Business Law (Company Law)-munotes

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1 1
DEFINITIONS
Unit Structure
1.0 Objectives
1.1 Introduction
1.2 Meaning of Accounting Standards
1.3 Meaning of Auditing Standards
1.4 Meaning of Books of Accounts
1.5 Meaning of Deposit
1.6 Meaning of Financial Year
1.7 Meaning of Foreign Company
1.8 Meaning of Independent Director
1.9 Meaning of Indian Depository Receipts
1.10 Meaning of One Person Company
1.11 Meaning of Small Company
1.12 Summary
1.13 Questions
1.0 OBJECTIVES
After studying the unit, the students will be able to:
 Understand the me aning of certain concepts of Company Law.
 Know the meaning of following terms: Accounting Standards,
Auditing Standards, Books of Accounts, Deposit, Financial Year.
 To understand concepts of Foreign Company, Independent director,
Indian Depository Receipts , One Person Company, Small Company.
1.1 INTRODUCTION
In this unit we are going to study certain terms related to accounting of
different organisations as defined in the Indian Companies Act.


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Business Law (Company Law) - III
2 1.2 MEANING OF ACCOUNTING STANDARDS
The Companies Act def ines Accounting Standards in Sec. 2(2) as under:
Accounting Standards means the standards of accounting or any
addendum thereto for companies or class of companies referred to in
section 133.
Sec.133 of The Companies Actstates that Central Government to p rescribe
accounting standards: The Central Government may prescribe the
standards of accounting or any addendum thereto, as recommended by the
Institute of Chartered Accountants of India, constituted under section 3 of
the Chartered Accountants Act, 1949 (38 of 1949), in consultation with
and after examination of the recommendations made by the National
Financial Reporting Authority.
The definition of AccountingStandards is exhaustive as time-to-time
Central Government can add standards as per requirement s of different
types of companies, on the recommendation of Institute of Chartered
Accountants of India and in consultation with National Financial
Reporting Authority.
In other words, Accounting Standards means authoritative standards for
financial report ing. These standards specify how transactions and other
events are to be recognized, measured, presented, and disclosed in
financial statements.
1.3 MEANING OF AUDITING STANDARDS
The Companies Act defines Auditing Standards in Sec. 2(7) as under:
Auditing standards means the standards of auditing or any addendum
thereto for companies or class of companies referred to in sub -section (10)
of section 143.
Sec.143 (10) of the Companies Actprovides that : The Central Government
may prescribe the standards of aud iting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India,
constituted under section 3 of the Chartered Accountants Act, 1949 (38 of
1949), in consultation with and after examination of the recommendations
made by the National Financial Reporting Authority:
Provided that until any auditing standards are notified, any standard or
standards of auditing specified by the Institute of Chartered Accountants
of India shall be deemed to be the auditing standards.
Whenever an independent examination of financial information is carried
out for any entity, whether the business motive is to make the profit or not,
whether the size of the entity is big or small or even if the entity has any
legal form, the Auditing standards as pre scribed will be applicable. All
Auditing standards are interlinked and have to apply in unity. munotes.in

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Definitions
3 Indian Auditing Standards goes hand in hand with International Standards
on Auditing formulated by (IAASB) International Auditing and Assurance
Standards Board.
1.4 MEANING OF BOOKS OF ACCOUNTS:
The Companies Act defines Books of Accounts in Sec. 2(13) as under:
Books of Account includes records maintained in respect of:
(i) all sums of money received and expended by a company and matters
in relation to which the r eceipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in the case
of a company which belongs to any class of companies specified
under that section;
Books of accounts means a place where all financial information is related
to a person, or a business is recorded. Books of accounts are maintained as
prescribed under Income tax Act, companies Act 2013, and GST Act a nd
for charitable organisations as per provisions of Public Trust Act.
In other words, Books of Accounts is a record maintained relating to
financial transactions and is the most important document for performing
further accounting procedures. Assets, liabilities, incomes, and expenses
are tracked in these accounts. As a general rule, the term “book of
accounts” is most commonly used to describe the general ledger in
double -entry accounting systems.
1.5 MEANING OF DEPOSIT
The Companies Act defines Dep osit in Sec. 2(31) as under:
Deposit includes :
 any receipt of money by way of deposit orloan or
 in any other form by a company,
 but does not include such categories of amount as may be prescribed
in consultation with the Reserve Bank of India;
Indian co mpanies may raise capital by inviting Deposits from public.
When company receives deposits, it has to maintain a register with details
about depositor and such register should be kept in the registered office of
the company. Even application money not refu nded by company can be
called as Deposits by company.
Deposit includes any receipt of money in any form whether it is loan,
deposit etc. but does not include such amount which is excluded from the
definition of Deposit by the Reserve Bank of India.
This se ction m ust be referred along with Sections 73 to 76 of the
Companies Act, 2013 and Section 2 (c) of the Companies (Acceptance of munotes.in

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Business Law (Company Law) - III
4 Deposits) Rules, 2014.Following Amounts received by the company
cannot be called as Deposits as per this section:
 any amount r eceived from Central or Sate Government ,
 any amount received from foreign Governments or Foreign Banks ,
 Amount guaranteed by Central or State Government ,
 Amount received by a Company from any other Company ,
 Any amount raised by issue of bonds and debenture s,
 Any amoun t received from its employee’s non-interest security
deposit ,
 Any amount received in course of business ,
 Loan from Public Financial Institutions
1.6 MEANING OF FINANCIAL YEAR
The Companies Act defines Financial year in Sec. 2(41) as under:
Financial year , in relation to any company or body corporate, means -
 the period ending on the 31st day of March every year, and
 where it has been incorporated on or after the 1st day of January of a
year,
 the period ending on the 31st day of March of the f ollowing year,
 in respect whereof financial statement of the company or body
corporate is made up.
A holding company or a subsidiary of a company incorporated outside
India and is required to follow a different financial year for consolidation
of its acco unts outside Ind ia, may allow any period of one year as a
financial year.
Provided further that a company or body corporate, existing on the
commencement of this Act, shall, within a period of two years from such
commencement, align its financial year as per the provisio ns of this
clause .
In India, this 1-year period starts from 1st April and ends on 31st March.
This period in which the income is earned is known as the Financial Year
or Fiscal Year.
The Balance Sheet and Income statement of companies acros s the
Globe are usually prepared for a period of 1 year. However, the date
from which this period starts varies from country to country.
For Example : In case the accounts are being prepared for the year
starting 1st April 2022 and ending on 31st March 2023 , this period
would be called as Financial Year 2022 -23
And this income would be assessed to tax in the next year and this
period would be called as Assessment Year 2023 -24.
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Definitions
5 1.7 MEANING OF FOREIGN COMPANY
The Companies Act defines Foreign Company in Sec. 2(42) as under:
Foreign Company means any company or body corporate incorporated
outside India which –
(a) Has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(b) Conducts any business activ ity in India in any other manner.
This definition also includes those foreign companies which are doing
business in India through electronic mode via email, mobile, social media
or otherwise.
To qualify to become a foreign company, one or more citizens of India or
by one or more companies incorporated in Indiaholds not less than 50% of
the paid-up equity or preference share capital.
For Example:
 Apple Inc.
 Microsoft Corporation
 Google
 Amazon
 Samsung
 Coca -Cola Company
1.8 MEANING OF INDEPENDENT DIRECTOR
Com panies Act defin es Independent Director in Sec. 2(47) as under:
Independent Director means an independent director referred to in sub -
section (6) of section 149;
Sec149(6) of The Companies Act provides that Company to have Board of
Directors consisting of an Independent Di rector.
An independent director in relation to a company, means a director other
than a managing director or a whole -time director or a nominee director:
(a) who, in the opinion of the Board, is a person of integrity and possesses
relevan t expertise and e xperience ,
(b) (i) who is or was not a promoter of the company or its holding,
subsidiary, or associate company ,
(ii) who is not related to promoters or directors in the company, its
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Business Law (Company Law) - III
6 (c) who has o r had no pecunia ry relationship with the company, its
holding, subsidiary or associate company, or their promoters, or directors,
during the two immediately preceding financial years or during the current
financial yea r,
(d) none of whose relatives has or had pecuniary r elationship or
transaction with the company, its holding, subsidiary or associate
company, or their promoters, or directors, amounting to two per cent. or
more of its gross turnover or total income or fifty lakh rupees or such
higher amount as may be presc ribed, whichever is lower, during the two
immediately preceding financial years or during the current financial year ,
(e) who, neither himself nor any of his relatives ,
(i) holds or has held the position of a key managerial personnel or is or has
been em ployee 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 ,
(ii) is or has been an employee or proprietor or a pa rtner, in any o f 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 asso ciate company; o r
(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 ,
(iii) holds together with his relat ives 2% or more of the total voting power
of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any non -
profitorganisation that receives 25% or more of its receipts from the
company, any of its promoters, directors, or its h olding, subsidiary, or
associate company or that holds 2% or more of the total voting power of
the company; or
(f) who possesses such other qualifications as may be prescribed.
An Independent Director is also known as an outside director. He is a
member o f a board of direc tors who does not have a material or pecuniary
relationship with company or related persons, except his remuneration.
In other words, Independent Director means a director who is not
connected or associated with the Company in any manner and works only
to safeguard the interest of the members/ shareholders.
We can say that an independent director is a non - executive director of a
company who helps the company in improving corporate credibility and
governance standards. He/ She does not ha ve any kind of rela tionship with
the company that may affect the independence of his/ her judgment. munotes.in

