain objects like providing Hire purchase/leasing services services or offering offering consultancy consultancy services services etc., etc., which which are no way connected connected with its main objects of manufacturing manufacturing activity. Liability Liability clause: clause: The fourth clause clause in Memorand Memorandum um should should state, state, the liability liability of members. A company will be either a limited company of unlimited. A company which limited by shares, must state that the liability of the members shall be limited.
e)
Capital Clause: This clause must state the amount of share capital with which the company is registered and the division of such share capital into different classes of shares.
f)
Association Association Clause: Clause: All All sign signat atur ures es to the the Memo Memora rand ndum um shal shalll have have to give give a declaration that they are agreeing to form a company and that they shall take up the shares mentioned against their names in the Memorandum.
3. ARTICLES OF ASSOCIATION The Second important document required for incorporation of a company is the Articles of Association. What are Articles of Association? Association? The Articles Articles are the Rules Rules and Regulations Regulations for interna internall manageme management nt of a company. company. The Memorandum & Articles of Association will define the objects for which a company has been incorporated. However, to manage the day-to-day affairs of the company there is need to have some set of rules and regulations hence, Articles of Association. The need to have some set of rules and regulations for internal Management of a company arises due to the fact that the companies Act mentions only law, but it does not give in all the cases, as to what procedure has to be followed to implement the law. Therefore, to know the procedure, one has to refer to the Articles. For instance, the companies Act, allows a company to issue shares to public. But it does not say as to how the share certificates have to be issued to share holders. It is also a fact that there are many issues on which companies Act is silent. In such cases, Articles can provide for those items, which have not been specifically provided for those items, which have not been specifically provided for under the Act. The articles should not be against provisions of the companies Act or any other law for the time being in force in India. Properly drafted articles will help the company in conducting its affairs in a smooth manner.
TABLE ‘A’ Table ‘A’ is nothing but a model of rules and regulations, which are given in Schedule – I, to the companies Act, for companies, which are limited by shares. A company can straight away adopt Table ‘A’ or make its own articles; the choice is with the company. If a company decides to make its own articles, then it must states in its articles that regulations contained in Table ‘A’ will automatically become applicable to suxh a company, even if the articles of that company may not contain those regulations. 4. PREPARATION OF OTHER DOCUMENTS FOR INCORPORATION: Once Memorandum & Articles of Association are ready, following additional documents are required for filing with the Registrar of companies. 1. Consent of person to act as a director in Form No. 29. 2. Particulars Particulars of the Directors, like Name, Age, Address etc., in Form No.32. 3. Address, of the Registered Office in Form No. 18. 4. A declaration that all provisions of the companies Act 1956 have been duly compiled with, in connection with incorporation in Form No. 1. 5. A power of Attorney, in favour of some officer for making changes, if required and for collecting the original certificate of incorporation. incorporation. 5. CERTIFICATE OF INCORPORATION On submission of above referred documents along with necessary Registration Fee etc., the Regis Registra trarr of compa companie nies s shall shall regist register er the compan company y and and iss issue ue a certif certifica icate te under under his
signature, which is called as ‘Certificate of Incorporation.’ From the date of issue of such certificate, a company is said to have been born with the name mentioned in the said certificate. 6. COMMENCEMENT OF BUSINESS A private company can straight away commence its business after getting a certificate of incorporation. In case of a public company, it has to fulfill certain conditions, conditions, then the Registrar will issue a certificate to commence Business.
MEMORANDUM OF ASSOCIATION The Memorandum of Association is the fundamental document of the company containing the basic conditions on which the company is incorporated. It lays down the objectives of the company and specifies the limit within which the company can operate. Format And Content A memorandum for a company limited by shares, should be in the format given in table B of schedule I to the act, or as near there to as circumstances admit. A memorandum contains the following clauses: 1. Name Clause – Containing the name as approved by the Registrar, along with the words ‘Private Limited’ or ‘Limited’, ‘Limited’ , as the case may be. 2. Re Regi giste stere red d Office Office Claus Clause e – Specifying the state where in the Registered Office of the company situate. 3. Ob Obje jec ct Clau Clause se – Specifying the activities, which the company proposes to and is authorized to undertake. It contains the three sub-clauses: a) Main ob objectives, wh which are pursued by the company immediately after its incorporation. b) Objects Incidental or ancillary to the attainment of main objects which are carried out only to the extent necessary for the attainment of the main objects.