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Definitions
7 1.9 MEANING OF INDIAN DEPOSITORY RECEIPTS
(IDR) :
Companies Act defines Indian Depository Receipt in Sec. 2(48) as
under:
Indian Depository Receipt means any instrument in the form of a
depository receipt created by a domestic depository in India and
authorised by a company incorporated outside India making an issue of
such depository receipts ,
 An IDR is issued by a foreign firm that cannot go through the Indi an
listing process.
 An IDR is beneficial for a foreign firm that wishes to share the risk
and rewards of the offering with Indian shareholders.
 IDRs are denominated in Rupees. It reflects a stake in a certain
number of the Issuing Company’s underlying equi ty shares. Deposite d
Shares are the name for these shares.
 These IDRs would be freely transferable and placed on Indian stock
markets.
 Depositary receipts are more convenient and less expensive than
purchasing stocks in foreign markets.
 Depositary receipts help international companies to raise capital
globally and encourage international investment.
1.10 MEANING OF ONE PERSON COMPANY:
Companies Act defines One Person Company in Sec. 2(62) as under:
One Person Company means a company which has only one pers on as a
member.
In other words, One Person Company is described as private company.
Advantages of One -Person Company:
 OPCs don’t have to conduct annual general meetings.
 Cash flow statements need not be included in their financial
statements.
 Directors cou ld sign the annual r eturns too; a company secretary is not
mandatorily required.
 Provisions regarding the independent directors are not applied to
OPCs.
 Directors can take home more remuneration as compared to other
companies.
 Such company when it is form ed it appoints it s successor by way of
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Business Law (Company Law) - III
8  Companies Act, 2013 has not prescribed any amount as minimum
paid-up capital for OPCs.
 He/she will act both as a director as well as a shareholder of the
company with limited liability.
For Example:
 Vast Online (OPC) Private Limited
 Evolve2achieve (OPC) Private Limited
 Amravati Diesel (OPC) Private Limited
 Bhardwaj Invention (OPC) Private Limited
1.11 MEANING OF SMALL COMPANY:
Companies Act defines Small Company in Sec. 2(85) as under:
Small Company means a company, other than a public company,
(i) paid -up share capital of which does not exceed Rs.50 lakh or such
higher amount as may be prescribed which shall not be more than Rs. 5
crore ; or
(ii) turnover of which as per its last profit and loss account does not
exceed Rs.2 crore or such higher amount as may be prescribed which shall
not be more than Rs.20 crore
Provided that nothi ng in this clau se shall apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
A small business offers opportunities for entrepreneurship, employ ment,
and job, and is much easier to run than a large corporation. Companies Act
states that small businesses cannot be considered public entities. Their
paid-up share capital does not exceed Rs. 2 crores or a larger amount that
is not more than Rs. 10 cro res.
A Small Company has several advantages compared with other companies
regarding requirements for compliance such as:
 is not required to rotate its auditors
 lower and fewer penalties for a small company than for other public
and private companies
 exempt s Small Compani es from filing directors’ reports
 it must not prepare a report on its Annual General Meeting munotes.in

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Definitions
9 A Small Company provides entrepreneurship, employment and jobs and
has been made easy to run by its various advantages over medium and
large compani es. According to the Companies Act, Small Companies are
not public companies.
1.12 SUMMARY
Accounting Statndards means authoritative standards for financial
reporting.
Auditing standards are used to carry out an independent examination of
financial inform ation of any entity.
Books of Account s is a record maintained relating to financial
transactions .
Deposit includes any receipt of money by way of deposit orloan orin any
other form by a compan y but does not include any amount prescribed in
consultation wit h the Reserve Bank of India.
Year Start from 1st April and ending on 31st March of next year is
called as Financial Year .
As per A ccounting Standards Income earned in the financial y ear
would be assessed to tax in the next year and this period would be
called as Assessment Year .
Foreign companies which are doing business in India, wh ich are
incorporated outside India.
Independent Director means a director who is not connected or
associated with the Company in any manner and works only to safeguard
the inte rest of the shareholders.
Indian Depository Receipt means any instrument issued by foreign
company reflected in Indian currency, traded on Indian Stock Exchanges.
One Person Company means a company which has only one person as a
member.
Small Company means a company, other than a public company having
paid up share capital exceeding R s.50 lakhs or such higher amount more
than Rs. 5 Crores.
1.13 UESTIONS :
I) Fill in the blanks:
a. ________ means a company which has only one person as a member.
b. _______ is a record mai ntained relating to financial transactions.
c. _________ means the standards of ac counting or any addendum thereto
for companies or class of companies referred to in section 133.
d. Financial year is the period ending on ___ every year.
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Business Law (Company Law) - III
10 f. A _____company need to be incorporated outside India.
(a. One Person company, b. Books of Accounts , c. Accounting
standards, d. 31st March, e. Indian Depository Receipt, f. Foreign
Company)
II) True or False:
a. Unlisted private company must have indep endent director.
b. Accounting standards does not permit uniformity.
c. Small company cannot have share capital over Rs.50 Lakh.
d. Deposit means any amount received as loan.
e. One person company means a company which has only one
employee in a company.
(a. False, b. False, c. True, d. False e. False)
III) Write Short Notes on:
a. Auditing Standards
b. Independent Director
c. Small Company
d. Deposit
e. Foreign Company
IV) Explain the Terms:
a. Accounting standards
b. One Person Compan y
c. Independent Director
d. Indian Depository Receipt
e. Deposit
V) Descriptive Question:
1. What is an Auditing Stan dards?
2. Explain the meaning of a Foreign Company.
3. What is Small Company?
4. What is financial year means under the Companies Act, 2013?
5. What do you mean by books of acc ount in a company?




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11 2
INCORPORATION OF COMPANIES
(Section 3 to Section 20)

Unit Structure
2.1 Introduction
2.1.1 Advantages of Incorporation of a Company
2.1.2 Disadvantage of Incorporation of a Company
2.2. Formation of Company
2.2.1. Memorandum
2.2.2. Contents of Memorandu m of Association
2.3. Article of Association
2.4. Distinction Between Memorandum and Articles of Association
2.5. Steps in Incorporation of a Company
2.6. Formulation of companies with charitable objects
2.7. Process of alteration of Memorandum of Assoc iation
2.8. Process of alteration of Article of Association
2.8.1. Step by Step Guide to Alter the Article of Association of a Company
2.8.2. Copies of memorandum, articles
2.9. Summary
2.10. Questions
2.1 INTRODUCTION
Meaning: A business is a body that has been legally separated from the
individuals that make up its membership. The phrase "Company has been
defined as a company incorporated under this Act or under any previous
company law," according to Section 2 (20) of the Companies Act, 2013.
A corpora te entity or firm is created via the legal procedure of
incorporation. The resultant legal entity, which distinguishes the firm's
assets and revenue from its owners and investors, is a corporation.
Common law defines a business as a "legal person" or "lega l entity" that is
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Business Law (Company Law) - III
12 A business is "incorporated" when it is set up in accordance with the
guidelines outlined in the Companies Act of 2013.
2.1.1 Advantages of Incorporation of a Company:
1. A dist inct legal identity :
When a company is incorporated, it acquires a distinct legal personality. A
corporation that has been incorporated, as opposed to a partnership firm
that lacks a distinct legal identity, has a legal identity that is distinct from
its shareholders and members.
2. Never -ending:
Unless the business is forced to dissolve for reasons specified in the act, it
will remain in existence even if all its members declare bankruptcy or pass
away. The Company is independent of its members' financia l situation.
3. Transferable Shares :
According to Section 82 of the Companies Act of 2013, a company's
shares are assumed to be movable and transferable in the manner
stipulated by the company's articles. As a result, the member can recoup
his investment by selling his shares on the open market without pulling
money out of the company. This ensures the stability of the company as
well as the investor's liquidity. Contrarily, in a partnership, a partner
cannot transfer his interest in the company's capital without the approval
of the other partners.
4. Suitability :
A corporation with legal status has the authority to file lawsuits against
people and other businesses on its behalf.
5. Versatility:
Every corporation is free to create rules that are appropria te for its
organization, so long as they don't go against fundamental legal and
ethical standards.
6. Limitation of Liability:
Members of a company are not liable for its obligations since the
corporation is a separate legal entity with its own existence. The extent of
the members' obligations is limited to their respective portions in the
business. Nobody is required to offer more than what they have already
done.
2.1.2 Disadvantage of Incorporation of a Company
Costs and documentation: The process of inco rporating a business is both
expensive financially and time -consuming due to the amount of
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Incorporation of
Companies
(Section 3 to Section 20)
13 1) A corporation is not a citizen:
Despite being a legal entity, a company is not a citizen. It can only
profit from those fundamental freedoms that are accorded to every
"person," citizen or not. However, the nationality, domicile, and
habitation of a firm do exist. A firm that was founded in a certain
nation has that nation's nationality, but unlike an indiv idual, it
cannot alter its nationality.
2) Limited access to company information :
The employees and lower -level members of the firm have limited
access to the company information and upper management, despite
the elaborate legislative structure intended to promote maximum
transparency and disclosure of corporate information.
3) Control and ownership must be kept separate :
Members of tiny shareholders have no real power to influence the
actions or choices of the organisation. This occurs because there are
so many employees in the organisation that no one person or even a
small group of employees can have a significant impact on how the
company operates. As a result, the title of "ownership" of the
corporation is only a phrase with no practical meaning .
4) Greater Social Responsibility:
Hundreds of thousands of people are employed by several
incorporated businesses, many of which have a net value in the
billions of dollars. They have a profound effect on society, and
major businesses frequently engage in cha ritable endeavours as part
of their CSR (corporate social responsibility) programmes.
These enormous corporations must abide by certain social standards
and contribute to the advancement of society because of the
enormous effect they have.
2.2. FORMATION OF COMPANY
As per section 3 of the Indian Company act 2013 company are being
formed by following the prescribed norms:
(1) (1) A company may be formed for any lawful purpose by:
(a) seven or more persons, in the case of a public company;
(b) two or more persons, in the case of a private company; or
(c) one person, in the case of a one -person company, or private
company, by signing his or her name to a memorandum and
complying with the registration requirements of thi s Act:

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Business Law (Company Law) - III
14

2.2.1 MEMORANDUM:

Every firm is required to create a memorandum of agreement in
accordance with Section 4 of the Indian firm Act 2013 3. "Memorandum"
refers to the company's memorandum as originally written at the
company' s establishment or as amended from time to time to carry out any
action required by any other Act law. A memorandum of association
enables individuals such as shareholders, creditors, investors, and other
members of a company to understand the reason(s) fo r the formation of
the organisation. They are given permission to learn about the
organisation's goals and the spectrum of approved activities the company
may engage in.
2.2.2. CONTENTS OF MEMORANDUM OF
ASSOCIATION:
1) Name Clause: When creating the Memorandu m of Association, the
firm name must be mentioned. A firm is free to choose any name it
wants, but it shouldn't be the same as another one that already exists.
The business name chosen should exactly match the name approved by
the Registrar of Companies as it appears in the Memorandum of
Association. Both a Public Limited Company and a Private Limited
Company should conclude with the words "Limited" or "Private
Limited," respectively.
2) Situation Clause: The name of the state in which a company conducts
busin ess and information about the Registrar of Companies'
jurisdiction must both be included in the firm's Memorandum of
Association. The corporation must establish its registered office within
15 business days. The registered office verification must also be
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Incorporation of
Companies
(Section 3 to Section 20)
15 company's domicile, which may or may not correspond to its operating
location.

The memorandum must be changed if the registered office's location
changes; the process is described below.
3) Objec t Clause: The Memorandum of Association must state the
purpose for which the organisation was established. One of the most
important provisions should be properly worded and include every
form of business that the firm may conceivably engage in in the futu re.
It is against the law for a firm to engage in any activity not expressly
included in the object clause. The items are divided into three
categories: "Main Objects," "Ancillary Objects," and "Other Objects."
The objectives must be clearly articulated an d clear in their nature. The
items must not also be unlawful, against Act prohibitions, or against
national public policy.
4) Liability Clause: The Memorandum of Association must expressly
outline the obligations of the company's members. They might be
guaran teed or limited by shares. The whole provision may be dropped
in the event of an unlimited liability business.
When a corporation is capped by shares, the members' responsibility is
restricted to any outstanding debt on the shares they personally own.
When a company is limited by guarantee, its members are responsible
for paying the sum specified in the memorandum at the time of the
firm's liquidation. In the case of limitless corporations, the members'
liability, which includes personal assets, is infini te.
5) Capital Clause: The Memorandum of Association should specify the
maximum amount of allowed capital that the company's members may
create. This sum is subject to stamp duty. Although there is no legal
restriction on how much money a corporation may rais e, once it has
been formed, it cannot increase the permitted share capital. In the case
of equity and preference shares, respectively, the denomination for
each of these shares must be either RS 10 or RS 100. A corporation
should ensure that the allowed ca pital obtained is high enough to
support future business development. This charter may also include
any additional rights and advantages that have been agreed upon by
the shareholders, creditors, investors, and other business members.

An unlimited corpor ation with authorised share capital is not required
to indicate it in the memorandum.
6) Association or Subscription Clause: The company's memorandum of
association should specify the approved capital as well as the quantity
of shares that each member owns. T he minimum number of shares
required for each subscriber to the memorandum is one. In addition to
signing the memorandum in the presence of at least one witness who
must authenticate the signature, each subscriber must indicate how
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Business Law (Company Law) - III
16 2.3 ARTICLE OF ASSOCIATION:
Sec 5 of Indian Companies act 2013 define The Articles of Association of
a company are that which prescribe the rules, regulations, and the byelaws
for the internal management of the company, the conduct of its business,
and is a document of paramount significance in the life of a company. A
business's articles, which govern the administration and authority of the
company and its executives, are sometimes likened to a rule book for how
the organisation should operate. It specifies a number of internal business
procedures, including the way calls are made, the credentials of directors
and workers, the roles and responsibilities of auditors, forfeiture of shares,
and more.
In fact, a contract between the members and between the membe rs and the
firm is established by the articles of association. The defined terms of this
agreement set forth the customary privileges and duties that come with
being a member of the firm.
2.4 DISTINCTION BETWEEN MEMORANDUM AND
ARTICLES OF ASSOCIATION
S.No. Memorandum of Association Articles of Association
1 Contains the essential
requirements for the company's
incorporation. contain the company's internal
rules and regulations.
2 intended for the general public's,
creditors', and shareholders'
benefit and clarity. Regulate the interactions among
the members as well as those
between the firm and its
customers.
3 outlines the boundaries beyond
which the company's action is
not permitted. The rules for working there are
laid forth in articles.
4 Memorandum specifies the
conditions under which the
articles must operate. Articles give specifics within
those bounds.
5 can only be changed under
particular conditions and in
accordance with the 2013
Companies Act's regulations. In
some circumstances, the Centra l
Government's approval is also
necessary. With the passage of a specific
resolution, articles can be changed
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Incorporation of
Companies
(Section 3 to Section 20)
17 6 Memorandums cannot contain
clauses that violate the
Companies Act. Memorandum
is the Companies Act's only
subsidiary. Articl es cannot contain clauses
that go against the Memorandum.
The Memorandum and the
Companies Act are both
subordinate to the Articles.
7 Any actions taken in violation of
the memorandum are extra vires
and cannot be approved by the
shareholders either. The shareholders may approve
actions taken in contravention of
the Articles so long as they do not
go beyond the Memorandum.

2.5 STEPS IN INCORPORATION OF A COMPANY
The legal procedure used to establish a corporate entity, or a business is
referred to as in corporation. A corporation that has been legally established is
regarded as a distinct legal person in its own right. These businesses are easily
recognised by the inclusion of words like "Inc." or "Limited" in their titles. It
develops into a corporate le gal entity that is entirely independent of its
proprietors.
1. Ascertaining Availability of Name:
The selection of an acceptable name is the first stage in the establishment of
any firm. A corporation can be recognised by the name it registers. In the
firm's memorandum of association, the name of the company is mentioned.
If the business is a private one, the name must finish in "Private Limited" or
"Limited," respectively.
The promoters must submit an application in writing to the state's Registrar
of Comp anies in order to determine whether the chosen name is accessible
for adoption. Paid along with the application is 500 rupees. After the firm
completes all necessary paperwork within three months, the Registrar
approves the adoption of the name.
2. Prepara tion of Memorandum of Association and Articles of
Association:
A company's memorandum of association serves as its constitution or
rulebook. The memorandum outlines the company's goals, the industry in
which it will operate, and the kind of business it int ends to engage in.
Additional divisions include five clauses.
1. Name Clause
2. Registered Office Clause
3. Objects Clause
4. Liability Clause
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Business Law (Company Law) - III
18 Articles of Association are essentially a set of guidelines that the internal
administration of the firm must abide by. A contract is established between
the firm and its members by the article. The article discusses the members'
obligations, rights, and liabilities. It binds each and every employee of the
organisation equally.
3. Printing, signing, and stamping o f the memorandum and articles of
organization, as well as their vetting, are all tasks that the Registrar of
Companies frequently assists entrepreneurs with. In particular, with
promoters who have never before written a memorandum or an essay.
The articles of association and memorandum of association can then be
printed after they have been reviewed by the Registrar of Companies. As a
result, the memos and articles are broken up into paragraphs and organised
by chronological order.
Each subscriber or their authorised representative must personally sign each
item in the presence of a witness for it to be legitimate.
4. Power of Attorney: The promoter may then hire an attorney who will have
the ability to act on behalf of the company and its promoters to compl ete the
legal and complicated documentation procedures of formation of a company.
The attorney will have the power to modify the articles and memoranda as
well as other papers that have been submitted to the registrar.
5. Additional Filed Documents with th e Registrar of Companies:
The First -e-Form No. 32 - Directors' approval
The Second - Notice of Registered Address (e -Form No. 18)
The Third - e-Form No.32. - Directors' Information
6. Statutory statement in e -Form No. 1: According to this statement, "All the
requirements of the Companies Act and the rules thereunder have been
compiled with respect to and matters precedent and incidental thereto."