c) Other ob objects wh which ar are ne necessary to to en enable th the company to undertake all types of legal business activities which the company may anticipate to pursue, such as, to deal in machinery, appliances, plants, tools, transport vehicles, etc.. to purchase, acquire, hold, dispose of and deal in any shares, debentures and other securities etc.. 4. Liability Clause – Stating that liability of the members is limited to the extent of the unpaid amount with reference to the shares held by them (or to extent of the amount undertaken to be contributed in the event of winding up, in case of a company limited by guarantee). 5. Capital Clause – Stating the authorized capital up to which the company can issue its shares. Association Clause – Is the subscr subscribe iber’s r’s declar declarati ation on that that they they desire desire of being being 6. Association formed in to the company and agree to take the specified number of shares in the company’s capital. 7. Stamp Duty And Witness – The Memorandum is to be stamped by affixing stamps of the prescrib prescribed ed value. value. The memora memorandu ndum m should should be sig signed ned and dated dated by all all the subscribers and witnessed by one person. This date must be after the date on which the memorandum has been stamped. Doctrine Of Ultra Vires – The objects stated in the Memorandum defines the field 8. Doctrine of industry within which the company must confine its activities. When a company acts beyond its objects. It exceeds its legal capacity and its powers under the Memorandum, Such an action is stated to be ‘Ultra Vires’ the Memorandum and is Void. The company cannot even ratify such act by amending its memorandum. The Implications of ultra vires acts are :i) Any member member can can get an inject injection ion restra restrainin ining g the company company from from acting acting ultra ultra vires. vires. ii) The directors directors become become persona personally lly liable liable to the company company and must make make good any loss incurred by the the company under under such act. iii) The directors shall be personally liable to the third party for any loss incurred by him, where such third party was was incited by the directors directors to the contract with the company company in a matter that was ultra vires. Exceptions: The doctrine of Ultra vires does not apply to: Where an act is ‘ultra vires’ the powers of the directors only, it can be ratified by the shareholders. Where an act is ‘ultra vires’ the articles of the company, the act can be ratified by amending the articles. Where the company’s money has been spent ‘ultra vires’ on purchasing some property, the company’s right over that property are not affected.
ARTICLES OF ASSOCIATON Articles Articles of Associat Association ion are the second second constitut constitutional ional document, document, which which lays down the rules and regulations for the conduct of internal affairs of the company. The articles constitute a contract between the company and its members and between members themselves. The artic articles les are are subord subordina inate te to the Memora Memorandu ndum, m, and and should should not, not, theref therefore ore,, contai contain n any any regulation, which is contrary to the Memorandum. Articles may be drafted in one of the forms given in table A, C, D or E of Schedule I to the Act, as may be applicable or in a form as near there to as the circumstances admit. The Articles of a private company having share capital must (a) Restrict the right to transfer its shares;
(b) Limit the maximum numbers of members to 50; and (c) Prohibit invitation to public to subscribe for any of its shares or debentures. It may be noted that even if a private company has become a deemed public company by virtue of Section 43 A its articles of Association may include provisions relating to matters Specified above. Articles usually provide for the following matters: 1. Excl Exclus usio ion n who wholl lly y or or in in apa apart rt of Tabl Table e A. A. 2. Comm Common on Seal Seal,, Its Its use use and and safe safe cust custod ody. y. 3. Alte Altera rati tion on of Capi Capita tall - how how and and to what what exte extent nt.. 4. Barr Barrow owin ings gs - the the mode mode and and the the limi limit. t. 5. Gener General al Meeti Meetings ngs - notic notice e requir required, ed, reso resolut lution ions, s, voting voting righ rights, ts, prox proxies ies etc. etc. 6. Dire Direct ctor ors s - thei theirr appo appoin intm tmen ent, t, qual qualif ific icat atio ion, n, remu remune nera rati tion on,, powe powers rs,, duti duties es and and removal, names of first directors, minimum and maximum number of directors. 7. Divi ividend dends s an and res reser erve ve fun funds. 8. Accounts and audit. 9. Mana Manage gerr or sec secre reta tary ry - app appoi oint ntme ment nt and and rem remun uner erat atio ion. n. 10. Ad Adopt option ion of of contra contracts cts ente entered red in to to the promot promoters ers.. 11. 11. Remu Remune nera rati tion on to prom promot oter ers s. 12. Specia Speciall prov provisi isions ons for amalg amalgam amati ation. on. 13. Winding up up.