7. Payment of Registration Fees: During incorporation, a predetermined fee
must be paid to the Registrar of Co mpanies. It is based on the firms' nominal
capital, which includes share capital.
8. Certificate of Incorporation: The Registrar will register the business and
issue a certificate of incorporation if he is absolutely certain that all
conditions have been m et by the company that is being established.
Therefore, the incorporation certificate issued by the Registrar is
unquestionable evidence that all Act criteria have been satisfied.
2.6. FORMULATION OF COMPANIES WITH
CHARITABLE OBJECTS:

Meaning: A Section 8 Company is one that is established "for promoting
commerce, art, science, sports, education, research, social welfare, charity,
protection of the environment or any such other object," provided that the
profits, if any, or other income is applied for pro moting only the objects of
the company and no dividend is paid to its members. Section 8 of the munotes.in

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Companies
(Section 3 to Section 20)
19 Companies Act, 2013, is where this phrase first appears. Therefore, a
business incorporated under the Companies Act, 2013, for philanthropic or
not-for-profit o bjectives is a Section 8 business or a Section 25 Company.

Creation of Companies with Charitable Objectives
(1) Where it is established to the Central Government's satisfaction that an
individual or group of individuals is eligible to register as a limit ed
company under this Act,

(a) aims to use its earnings, if any, or other revenue in advancing its
purposes; (b) has as one of its objectives the promotion of trade, art,
science, sports, education, research, social welfare, religion, charity,
environme nt protection, or any other object; and c) The Central
Government may, by licence issued and under such conditions as it deems
appropriate, permit that person or association of persons to be registered as
a limited company under this section without the ad dition to its name of
the words "Limited" or, as the case may be, the words "Private Limited."
The Registrar will then, upon application, in the form, register such person
or association of persons.

(2) The compan y established in accordance with this section is subject to
all the rights and liabilities of limited companies.

(2) A company registered in accordance with this section may include a
firm as a member.

(4) (i) A business registered under this section may no t change the terms
of its articles or memoranda without first receiving authorisation from the
Central Government. (ii) Only after meeting these requirements is a
company registered under this section permitted to transform into a
company of any other sort .

 Results of registration. —Section 9 of the Company Act Such
subscribers to the memorandum and all other individuals who may at
any time join the company will be a body corporate by the name stated
in the memorandum, capable of performing all the duties o f an
incorporated company under this Act, having perpetual succession,
and having the authority to acquire, hold, and dispose of property, both
movable and immovable, tangible, and intangible.

 Company's registered office:

Any correspondence pertaining to the firm should be submitted to its
registered office, which is its official address. Since it is a matter of
public record, the Company receives communications from various
government agencies and other organisations u sing the same record. At
the time of the company's incorporation, the registered office is chosen.
By following the method outlined in the Companies Act of 2013, we can
alter the registered office of the Company at any point in the future. A
business must have a registered office capable of receiving and munotes.in

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Business Law (Company Law) - III
20 recognising any messages and notices that may be always directed to it
within thirty days of its establishment and afterwards. At the time of
formation, the firm must submit the required address documentati on,
such as a conveyance, lease agreement, rent agreement, etc., and a copy
of a utility bill (not older than two months).

CHANGE IN REGISTERED OF THE COMPANY:
Once a business is registered, its registered office may be changed at any
time. Due process needs to be followed to change the registered office.
After the date of the company's incorporation, notice of any change in the
circumstances of the registered office must be sent to the Registrar within
thirty days of the change, who must then record it. A ny time a business's
registered office is moved outside of a city, town, or village, a special
resolution of the company must be enacted to authorise the new address.
Without the Regional Director's approval, a company's registered office
cannot move from the jurisdiction of one registrant to that of another
registrant. Every firm must prominently display its name and registered
office address in visible characters on the exterior of any office or location
where it conducts business. This information must a lso be kept up to date.
2.7. PROCESS OF ALTERATION OF MEMORANDUM
OF ASSOCIATION
The expression “alter” means to modify/ change or vary; to make or
become different in some respect. As per section 2(3) of the companies
act, 2013 “Alter and alteration” shal l include the making of additions,
omissions, and substitutions.
Step 1: Board of Directors meeting notice
Any amendment to a Memorandum of Association must first be
communicated to the Board of Directors (BoD) in order to proceed. The
BoD must be informe d by notice at least seven days before the actual
board meeting, as required by Section 173 of the Act.
A draught of the resolution and information on the proposed change must
be included with the notice.
Step 2 - Meeting with the Board of Directors in Ste p 2
The conducting of the board meeting is the second stage in amending the
Memorandum of Association. The conference hears arguments about the
need, benefits, and drawbacks of the suggested change. The date, place,
and time of the general meeting are then set, if the BoD decides to
implement such a change. Additionally, a director or another person is
permitted to give notice of the general meeting to each and every company
member.

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Incorporation of
Companies
(Section 3 to Section 20)
21 Step 3: Extraordinary General Meeting Notice
The notice of the general me eting is then distributed to the company's
directors, members, and auditors. The notification must be delivered at
least twenty -one days before to the scheduled general meeting in
accordance with Section 101 of the Act. The notice may be sent physically
or electronically. The proposed meeting's actual date, time, and location
should be included in the notification. It should also provide a summary of
the agenda items that will be discussed during the meeting.
Step 4: General Meeting • The quorum for the mee ting is first verified on
the day of the general meeting. A private business requires a quorum of at
least two members. ( Personally present.) The quorum for a public
corporation is at least five, however under Section 103 of the Act, the
quorum varies depe nding on the number of members present.

• The existence of the business auditor is then verified. A leave of absence
could be given if he or she is not present. Finally, the special resolution
that was being con sidered for changing the Memorandum of Association
was approved. A special resolution is said to have passed when it receives
at least three times as many votes in support as against it. Votes may be
cast in person, via mail ballot, or through a proxy.
Step 5: Submit an application to the company's registrar.
Various applications must be submitted to the RoC within 30 days after
passing the necessary resolution after it has been passed. As will be
detailed below, the applicability change from one clause to another.
2.8 PROCEDURE FOR ALTERA TION OF ARTICLES
OF ASSOCIATION OF A COMPANY
Section 14 of the CA, 2013, provides for the modification of AOA. It
states that certain resolutions may be used to change articles. Additionally,
it has the ability to change t he articles governing the transformation of a
private company into a public company and a public company into a
private firm. Additionally, the articles that are being suggested for change
must be checked to see if they are entrenched; if so, the proper pr ocedure
for amending such provisions must be followed.
2.8.1 STEP BY STEP GUIDE TO ALTER THE AOA OF A
COMPANY
1. Board Meeting:
Call a meeting of the board where pert inent information such as the -
• Take into account and approve an y changes to the company' s AOA.
• Next, choose the day, time, date, and agenda for the general meeting
that will adopt the special resolution to put the change into effect. munotes.in

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Business Law (Company Law) - III
22 • Following that, a director will be given permission to issue notice for the
general meeting and a draugh t notice for the meeting will be created.
• Give the go -ahead for any official, including the company secretary, to
notify all members by notice of the impending general meeting.
• Permit the CS, CFO, or any director to submit a copy of the special
resolu tion to the ROC. (Registrar of Company)
2. Call a General Meeting
• To adopt a special resolution to change AOA, a general meeting must be
summ oned.
• A postal ballot may be used to pass a resolution.
3. Time -Bound Disclosures • In accordance with Regulat ions 30 and 46(3)
of the SEBI (LODR) Regulations, 2015, a listed company must transmit
the results of the general meeting to stock exchanges where it is listed
within 24 hours of the meeting's end.
 Regulation 44 of the SEBI (LODR) Regulations, 2015 manda tes that
the listed company shall submit to the stock exchange within 48 hours
of the conclusion of its general meeting the details regarding the
voting rights in the format specified by SEBI. In addition, it should
post the meeting's outcomes on the compa ny website within two days.
4. Filing of Forms and Documents
• A copy of the special resolution and an explanation must be filed with
the ROC in Form MGT -14 within 30 days of passage, together with the
necessary paperwork and fees, according to Section 117 read with Rule 24
of the 2014 Companies (Management and Administration) Rules.
5. Post Compliances • It must be guaranteed that the changes to the
articles are indicated in each copy of the AOA in order to be in
compliance with Section 15(1).
2.8.2 COPIES OF MEMORANDUM, ARTICLES, ETC TO
BE GIVEN TO MEMBERS

According to section 17 of the company act, a company must send a
member who requests it a copy of each of the following documents within
seven days of the request and subject to payment of any fees tha t may be
prescribed:
 (a) the memorandum;
 (b) the articles; and
 (c) every agreement and every resolution.

 Service of documents. —A document may be served on a company or
one of its officers in accordance with Section 20 of the Company Act
by sending it to the company or the officer at the registered office of munotes.in

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Incorporation of
Companies
(Section 3 to Section 20)
23 the company via registered mail, speed post, courier service, leaving it
at the registered office, or using any other electronic or other mode that
may be prescribed. As long as the securities are s tored with a
depository, the depository may supply the firm with the records of the
beneficial ownership through electronic or other means. A document
may be served on the Registrar or any member by sending it to them
through mail, registered mail, speed m ail, courier, delivery at their
offices or addresses, or by any other prescribed electronic or other
manner. This includes electronically filing papers with the Registrar.
To the extent that a member requests delivery of a document via a
certain method, he is responsible for paying any costs decided upon by
the business at its annual general meeting.
2.9 SUMMARY
A company is a legal entity formed by individuals, shareholders, or other
companies to engage in business activities. It is an organization that sells
goods or services to customers, with the primary goal of generating
revenue and profits

A Memorandum of Association (MOA) is a legal document that outlines
the constitution of a company. It contains Name Clause, Registered Office
Clause, Object Cla use, Liability clause, Capital Clause.