Stamp Duty And Witness: The Articles are to be signed by all the subscribers, duly stamped and witnessed, as in case of Memorandum. Doctrine Of Constructive Notice: Any person who enters into a contract with a company, is expected to have knowledge of the power and position of the company and its directors, and is presumed to have gone through its Memorandum and Articles. This is popularly called the 'doctrine of constructive notice'. Thus no person who binds himself to the company can later plead that he had no knowledge of the contents of its memorandum and article’s.
PROSPECTUS: 'Prospectus' is the basic document for raising funds from the public. 'Prospectus' means any docu docume ment nt desc descri ribe bed d or issu issued ed as a pros prospe pect ctus us and and incl includ uded ed any any noti notice ce,, circ circul ular ar,, advertisement advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of the company. Thus, a prospectus is a general invitation of the company on the conditions specified in the application form. Priva Private te compan companies ies are are prohib prohibite ited d from from inviti inviting ng any any public public subsc subscrip riptio tion n in shares shares or debentures and as such they cannot issue any prospectus.
Ever Every y publ public ic comp compan any y havi having ng shar share e capi capita tall is requ requir ired ed to issu issue e on its its form format atio ion n a prospect prospectus, us, or to file with the registra registration tion a statemen statementt in lieu of prospect prospectus, us, where the company does not invite public subscription. Essential Contents Of Prospectus (i) (i) (ii) (ii) (iii) (iii)
Date Date of pros prospe pect ctus us whic which h gen gener eral ally ly the the dat date e of of its its publ public icat atio ion. n. Name Name and and reg regis iste tere red d off offic ice e of of the the comp compan any. y. Consta Constant nt of the Cent Centra rall Govern Governmen mentt for the the presen presentt issue/ issue/com compli plian ance ce with with the the SEBI SEBI Guidelines. (iv) (iv) Names Names of stoc stock k excha exchange nges s where where appl applica icatio tion n made made of listi listing ng of pres present ent iss issue. ue. (v) (v) Puni Punish shme ment nt for for fic ficti titi tiou ous s app appli lica cati tion ons. s. (vi) (vi) Refu Refund nded ed of the issu issue e if minimu minimum m subsc subscri ript ptio ion n of 90% 90% is not recei receive ved d withi within n 90 days from issue closure. (vii (vii)) Issu Issue e of allot allotme ment nt letter letters/ s/re refu fund nds s with within in the period period of 10 weeks weeks and intere interest st on delayed refunds. (viii) (viii) Date Date of openin opening g and closi closing ng and and the earl earlies iestt closing closing date date.. (ix) (ix) Name Name and and add addre ress ss of aud audit itor ors s and and lea lead d man manag ager er.. (x) (x) Name Name and and add addre ress ss of of trus truste tee e und under er deb deben entu ture re tru trust st dee deed. d. (xi) Credit rating from CRISIL (or other rating agency) for the proposed debenture/preference shares issue. (xii (xii)) Ter Terms of under nderwr wriitin ting. (xii (xiii) i) Capi Capita tall stru struct ctur ure e of the the comp compan any, y, size size of pres presen entt issu issue, e, paid paid up capi capita tall afte afterr present issue of after conversion of debentures. (xiv (xiv)) Term Terms s and and part partic icul ular ars s of the the iss issue ue.. (xv) (xv) Main Main object objects s of the comp compan any, y, promot promoter ers, s, names names,, addr addres esse ses s and and occu occupa pati tion on of mana manage ger, r, mana managi ging ng dire direct ctor or and and othe otherr dire direct ctor ors, s, deta detail ils s of the the proj projec ect, t, its its implementatio9n and prospects. (xvi) (xvi) Stock Stock market market data data for shares shares/de /deben bentur tures, es, high high / low price price in the last thre three e years years and monthly high/low during the last six months. (xvii) (xvii) Particul Particulars ars of any previou previous s issue by the the company company and other other companies companies under under the same management. (xviii) (xviii) Manageme Management nt percept perception ion of risk factors. factors. (xix) (xix) General General informa information tion as to consen consentt of directors directors,, auditors, auditors, solic solicitors itors,, manager manager to the the issue, Registrar of issue, bankers to the company, bankers to the issue, names and addresses of the company secretary, legal adviser, lead managers, co-managers, auditors, etc. (xx) (xx) Fina Financ ncia iall inf infor orma mati tion on of of the the comp compan any. y. (xxi (xxi)) Mini Minimu mum m subs subscr crip ipti tion on,, expe expens nses es of the the issu issue, e, unde underw rwri riti ting ng comm commis issi sion on and and brokerage. (xxii) (xxii) Rights Rights of the members members as to voting, voting, dividend dividend,, lien on shares, shares, forfeitu forfeiture re of shares, shares, etc. (xxiii) (xxiii) Restrict Restriction ion on transfer and transmis transmission sion of shares/debe shares/debentur ntures. es. (xxiv) (xxiv) Material Material contra contracts cts and inspec inspection tion of documen documents, ts, etc.
SHARE CAPITAL AND ALLOTMENT The total capital capital of the company is divided divided into small small equal equal parts parts called called shares. shares. Funds for the company are raised by issuing shares to the investors. A share is thus an interest in the share capital of a company, made up of diverse rights confer conferred red on its holder holders s by the artic articles les of the compan company. y. Share Shares s are are movab movable le proper property ty transferable in terms of articles. Kinds Of Shares Shares are mainly of two kinds - equity and preference. Preference shares carry a preferential right in the payment of dividend by fixed amount or at a fixed rate, and a preferential right for repayment of capital on winding up. Preference shares may be cumulative or non-cumulative, redeemable or irredeemable, participating or non-participating. Generally, and unless specified, preference shares are non-cumulative, irredeemable irredeemable and non-participating. non-participating. Equity shares are the ordinary shares, which receive dividends out of profits as proposed by the board of directors and declared by the members. Dividend on equity shares is paid only after paying dividend on preference shares. Similarly, repayment of equity shares is made only after all other liabilities and preference shares have been paid. Equity shares carry voting rights and are also entitled to any surplus left over in the event of winding up. Sweat Equity Shares Sweat Equity share is a class of shares are issued by the company to employees or directors at a dis discou count nt or for consid considera eratio tion n other other than than cash cash for provid providing ing know-h know-how ow or makin making g available rights in the nature of intellectual property rights or value additions. The following conditions must be satisfied for issuing Sweat Equity shares: The issue is authorized by a special resolution, which should specify the number of shares shares,, curren currentt market market price price,, consid consider erati ation, on, if any, any, and the class class or class classes es of directors or employees to whom such shares are issued. The comp ompany must ust be one one yea year old old after fter it has obt obtained ined certi ertifi fic cate of Th commencement of business. In the case of listed company, the issue must be in accordance with SEBI regulations. An unlisted company will issue such shares according to the prescribed guidelines. Allotment A company invites offers from the public to purchase its shares, by issuing a prospectus. The investors make their offers by submitting their application forms with the company. When these offers are accepted by the company, the shares are ‘allotted’ to the applicant. The compan company y convey conveys s its accep acceptan tance ce by legal legal agree agreemen mentt betwee between n the compa company ny and and the applicant. If the company allots lesser number of shares than applied for, in case of over-subscription, the appli applicat cation ion money money in respe respect ct of the share shares s not allot allotted ted is eithe eitherr adjus adjusted ted towar towards ds allotment money payable on shares, or refunded. Conditions For Valid Allotment (1) The allotment must be made by a competent authority, that is, the Board of Directors. (2) The allotment must be made within a reasonable time. (3) The allotment must be absolute and unconditional. unconditional.
(4) The allotment must be properly communicated. (5) The allotment should be made made after after the beginning beginning of the day from the date of issue issue of prospectus or on such later later time as may be specified in the prospectus. prospectus. (6) The allotment should not be made after 3 days from the date of filing a statement in the prospectus. (7) The allotment should not be made unless the amount of minimum subscription as stated in the prospectus, has been received by the company and the amount received shall be refunded within 120 days from issue of prospectus. The application money on each share must not be less than 5% of its nominal value. The application money must be kept in a separate account with a scheduled Bank until the certificate of business commencement has obtained and the amount of minimum subscription received. received. Allotment Money And Calls On Shares The The amount amount payabl payable e on each each shar share e is genera generally lly spread spread over over certai certain n ins insta tallm llment ents. s. It is payable partly on application, partly on allotment and /or one or more calls. After the shares have been allotted, the shareholder is required to deposit the allotment money. Thereafter the call money is also demanded in terms of the issue. When all the calls are paid, the share becomes fully paid-up. Forfeiture Of Shares If a share holder defaults in making payment of allotment money or any call money, in respect of the shares allotted to him, the company reserves the right to forfeit the shares. In that event, the company forfeits the amount paid-up on those shares and the shareholder loses his rights under the shares. SEBI Guidelines For Public Issues The Securities and Exchange Board of India SEBI) has issued elaborate guidelines on public issues, including first public issue to be made by an existing private or closely held company after its conversion into a Public company. Under the new guidelines prior approval of the “controller of capital Issues shall no more be required. The new guidelines have been modified and clarified from time to time. Share Certificate Share certificates certificates are issued by a company to its shareholders, shareholders, as an evidence of the title to the shares. A share certificate is a declaration that the person whose name is written on that certificate is legal owner of the number of shares specified therein. A share certificate is transferable transferable by delivery and endorsement. Share Warrant A share warrant entitles the bearer to the shares specified in that warrant and the shares may be transferred to him on delivery of the warrant. A public company may issue share warrants with respect to its fully paid-up shares, if authorized by its Articles and with prior approval of the Central Government. Government. Transfer Of Shares: As noted above, shares are movable property transferable by delivery and endorsement, in accordance with the articles of association. The instrument of transfer (i.e. transfer deed) is executed both by the transferor and the transferee, and the transferor thereafter delivers it to the transferee along with share certificates. A company shall register transfer of shares only when a proper instrument of transfer duly stamped and executed, along with the share certificate (or letter of allotment) is lodged with the company. Thereafter, the transferee’s name is entered into the register of members, and the transferor’s name is either struck off or his holding is reduced by number of shares transferred. transferred.