An article of association is a legal document that outlines the purpose,
functions, and structure of an organization or company. It sets forth the
rules and regulations by which the organization or company will opera te,
including the rights and responsibilities of its members, shareholders, and
board of directors.
2.10 QUESTION S
I) Rewrite the following sentences by selecting correct option
1. What is the minimu m number of members required to form a public
limited company?
a. 10 b. 2 c. 5 d. 7
2. What is known as charter of company
a. MOA b. AOA c. Prospectusd. d. Certificate of Incorporation
3. In case o Private companies, MOA must be signed by _____ members
a. 1 b. 2 c. 3 d. 7
4. Private company can start its business immediately after the issue of
a. certificate of commencement of business
b. certificate of incorporation
c. both
d. none of the above
5. Application for approval of nam e of a company is to be made to
a. SEBI b. Registrar of Companies
c. Government of India
d. Government of the State in which Company is to be registered
(Ans. 1 -d , 2-a, 3-b, 4-b, 5-b) munotes.in

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24
II) State whether the following statements are true or false:
1. It is necessary to get every company incorporated, whether private or
public.
2. Statement in lieu of prospectus can be filed by a public company
going for a public issue.
3. A private company can commence business after incorporation.
4. Experts who help promoters in the promotion of a company are also
called promoters.
5. A company can ratify preliminary contracts after incorporation.
(Ans. True – 1,2,3 False – 4,5)

III) Write a short note on:
a) Incorporation of company
b) Article of Association
c) Memorandum of Association
d) Company's registered office
e) Alteration of AOA

IV) Descriptive Question:
1. Explain Memorandum of Association? what are the Contents of
Memorandum of Association?
2. Advantages and Disadvantage of Incorporation of a Company
3. Difference between Memorandum of Association and Article of
Association.
4. what are the various step in Incorporation of a Company?
5. what are the process of alteration in Memorandum of Association


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25 3
PUBLIC OFFER
SECTION 23,25 TO 28,33,35,39

Unit Structure:
3.0 Objective
3.1 Introduction
3.2 Section 23 Public issue
3.3 Prospects
3.3.1 different type of prospects
3.4 Deemed Prospectus
3.4.1 Prospectus includes the following content.
3.5 Variation in terms of contract or objects in prospectus u/s 27
3.6 Offer of sale of shares by certain members of company
3.7 Issue of application forms for securities
3.8 The liabilities for Mis -statements in prospectus
3.8.1 Penalities for misstatements in prospectus
3.8.2 Pe nalty for misstatement
3.9 Allotment of securities by company(section 39).(Bye Law)
3.10 Allotment of securities under the companies act,2013
3.11 Summary
3.12 Questions
3.0 OBJECTIVE
Students will be able to:
• Elaborate various concepts li ke prospectus, statement in place of
prospectus, and Shelf prospectu s after completing the lesson.
• Describe the Prospectus's contents.
• Talk about the prospectus's legal obligati ons.
• Outline the penalties for making false statements and how to defen d
yourself against these penalties.
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26 3.1 INTRODUCTION
Companies require money to stay afloat in the commercial world. These
cash could be needed for immediate or long -term needs. Comp anies issue
shares to meet their long -term demands.
There are three ways to issue shares:
(1) by a private placement of shares,
(2) through a public offering.
(3) Distributing the share to current investors
3.2 PUBLIC ISSUE SECTION 23 OF THE COMPANIES
ACT, 2013
Mentions Public Issue as a method of public fund -raising. It refe rs to the
marketing or sale of stock in anticipation of public subscription through
the release of a prospectus. By releasing shares to the general public and
becoming listed on one of India's reputable stock exchanges, public issues
are important.
23 (1) A Public company may issue securities - (Bye Law)
a) to public through prospectus (herein referred to as “public offer”) by
complying with the provisions of this part; or
b) through a rights issue or a bonus issue in accordance with the
provisions of this a ct and in case of a listed company or a company which
intends to get its securities listed also with the provisions of the Securities
and exchange boards of India, 1992 and the rules and regulations made
thereunder.
(2) A private company may issue securit ies-
a) by way of rights issue or bonus issue in accordance with provisions of
this act or
b) through private placement by complying with the provisions of part II
of this chapter.
An explanation of this section 23: A Public company may issue
securities -
The prospectus and securities allotment rules are outlined in the
Companies Act of 2013. The fundamental techniques for issuing securities
by both public and private enterprises are outlined in Section 23, which is
the first section under this chapter.
The following is briefly outlined in the section:
A public firm has three options for issuing securities:
1. Through public prospectus. munotes.in

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Public offer

27 2. Private placement, second.
3. Bonus or rights problem.
A firm that is already publicly traded or one that plans to list its securities
may issue securities in accordance with the Securities and Exc hange
Board of India Act, 1992, and any relevant prescribed rules.
• The t erm "public offer" as used in this section refers to a company's
initial or subsequent public offering of securities as well as a current
shareholder's public offer to sell securities through the publication of a
prospectus.
• An initial public offering ( IPO) occurs when a non -public corporation
makes securities available to the general public for purchase, as well as
when any current holder of such securities in a non -public company m akes
a similar offer.
• A further public offer involves a sale of securi ties to the public by
current owners of such securities in a listed business. It also refers to an
offer of securities for subscription to the public by a listed firm.
A corporation can list on a reputable stock market in India by way of a
public issue, or by offering securities to the general public. As stated in
Section 24 of the Act of 2013, SEBI has the authority to regu late the
issuance and transfer of securities by listed and unlisted comp anies. As
such, SEBI (Issuance of Capital and Disclosure Requirement) Regulation,
2009 and SEBI (Listing Obligations and Disclosure Requirements),
Regulations, 2015, are two rules and regulations that must be adhered to
when making a public offering. stock s for corporate private placements
are not as regulated or as closely watched as those for publicly traded
stocks.

3.3 PROSPECTUS
The Companies Act, 20 13 defines a prospectus under section 2(70 ).
Prospectus can be defined as “any document which is described or issued
as a prospectus”.
Any invitation to the public to subscribe for shares or debentures is
included in the definition of pr ospectus. A prospectus is a written
statement that serves as an invitation to the general public to purchase
business shares or debentures. Thus, a prospectus is a document that is
label led or published as a prospectus. A prospectus includes even requests
for public bids to subscribe for shares or debentures.
Type of Prospectus:
3.3.1 These are of different types. Some of them are: -
1.Red Herring
2.Shelf munotes.in

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Business Law (Company Law) - III
28 3.Abridged
4.Deemed
1. Red Herring Prospec tus
All of the information on the offer of securities is contained in the offer
document. However, it excludes the size of the offering and the cost of
the securities. Additionally, it is not the final prospectus because the
company may make updates before the final release.