Buy Back Of Shares: A company may purchase or buy – back its own shares or other specified securities out of its free reserves or securities premium account or the proceeds of any shares or other specified securities but the buy – back shall not be effected out of the proceeds of an earlier issue of the same kind of shares/securities. shares/securities. The buy – back must be authorized by the articles, adopted by a special resolution and should be in respect of such shares which are fully paid – up. Further, the buy – back should not exceed 25% of the total paid up capital and free reserves and after such buy – back the ratio ratio of the debt, both secured secured and unsecure unsecured, d, owned by the company company is not more than twice the capital and its free reserves. In case of a listed company the buy – back should be in accordance with SEBI regulations and in case of an unlisted company; the buyback should be in accordance with the prescribed guidelines. Every buy – back should be completed with twelve months from the date of passing the special resolution. A declaration of solvency in the prescribed form signed by at least two directors shall be filed with the Registrar and also with SEBI, if it is a listed company, before making such buy – back. The shares and securities in respect of which buy – back is affected, shall be extinguished and physically destroyed within seven days of the last date of completion of buy – back. The company is not entitled to make further issue of same kind of shares and securities, which have been bought back within a period of 24 months except by way of bonus shares or in the discharge of subsisting obligations. A return containing prescribed particulars particulars relating to buy – back shall filed within 30 days of such completion with the Registrar and also with SEBI, if it is a listed company. If free reserves are utilized for buy – back, sums equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account. The company is not permitted to buy – back its own shares or other specified securities whether directly or indirectly through any subsidiary company or its own subsidiary companies or through any investment company or if it has not compiled with the provisions of sections 159, 207 and 211. Further if a default is made by the company is repayment of deposits or interest payab payable, le, redemp redemptio tion n of debent debenture ures s or prefe prefere rence nce shares shares or payme payment nt of divide dividend nd or repayment of any term loan or interest payable thereon of any bank or financial institution, it shall not resort to buy – back till the subsistence of the default. Dividend on Shares: The shareholders get the return on their share investment in the company in the form of dividend. Dividend can only be paid out of the profit and not out of capital. Normally, dividend is recommended by the Board of Directors on the basis of the profits earned by the company and are paid to the shareholders after it is declared at the Annual Gener General al Meeti Meeting. ng. The shareho shareholde lders rs have have a right right to declar declare e divide dividend nd or adopt adopt as it is recommended by the directors but they have no right to increase the dividend. The Board of Directors may pay an interim dividend, if so authorized by the Articles, if they feel satisfied that the current year’s profits are sufficient for paying interim dividend. Nomination Facility: A holder or joint holder of shares in or debentures of a company may nominate a person, in the event of his death or in the event of death of all the joint holders. If a minor is appointed as nominee, the holder may nominate any other person to become entitled to such securities,, in the event of his death, during the minority. The nomination may be varied, if securities desired. A nominated person, if becomes entitled to shares in, or debentures of, a company by virtue of his nomination, may elect to get himself registered as holder of such securities or else may make such transfer of shares or debentures as the deceased share holder or debenture holder could have made. RAISING CAPITAL FROM PUBLIC
How To Raise Funds? A company may raise funds either by private placement with friends and relative, or by making making public public issues. issues. A company company may raise raise funds funds by various various instruments instruments viz. Shares, Shares, debentures, bonds or deposits. The procedure of raising share capital is being discussed in the following paragraphs. The procedure for other instruments is also the same.