It is so titled be cause it has a para in red ink and the issuer corporation
must file it with the registrar at least three days before the opening of the
offer. According to that, the company is not seeki ng to sell the shares
before SEBI has given its consent.
2. Shelf Pros pectus
The Shelf Prospectus is a single document that a company may issue
several issues from, and banks and other financial institutions typically
issue it.
• In this situation, the fir m does not need to submit a new prospectus
with each issue after filin g it with the ROC. Although it has a one -year
expiration date, the corporation may file an information memo
requesting a modification if the situation changes.
3. Abridged Prospectus
It refers to a memorandum that highlights key elements of a prospectus
and provides investors with concise information to assist them make an
investment choice fast.
• In this situation, the Company must include it with each application for
the acquisition o f securities.
3.4 DEEMED PROSPECTUS:
Deemed prospectus has been stated under section 25(1) of the Companies
Act, 2013 .When any company to offer securities for sale to the public,
allots or agrees to allot securities, the document will be considered as a
deemed prospectus through which the offer is made to the public for sale.
The document is deemed to be a prospectus of a company for all purposes
and all the provision of content and liabilities of a prospectus will be
applied upon it.
In the case of SEBI v. Kunnamk ulam Paper Mills Ltd. , it was held by the
court that where a rights i ssue is made to the existing members with a right
to renounce in the favour of others, it becomes a deemed prospectus if the
number of such others exceeds fifty.
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29 3.4.1 Prospectus incl udes the following content:
1. Name of the Company
2. Registered Address of Company
3. Objects of the Company
4. Purpose of the issue
5. Nature of Business
6. Capital structure of Company
7. Name and address of Signatories and no of shares subscribed
by them
8. Qualific ation shares of the Directors
9. Particulars of Debentures and redeemable p reference shares
10. Remuneration of Directors and Promoters
11. Minimum Subscription for allotment
12. Date of opening and closing of issue
13. Details of Underwriter
14. Underwriting Commission an d Brokerage
15. Name and address of Auditor, Company Secretary, Banker
and T rustee of Company
16. Particulars of material documents
17. Expected rate of dividend and voting rights
3.5 VARIATION IN TERMS OF CONTRACT OR
OBJECTS IN PROSPECTUS U/S 27 (BYE LAW)
(1) A co mpany shall not, at any time, vary the terms of a contract referred
to in the prospectus or objects for which the prospectus was issued, except
subject to the approval of, or except subject to an authority given by the
company in general meeting by way of special resolution:
Provided that the details, as may be prescribed, of t he notice in respect 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 off ice of the company is situated indicating clearly the
justification for s uch variation:
Provided further that such company shall not use any amount raised by it
through prospectus for buying, trading or otherwise dealing in equity
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30 (2) The dissenting shareholders being those 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 such exit price, and in such manner and conditions as may
be specified by the Securities and Exchange Board by making regulations
in this behalf. (Bye Law)
Except by adopting a special resolution by postal vote, the firm may not
modify the terms of contracts me ntioned in the prospectus or the purposes
for which the prospectus was is sued. The notice of the proposed special
resolution must include the following information: -
(a) the initial goal or purpose of the Offering;
(b) the total amount raised;
(c) the am ount of money used to further the company's objectives as
indicated in th e prospectus;
(d) the extent of achieving the intended goals (i.e., 50%, 60%, etc.;
(e) the amount of funds that were not used from the funds generated
through the prospectus,
(f) th e specifics of the proposed modification to the terms of contracts
referr ed to in the prospectus or the objectives for which the prospectus
was issued;
(g) the justification for the requested modification;
(h) the proposed deadline for achieving the modi fied objectives;
(i) the clause -by-clause information required by sub -rule (3) of rule 3 with
regard to the initially proposed objectives of the issue; and
(j) the risk factors pertaining to the proposed modification. and
(k) The additional pertinent dat a required for the members to make an
informed choice about the proposed resolution.
(2) Form PAS -1 must be used for the advertisement of the notice for
getting the resolution passed that modifies the terms of any contract
mentioned in the prospectus or c hanges the purposes for which the
prospectus was issued. This advertiseme nt must be published at the
same time as the postal ballot notices are sent to shareholders.

The notice must also be posted on the company's website, if one exists.
3.6 OFFER OF SALE OF SHARES BY CERTAIN
MEMBERS OF COMPANY. (BYE LAW)
(1) Where certain mem bers of a company propose, in consultation with the
Board of Directors to offer, in accordance with the provisions of any law
for the time being in force, whole or part of their holdi ng of shares to the munotes.in

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31 public, they may do so in accordance with such proced ure as may be
prescribed.
(2) Any document by which the offer of sale to the public is made shall,
for all purposes, be deemed to be a prospectus issued by the company and
all laws an d rules made thereunder as to the contents of the prospectus and
as to li ability in respect of mis -statements in and omission from prospectus
or otherwise relating to prospectus shall apply as if this is a prospectus
issued by the company.
(3) The members, whether individuals or bodies corporate or both, whose
shares are propos ed to be offered to the public, shall collectively authorise
the company, whose shares are offered for sale to the public, to take all
actions in respect of offer of sale for and on t heir behalf and they shall
reimburse the company all expenses incurred by it on this matter. (Bye
law)
Explanation of the Same:
Promoters of a publicly traded firm can sell their shares in a transparent
manner to the general public through an offer for sa le.
When specific business members want to sell all or a portion of their
shares to the public, they can do so by following the established method.
The Board of Directors must be consulted about this idea, and it must also
follow all currently in effe ct laws.
Any such offer document shall be regarded to be a prospectus iss ued by
the company, and this document shall be subject to all laws and
regulations relating to prospectuses.
Collectively, these members shall provide the company its consent to act
for and on their behalf in connection with the offer of sale. They will
cover any costs made by the business in this regard.
3.7 ISSUE OF APPLICATION FORMS FOR
SECURITIES (SECTION 33) (BYE LAW)
As per Section 33 of Indian Companies Act 2013 no form of appli cation
for the purchase of any of the securities of the company shall be issued
unless such form is accompanied by an abridged prospectus. Provision in
the Companies Act 2013 related to issue of application forms for
Securities is as under.
(1) No form of application for the purchase of any of the securities of a
company shall be issued unless such form is accompanied by an abridged
prospectus:
Provided that nothing in this sub -section shall apply if it is shown that the
form of application was issued
(a) in connection with a bona fide invitation to a person to enter into an
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32 (b) in relation to securities which were not offered to the public.
(2) A copy of the prospectus shall, on a request being ma de by any person
before the closing of the subscription list and the offe r, be furnished to
him.
(3) If a company makes any default in complying with the provisions of
this section, it shall be liable to a penalty of fifty thousand rupees for each
default.
3.8 THE LIABILITIES FOR MIS -STATEMENTS IN
PROSPECTUS CAN BE COVERED UNDE R THE
FOLLOWING HEADS:
1. Civil Liability
2. Criminal Liability
Civil responsibility for prospectus lies (section 35)
When a prospectus contains factual errors or omissions that are int ended
to mislead, civil liability may result, provided that the error or omission
caused the shareholder to purchase the shares in question. Every director,
promoter, and other individual, such as an expert who approved the
release of the prospectus, is re sponsible for any untruth or
misrepresentation made to the person receivi ng the share allocation. The
shareholder who bought shares on the basis of such misrepresentation has
the right to sue the firm, as well as its directors, promoters, experts, etc.,
for any losses or damages he may have experienced.
1. Civil Liability
When ever a person purchases a company's securities based on a
misleading statement, inclusion, or omission in the prospectus and suffers
loss or damage as a result of acting on that infor mation,
 The company and everyone involved —including the person who made
the misleading statement —are liable.
 The firm's director or has consented to take that position; or
• The director of the compa ny at the time the prospectus was released:
 A professional who has been i nvolved or interested in the
establishment, management, or marketing of the firm, as well as one
who is a promoter of the company, has sanctioned or allowed the
release of the prospec tus,
 or is a promoter of the company will be responsible for compensatin g
any individual who has experienced such loss or harm, without
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33 Exemption from Liability
No person shall be liable for misstate ment if the person proves that -
1.Prior to the prospectus's release, the in dividual withdrew his permission.
If a person who had agreed to become a director of the firm later
withdraws their agreement, it would mean that the prospectus was
published without their approval.
2. if a person is not consulted or informed before the p rospectus is
released. When a person learns that a prospectus was released without his
or her knowledge or approval, and after learning of its release, the person
issues a proper publ ic notice stating that the prospectus was not issued
with his or her cons ent.
3. Such a claim or omission was irrelevant, or
4. He had a good basis to think that the statement was accurate and that the
omission or inclusion was required, and he had that b elief up to the
prospectus' release.
3.8.1 Penalities for misstatements i n prospectus
1. Compensation: The aforementioned individual is responsible for
compensating each subscriber for shares or debentures for any loss or
harm he suffers as a result of any fa lse information included therein.
2. Damages for deception or fraud: Anyone who was persuaded to invest
in a firm by a prospectus that contained a misleading statement may
bring a claim against the company and the person at fault for damages.
Before suing the corporation for damages, the shares should be returned
to it first. When a statement is made carelessly or without faith in its
veracity, fraud has occurred. Fraud or deception is when a statement is
made with the intent to deceive.
3. General law liability: For false representations or fraud, any person in
charge of the prospect us' release may be held accountable under either
general law or the Act.
4. Rescission of the Contract for Misrepresentation: Rescission of the
Contract refers to a court order or a party's termination of a contract. If
the assertion he used to purchase t he shares is untrue or the result of
deception, whether innocent or dishonest, the contract will be voided. It
must not be a legal matter but a material fact. It should be highlighted
that if a party had the resources to ascertain the truth with reasonable
diligence, he could not assert a right to rescission of contract based on
misrepresentation.
2. Criminal Liability
Section 63 of the Companies Act deals with criminal liability for mis-
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34  Every person who authorises the release of a prospectus is liable
for fraud if the prospectus contains any statement that is false or deceptive
in whatever way it is presented or if any information is inserted or omitted
that h as the potential to deceive.
 According to Section 447, "fraud" refers to any act, omission, or
concealment of any truth that is done with the intention of misleading
others, obtaining an unfair advantage, or harming the interests of the firm,
its sharehold ers, creditors, or any other person. Such a conduct does not
necessarily include any unjust gain or loss. Under the provisions of this
clause, misuse of position is also deemed fraud.
Penalty for mis -statement
If someone is found guilty of the crime of fra ud, they will be sentenced to
a term of imprisonment that must be less th an six months and cannot
exceed 10 years. He will also be subject to a fine, which must be less than
the sum involved in the fraud and cannot be greater than three times that
amount.
The sentence must be at least three years in jail if the fraud invol ved
public interest.
3.9 ALLOTMENT OF SECURITIES BY COMPANY
(SECTION 39). (Bye Law)
(1) No allotment of any securities of a company offered to the public for
subscription shall be made unless the amount stated in the prospectus as
the minimum amount has been subscribed and the sums payable on
application for the amount so stated have been paid to and received by the
company by cheque or other instrument.
(2) T he amount payable on application on every security shall not be less
than five per cent. of the nominal amount of the security or such other
percentage or amount, as may be specified by the Securities and Exchange
Board by making regulations in this behalf .
(3) If the stated minimum amount has not been subscribed and the sum
payable on application is not received within a period of thirty days from
the date of issue of the prospectus, or such other period as may be
specified by the Securities and Exchange B oard, the amount received
under sub -section (1) shall be returned within such time and manner as
may be prescribed.
(4) Whenever a company having a share capital makes any allotment of
securities, it shall file with the Registrar a return of allotment in s uch
manner as may be prescribed.
(5) In case of any default under sub -section (3) or sub -section (4), the
company and its officer who is in default shall be liable to a penalty, for
each default, of one thousand rupees for each day during which such
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35 3.10 ALLOTMENT OF SE CURITIES UNDER THE
COMPANIES ACT, 2013
(i) Private Placement
(ii) Right Issue
(iii) Preferential Allotment
1. PRIVATE PLACEMENT: - Private placement refers to any offer of
securitie s, invitation to subscribe for securities, or invitation to subscribe
for securities made to a select group of individuals by a company (other
than through a public offer) through the issuance of a private placement
offer letter that complies with the requ irements outlined in Section 42 of
the Companies Act, 2013. Section 42 of the Companies Act of 2013 in
conjunction with Rule 14 of the Companies of 2014 govern private
placements of stocks.
CONDITIONS: - (i) A private placement offer may not be made to mor e
than 200 individuals in a single financial year, with the exception of
"Qualified Institutional Buyers (QIBs)" and employees of the Company
who are receiving securities under a plan of employee stock options in
accordance with Section 62's clause (b).
The Securities and Exchange Board of India (Issue of Capital and
Disclosur e Requirements) Regulations, 2009, as amended, define a
qualified institutional buyer (QIB) as one who meets the requirements for
capital and disclosure.
(ii) Regardless of whether p ayment has been received for the securities or
whether the company intend s to list its securities on a recognised stock
exchange inside or outside of India, if a company, whether listed or
unlisted, makes an offer to allot, invites subscription, allots, or enters into
an agreement to allot securities to more than 200 persons, t he transaction
will be deemed to be an offer to the public and will be subject to Part I's
rules.
No new offer or invitation under this section may be extended unless the
Company has withdrawn or abandoned an earlier offer or invitation, the
allotments fo r which have been completed, or both.
(iv)There must be a minimum of 60 days between any two such offers or
invitations, and no more than four such offers or invitations may be
extend ed in a fiscal year or more than once in a calendar quarter.