MEETING AND RESOLUTINS Meeting A compan company y functi functions ons throug through h its direct directors ors,, who hold hold meetin meeting g and decide decide on matter matters s concerning the company’s business. Besides, the shareholders also meet annually to take important decisions giving policy guidelines to the directors on various matters. Meetings are therefore, of great significance with regard to decision-making decision-making on company affairs. Compa Company ny meetin meetings gs are are four four typestypes-Boa Board rd meeti meeting, ng, statut statutory ory Meeti Meeting, ng, Annual Annual Gener General al Meeting and Ordinary General Meeting. Board Meeting In order that the board of directors should meet at regular intervals, it is essential that a board meeting be held at least once in every three months and at least four times in a year. Proper notice of the meeting should be given to every director. The quorum for a board meeting is one-third of the total number of directors on the board, or two directors, whichever is higher. If the quorum is not present, the board cannot transact any business and the meeting shall stand adjourned for the same day in next week, at the same time and place. The Chairman of the Board presides over the meeting. If the Chairman is not present, the directors shall appoint one of themselves as the Chairman, who shall then preside. At a board meeting, the matters generally taken up for consideration include-making calls on shares, shares, issuing issuing debenture debentures s or other borrowing, borrowing, investme investment nt of company’s company’s funds and extending loans, filling a certain powers to a directors or a committee of the Board, filling a casual vacancy in the Board appointment of managing director or manager, etc. Statuatory Meeting Statutory meeting is the first general meeting of the members of the company. It is held only by public limited companies with in a period of not less than one month and not more than 6 months, months, from the date it is entitled entitled to commence business business.. The meeting meeting is held for discussing the matters matters relating relating to the formation of the company and matter matter arising out of the statutory report. Annual General Meeting Annual General Meeting (AGM) (AGM) is the meeting of the members of a company is to be held by every company – public and private. The first AGM must held with in the 18 months of the date if incorporation of the company. One AGM must be held in every calendar year. The time gap between two successive annual general meetings should net exceed 15 months (Which may be extended by the registrar, on an application, by another 3 months).
AGM must be held at the register office of the company or at any other place in the city where the registered office is situated and not elsewhere. The meeting must be held during hours and not a working day. The company must give a notice of at least 21 clear days to its members. A shorter notice can be given if all the members agree to it unanimously. The notice must specify the place, day and hour of the meeting and the business to be transacts there at. Besides, a copy of the balance sheet, Profit and Loss account, auditors report and documents attached there to, shall be sent along with the notice. It is also accompanied by an ‘explanatory ‘explanatory statement’ setting out the the material particulars particulars regarding regarding ‘ special business’ to be transacted at meeting. ‘ Special business’ means and business other than ‘ ordinary business’. And ‘Ordinary business’ transacted at the AGM, includes: a) b) c) d)
Consolida Consolidation tion and adoption adoption of accounts, accounts, reports reports of directors directors and auditors. auditors. Declar Declarati ation on of of divid dividend end.. Appointme Appointment nt of directors directors in place place of those those retiring retiring by rotatio rotation, n, and Appointme Appointment nt of auditors auditors and fixation fixation of their their remune remunerati ration. on.
Quorum Minimu Minimum m number number of member members s requi required red to consti constitut tute e a valid valid meetin meeting g and and to transa transact ct business is called quorum. If no quorum is present, there can be no meeting and no business can be transacted. Unless the Articles provide for a large number, quorum for a public company shall be five members present personally personally and for a private company for the purpose of quorum. If within half an hour from the time appointed for holding the meeting the quorum is not fulfilled, the meeting shall stand adjourned to the same day of the nest week a the same time and place, or such other day, time and place as the Board may determine. Minutes: A brief summary of the proceedings of the meeting is to be recorded in the minutes Book. Extra-Ordin Extra-Ordinary ary General General Meeting: Meeting: A general general meeting other than the annual annual general general meeting is called extraordinary general meeting (EGM). An EGM. As convened when some special and urgent business is to be transacted and which must be transacted before the next annual general general meeting. Besides, Besides, members members holding holding 1/10 th of the paid – up capital carrying voting rights may also request to the Board of Directors to convene an EGM. The requirements of notice, quorum, minutes, etc. shall be the same as mentioned with regard to AGM, expect their in the case of a shorter notice, the consent of members, holding not less than 95 % of such part if the paid – up share capital gives a right to vote at the meeting, shall be sufficient. Voting: Voting is a means of determining the sense or opinion of a meeting i.e. whether the meeting approves or disapproves of the proposals placed before it. A proposal is also known as a motion. After discussion the motion is put to vote, and if it is favoured by the requisite majority, it is adopted as a resolution. Voting may be conducted either by show of hands or by poss. On a show of hands, one member has one vote, the number of members who raise their hands in favour and those against the motion, are counted and the motion is declared carried or lost, as the case may be. Proxy votes are not counted on a show of hands unless the Articles provide otherwise.
In a voting by poll, the number of votes cast in an election for or against a resolution, are counted. In a poll, the voting right of a member is in proportion of his shareholding. A proxy can also vote in a poll. Proxy: Any member entitled to attend and vote at a general meeting may appoint another person, whether a member or not, to attend and vote as his proxy. A proxy has no right to speak at the meeting or vote on a show of hands. He can vote only on a poll, unless the articles provide otherwise. Resolution: At a general meeting, all decisions are taken in the form of resolutions. Resolutions may be ordinary or special. An ordinary resolution is one, which requires a simple majority i.e. more than 50% of the votes cast in person or by proxy in favour of the resolution. A resolution is said to be ‘special resolution’, resolution’, where: 1. The intention intention to propose propose the resoluti resolution on as special special resoluti resolution on is specified specified in the notice notice of the general meeting. 2. It requires at least 75% of the votes cast, cast, either by by show of hands hands or on poll in person person or proxy, in favour of the resolution. A special resolution shall be required in matters such as, altering the objects clause in the memorandum, changing the registered office from one State to another, changing the name of the company, alteration of the Articles, paying interest out of capital, reduction in share capital, capital, determini determining ng the remunera remuneration tion of any director director or managing managing director director,, voluntary voluntary winding up of the company, commencement of new business, further issue of shares to persons other than the existing share holders, etc. Certain resolutions can be considered at a general meeting only when a ‘Special Notice’ is given by the proposer. The proposer must give a notice to the company, signifying his intention to move the resolution, atleast 14 days before the date of the meeting. After receipt of notice, the company shall give atleast 7 days notice to all its members, either by adve advert rtis isem emen entt or by any any othe otherr mode mode.. Spec Specia iall Noti Notice ce is requ requir ired ed for for reso resolu luti tion ons s for for appointment of a director other than a retiring director, or for removal of a director, or for appointment of an audit or other than the retiring auditor, or for removal of an auditor.
WINDING UP Winding up implies dissolution of a company, when the assets of the company are realized, its-debts and liabilities are paid off, and the balance is distributed amongst the members in promotion to their contribution to the share capital of the company, the company is said to be wound up. There There are three three modes modes of windi winding ng up of a compan company y namely namely,, windi winding ng up by the court, court, voluntary winding up under court’s supervision. Winding Up By The Court: A Company may be wound up by the court in the following circumstances: circumstances: a) If the company company has, by by a special special resolution, resolution, resolved resolved that it may be wound up up the court. b) If the company company default default in delivering delivering the the statutory report to the Registrar Registrar of Companies or in holding the statutory meeting. c) If the company company does not commence commence its busine business ss within within a year from its incorpo incorporati ration, on, or suspends its business for a whole year. d) If the number number of members members is reduced, reduced, in the case case of a public company company below below seven, seven, and in the case of a private company below two. e) If the company company is unable unable to pay pay its its debts. debts. f) If the court court is of opinion opinion that that it is ‘just ‘just and and equitabl equitable’ e’ that that the company company should should be wound wound up. Following grounds have been considered to be ‘just and equitable’ for ordering winding up of a company by court: 1. Where Where the business business of the company company has disappe disappeared ared through through the Govern Government ment taking taking over that business. 2. Where Where the company company has lost lost its substratu substratum m i.e. the subject subject matter matter of the company company is gone, or the object for which it was incorporated has substantially failed. failed. 3. When it is imposs impossible ible to carry carry on the busine business ss of the company company except except at a loss. loss. 4. When there there is a dead dead lock in the the managemen managementt for instance, instance, when when there there are only two two members and they don’t agree with each other. 5. When When the the affa affair irs s of the the comp compan any y are are bein being g carr carrie ied d out out in a mann manner er oppr oppres essi sive ve towards the minority shareholders. shareholders. Who May Apply: Apply: An application to the court, for the winding up of a company, may be made by-the company, any creditors or creditors, any person(s) liable to contribute to the assets of the company in the event event of its windi winding ng up (i.e. (i.e. contri contribut butori ories) es),, any any of the afores aforesaid aid partie parties s wheth whether er toge togeth ther er or sepa separa rate tely ly,, the the Regi Regist stra rar, r, or by any any pers person on auth author oriz ized ed by the the Cent Centra rall Government. Procedure: After hearing a winding up petition, the court may either dismiss it or order for its winding up. If the court orders for winding up, the Official Liquidator becomes the liquidator of the company. The Liquidator then takes over the entire assets and liabilities of the company, realizes the assets and discharges the liabilities. When the affairs of the company have been completely wound up, the court shall make an order that the company be dissolved from the date of the winding up order. Voluntary Winding Up: A Company may be voluntarily wound up in the following circumstances: circumstances: 1) When When the period period fixed fixed for duratio duration n of the company company by its Articl Articles es has expire expired, d, or the event, event, if any, any, has has occur occurred red on the occurren occurrence ce of which which the articles articles provide provide for the dissolution of the company and the company has passed an ordinary resolution for its voluntary winding up.