(v)The amou nt of the offer or invitation must be equivalent to at least Rs.
20,000 per individual in face value of the securities.
(vi) A company making an offer or invitation under this sectio n must allot
its securities within 60 days of the date it receives the ap plication money
for those securities. If it is unable to do so, it must repay the application
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36 period. If it fails to do so within the aforesaid time frame, it will be
responsible fo r repaying the application money.Additionally, the funds
received as share application funds must be stored in a separate bank
account at a designated bank and cannot be used for the following
purposes: - For adjustments against securities allocation; - For repayment
of funds in cases where the Company is unable to allocate securities.
(vii) No corporation is pe rmitted to make an offer of securities under this
section through the publi cation of public ads or the use of media,
marketing, or distribution chan nels or agents.
(viii) Any invitation or offer that does not adhere to the rules of this
section will be considered a public offering, and all rules under the
Companies Act of 2013, t he Securities Contracts (Regulation) Act of
1956, and the Securities and Exchange Board of India Act of 1992 must be
followed.

2. SHARES' RIGHTS ISSUE: When new shares are issued to existing
shareholders in proportion to their present holdings, this is re ferred to as a
right issue of shares. Section 62 of the 2013 Companies Ac t governs the
Right Issue of shares.
CONDITIONS: - In accordance with Section 62 (1), whenever a business
with a share capital seeks to issue additional shares in order to enhance its
subscribed capital: -
(a) by issuing a letter of offer subject to the fo llowing requirements,
namely: - To people who, at the date of the offer, are holders of equity
shares of the firm in proportion, as closely as circumstances permit, to the
paid-up sha re capital on those shares.
(i)the offer shall be made by notice specify ing the number of shares
offered and limiting a period of time not to exceed thirty days from the
date of the offer within which the offer, if not accepted by 90% of its
members, shal l be deemed to have been declined; (ii)unless the Articles of
the Company otherwise provide, the foregoing offer shall be deemed to
include a right exercisable by the person concerned to renounce the shares
offered to him. And
(iii) The Board of Directors may dispose of the shares in a way that is
advantageous to the shareholde rs and the company after the time period
specified in the aforementioned notice has expired or upon receiving an
earlier indication from the person to whom such notice was given that he
declines to accept the shares offered.
3. PREFERENTIAL allocation OF S HARES: Section 62(1(C) of the
Companies Act of 2013 and Rule 13 of the Companies (Share Capital and
Debentures) Rules of 2014 govern the preferential allocation of shares.

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37 3.11 SUMMARY
Any business needs money to be able to survive and grow. The act of
2013's Section 23 allows for the issuing of securities to the public,
members, or other parties in order to meet short - or long -term financial
needs. The many techniques listed in s ection 23 are excellent ways for a
business to get funds. Although section 23 permits the use of a variety of
methods for raising money, each form of issuance has its own set of
criteria, procedures, and disclosure requirements. A prospectus is a crucial
document for public offerings and a method of issuing securities and
obtaining cash. A prospectus is crucial for an initial public offering (IPO)
in particular since it informs investors about the firm. Private placement is
governed by a separate provision that has undergone several amendments
to ensure that there are no gaps in the law. This section, which outlines the
techniques to ensure that a corporation has money and is, thus, operating,
is crucial. Understanding this clause is crucial since it, togeth er with other
Act provisions and SEBI and MCA rules and regulations, aid in ke eping
businesses viable.
3.12 QUESTIONS
I) Rewrite the following sentences by selecting the correct option
1. How many ways are there for issuing shares
a-by a private placement of share s b-by a public offer
c-distributing the share to current investor d-all of the above
2.How many options are there available for public firm for issuing
securities.
a-Public prospectus b- Private Placement
c-bonus or rights d-all of the above

3.Which of the followin g is not a prospectus?
a-Red herring b-Deemed
c-Shelf d-MOA

4.Prospectus includes:
a-Name of the company b-Nature of business
c-Capital of the company d-all of the above

5.Red herring prospectus excludes :
a-size of the offering b-cost of securi ties
c-none of the above d-all of the above


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38 (Answers:1 -d,2-d,3-d,4-d,5-d)
II) State whether the following statements are true/false
1. Red herring prospectus is a final prospectus
2. Deemed prospectus is covered under section25( 1) of the
companies act,2013
3. Form PAS-1 must be used for the advertisement of the notice for
getting the resolution passed that modifies the terms of any
contract mentioned in the prospectus or changes the purposes for
which the prospectus was issued.
4. A pr ivate placement offer may not be made to more than 25 0
individuals in a single financial year
5. section 63 of the Companies Act deals with criminal liability for
mis-statements in prospectus
(Answers: -1-false,2-true,3 -true,4 -false,5 -true)

III) Write a short note on
a) Variation in terms of contract.
b) Offer of sale of shares
c) Exemption from the liabilities for Mis -statements in
prospectus

IV) Descripti ve Questions
1. Define Public offer and explain different way of issue of share by the
companies?
2. Define Prospect us and what are the different type of prospects?
3. W hat does a prospect us includes?
4. W hat are the different liabilities for Mis -statements in prospectus?
5. What are the different type o f allotment of securities under the
companies act 2013 .

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39 4
PRIVATE PLACEMENT
Unit Structure
4.1 Introduction:
4.2 Types of Private Placement
4.2.1.1 Preference share
4.2.1.2. D ocuments submitted for the preferential allocation of
shares
4.2.1.3 Advantages of Preferential Allotment
4.2.1.4. Disad vantages of Preferential Allotment
4.2.2.1 How does Qualified institutional placement works
4.2.2.2. Regulations for a Qualified Institutional Placement (QIP)
4.2.2.3 Who are Qualified Institutional Buyer (QIB)
4.2.2.4 . Difference between Offer for Sale an d Qualified Institutional
Placement
4.3. Private Placement Offer Letter
4.4. Maximum Limit of Private Placement
4.5 Penalty for Non -Compliance of Private Placement
4.5.1 Equity Shares
4.5.1.1. Features of Equity Shares Capital
4.5.1.2 Types of Eq uity Share
4.5.1 .3. Merits of Equity Shares Capital
4.5.1.4. Demerits of Equity Shares Capital
4.5.2. Preference Share:
4.5.2.1 Meaning
4.5.2.2. Features of Preference Shares
4.5.2.3. Types of Preference Shares
4.5.2.4. Advantage of Preference share s:
4.5.2.5. Disadvantages of Preference Shares munotes.in