2) When the company has, has, at any any time, passed passed a special resolution for its voluntary voluntary winding up. Within fourteen days of the passing of the ordinary or special resolution, the company shall give a notice of the same in the Official Gazette and also in some newspaper circulating in the district of the Registered Office of the company. A voluntary winding up shall commence at the time when the resolution is passed and the liquidator is appointed, but it does not put an end to the corporate existence of the company. The company shall cease to carry on its business, except insofar as may be required for the beneficial winding up of such business. Members Voluntary Winding Up: In a members voluntary winding up, the Board of Directors or where there are more than two directors, the majority of directors, should make a declaration of solvency, at a Board Meeting, stating that the company has no debts or that it will be able to pay its debts in full within the specified period (not exceeding three years). Such a declaration in the prescribed form, along with a report of the auditors on the profit and loss account and balance sheet as on the latest practicable date before the making of the the decl declar arat atio ion, n, shal shalll be file filed d with with the the Regi Regist stra rar. r. With Within in five five week weeks s of maki making ng the the declaration, the resolution for winding up should be passed at the general meeting, the liquidator(s) liquidator(s) shall be appointed and his/their remuneration fixed. With Within in 14 days days the the reso resolu luti tion on shou should ld be adve advert rtis ised ed in the the Offi Offici cial al Gaze Gazett tte e and and the the newspaper. A notice of appointment of liquidator shall be given to the Registrar within 10 days. The liquidator shall realize the assets, prepare lists of creditors and settle their claims. The liquidator will then distribute the surplus among the contributories. The liquidator shall make an account of the winding up and proceed to give notice of final meeting and dissolution of the company. Creditors Voluntary Winding Up: In creditors voluntary winding up, a meeting of the creditors is convened along with the general meeting. The board of Directors shall give a full statement of the position of the company’s affairs together with a list of the creditors of the company and the estimated amount of their claims. The creditors may pass a resolution for the winding up of the company. A copy of the resolution shall be filed with the Registrar within 10 days of passing the resolution. The creditors at their meeting may nominate a person to be the liquidator for the purpos purpose e of windi winding ng up the affai affairs rs and distribu distributin ting g the assets assets of the compa company. ny. The credit creditors ors may may also also appoin appointt a commit committee tee of Inspec Inspector tors s consis consistin ting g of not more more than than five five persons. Besides, the members may also appoint a liquidator at the general meeting. If the liquidator appointed appointed by the members and the creditors, creditors, are different different persons, persons, then the creditors creditors nominee shall become the liquidator .If the members do not appoint, creditors nominee becomes the liquidator and vice versa. The The liquid liquidat ator or then then follow follows s the same same proced procedure ure as descr describe ibed d in the case case of member member’s ’s voluntary winding up. Winding Up Under Supervision Of The Court: After a company has passed a resolution for voluntary winding up, the court may order that the winding up shall continue but under the courts supervision. The effect of an order for supervision is the amalgamation of voluntary winding up and winding p by the court. The extent of supervision will depend on the court’s order. The court may also appoint additional liquidator or remove any liquidator. The liquidator shall work according to the instructions of the court.
Contributories: ‘Contributory’ means every person who is liable to contribute to the assets of a company in the event of its winding up. A sharehold shareholder er is liable liable to contribut contribute e an amount remaining remaining unpaid on his shares. Besides, holders of fully paid up shares and even past members are deemed as contributories, under certain circumstances (given in Section 426).