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40 4.5.3. Debentures:
4.5.3.1. Meaning:
4.5.3.2. Types of Debentures
4.6 Summary
4.7. Questions
4.1 INTRODUCTION
Offer or invitation for subscription of securities on private placement.
(Bye Law) --
(1) Wit hout prejudice to the provisions of section 26, a company may,
subject to the provisions of this section, make private placement through
issue of a private placement offer letter. (2 ) Subject to sub -section (1), the
offer of securities or invitation to sub scribe securities, shall be made to
such number of persons not exceeding fifty or such higher number as may
be prescribed, [excluding qualified institutional buyers and employees of
the company being offered securities under a scheme of em ployees stock
option as per provisions of clause (b) of sub -section (1) of section 62], in a
financial year and on such conditions (including the form and manner of
private placement) as may be presc ribed.
Explanation:
Private placement, as defined by Sec tion 42 of the Co mpanies Act of
2013, is any offer or invitation by a company to subscribe for or issue
securities to a chosen group of people (other than through a public offer)
through a private pl acement offer -cum-application form that complies
with the requirements out lined in Section 42 of the Companies Act of
2013.
According to Section 42 of the Companies Act of 2013, an allocation can
only be made up to 200 times per year; beyond that, th e issue is deemed
public and the firm must follow the pub lic issue procedure. There is no prospectus released during the private placement procedure.
4.2 TYPES OF PRIVATE PLACEMENT
1. Preferential Allotment
2. Qualified institutional placement
1.Preferential Allotment: Shares are allocated on a preferential basis to a
particular group of people or businesses that express interest in them at a
predetermined price. Shares or other securities offered through a public
offeri ng, a rights offering, an employee stock option plan, an employee
stock pu rchase plan, an issue of sweat equity shares or bonus shares,
depository receipts issued in a nation outside of India, or foreign securities
are not included in preferential allotmen t. The rules for such an allocation munotes.in

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41 are laid forth in SEB I (DIP) guideline s Chapter XIII. The corporation must
take into account that the investors may have a lock -in period for the
securities' issuance.
2. A qualified institutional placement (QIP): Fundam entally, a QIP is a
method for listed firms to raise mone y without having to file formal
documentation with market regulators. Only institutional investors may
purchase shares or other securities from a listed firm. As a result, listed
corporations are enc ouraged to raise money on the domestic market. The
SEBI ( DIP) guidelines' Chapter XIIIA specifies the rules regulating these
placements. In India and other Southeast Asian nations, it is typical.
4.2.1.1 Preference share:
The Preference Shares are ownershi p interests in the Company that
provide their owners the exclusive right t o profit from the Company
before other normal shareholders. Furthermore, in the event that the
Company must shut down or fails in the future, the Preference
Shareholders are entitled to a reimbursement of their capital. As a result,
there is far less risk of loss.
When a business issues securities or shares to a certain group of investors,
this is known as a preferred issue. The Preferential Issue is not a Right
Issue or a Public Issu e. The Preferential Issue of Shares is a unique means
of raising money in compared to other methods. In a preferential issue of
shares, the whole allocation of shares is given to a pre -identified person
who may or may not already be a shareholder in the co mpany.
4.2.1.2. D ocuments submitted for the preferential allocation of sha res
Form Purpose Time Period
Form PAS -3 In order to refund the shares that were allocated. List of allotees verified authentic copy of board resolution within 15 days after allocation date.
Form MGT -14 Fro passing a special resolution for the preferential allotment. Within 30 days of the resolution’s passage, a certified true copy of the Special resolution, as well as an explanation, must be submitted.

4.2.1. 3 Advantages of Preferential Allotment
The corporation benefits from preferential allotment of shares in several
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42 1. No c hange on Assets:
The absence of a levy on the assets is t he first benefit. Shares and
convertible securities are available through preferential allocation. Unlike
debentures, the shares do not place a levy on the assets. Furthermore,
maintaining the assets at risk is not a requirement for preferential
allocation . As a result, it is advantageous for both the company and the
current shareholders.
2. Convertible securities:
The following benefit is an additional gain for shareholders and investors.
Dealing in convertible securities is possible through preferential
allocation. Invest ors and shareholders can convert their convertible assets
into shares and get dividends and additional earnings if the share price
rises. The predefined and fixed interest on the sec urities or debentures is
exceeded by the dividends and ea rnings. For all o f the current investors
and stockholders, it is a fantastic opportunity.
3. No dilution of power:
The lack of a requirement for power dilution is the next benefit. Because
stockholde rs do not get voting rights, preferential allocation does not
result in a reduction in power. Investors or shareholders have a right to
dividends and interest but no vote or participation in board meetings. As
they won't have to share their authority with other shareholders, it is
advantageous for both the firm and the directors .
4. Improve the borrowing capital:
The firm's ability to borrow money is increased via preferred allocations,
which is the last benefit. It lets them make room for non -convertible
debentures and loans, which lowers the debt -to-equity rati o.
4.2.1.4. Disa dvantages of Preferential Allotment
1. Harm to the reputation of the firm:
Even though a corporation that fails to pay an annual or defined amount of
dividend may not face legal re percussions, its reputation might suffer.
First things fir st: an investor w on't buy a business or a securities that won't
generate future profits. If, for instance, Firm A generates profits and
distributes dividends to its shareholders each year whereas Fi rm B does
not, an investor may choose to invest in Firm A in order to profi t.
Additionally, it may have an impact on the company's reputation while
borrowing money. The reason for this is that lenders won't offer money
unless they are confident the firm wi ll repay the whole amount.
2. Investors' lack of voting ri ghts:
Shareholde rs who receive funds through preferential allotments do not
have the same degree of ownership or voting rights as regular
shareholders. Additionally, it could stop them from putting their funds into munotes.in

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43 such a plan. As a result, it may have th e advantage of ge nerating a sizeable
sum of money for the business' operations but may not also benefit
shareholders.
3. Impact credit worthiness:
The distribution of preference shares lowers a comp any's creditworthiness
since the shareholders have the rig ht to the company 's personal assets.
4. The allocation of shares with preference also enables certain groups to
get advantages that they may not otherwise enjoy. For instance, promoters
are known to have repeatedly profited personally from the benefits of
these privileged shareholders. This deprives other real, otherwise
interested owners of their shareholding rights and keeps them in a
somewhat subordinate position to preferential shareholders. It a lso denies
them the same rights as preferential shareholde rs.
4.2.2.1 How d oes Qualified institutional placement works:
1. The Securities and Exchange Board of India originally designated a
qualified institutional placement (QIP) as a securities issuance. (S EBI).
An Indian -listed firm can raise money on its home ma rket using the
QIP without having to notify any market regulators in advance of the
issuance. Companies are only permitted to raise capital through the
sale of securities under SEBI regulations.
2. On May 8, 2006, the SEBI announced the rules for this distin ctive
form of Ind ian funding. The main goal of creating QIPs was to prevent
India from relying too much on foreign money to finance its economic
expansion.
 Prior to the QIP, Indian regulators had gr own increasingly
concerned that domestic companies were us ing American depo sitory
receipts (ADRs), foreign currency convertible bonds (FCCBs), and global
depository receipts (GDR) rather than Indian -based capital sources to
access international funding too easily. The QIP rules were put out by the
authorities to encourage Indian enterprises to seek money domestically
rather than through international channels.
 QIPs are beneficial for a number of causes. Their usage saves time
since they provide access to f inance and QIPs far more quickly than a
follow -on public o ffering would.(FP O). The speed is due to the fact that
QIPs must adhere to far less legal laws and restrictions, which makes them
considerably more economical. Additionally, there are lower legal
expenses and no costs associated with listing internationall y.
4.2.2.2. Regul ations for a Qualified Institutional Placement (QIP)
The following are some rules and specifications that apply to businesses
looking to raise capital through a QIP:
• To be listed on a stock market, the firm must fulfil t he basic sharehol ding
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44 • If the issue is up to Rs 2.5 billion in size, the company should ensure that
there are at least two allottees, and if the issue is beyond Rs 2.5 billion, at
least five allottees;
• One allottee may not receive more than half of the total amount allotted;
and
• At least 10% of the company's issued securities must go to mutual funds
or allottees.
• Allottees must not be associated in any way with the issue's backers.
4.2.2.3 Who are Quali fied Institutiona l Buyer (QIB)
Any one of the people mentioned below might be a qualified institutional
buyer (QIB).
1. Foreign portfolio investor registered with the Board who is not a
Category III foreign portfolio investor
2. Registered with the Board foreign venture capitalist
3. A minimum corpus of 25 crore rupees for a pension fund A mutual
fund,
4. Insurance funds established and maintained by the Union of India's
army, navy, or air force a commercial bank with a set schedule;
6. The National In vestment Fund
7. An alternative investment fund; 8. a state industrial development
company
8. A corporation that is insured and licenced by the Insurance Regulatory
and Development Authority
9. A provident fund having a capital of at least 25 billion rupees.
10. A mul tinational and bilateral development finance institution;
11 a public financial institution as specified in Section 4A of the
Companies Act of 1956;
12. A fund for venture capital
4.2.2.4 . Difference between Offer for Sale and Qualified Institutional
Placement
The following table lists the distinctions between Offer for Sale and
Qualified Institutional Placement.

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45 Offer for Sale Qualified Institutional Placement
Promoters might lowe r their
share and sell it to other players
by using the of fer for sale
procedure. A qualified institutional placement
is a method by which a listed
business can raise money from
different QIBs for different
purposes.
Offer for Sale has no plans to
seek fu rther funds. From one
shareholder to another,
ownership is transferred. Qualified Institutional Placement
wants to enhance the nation's capital
base by raising money from QIBs.
In an Offer for Sale, the winning
bidder must pay the entire sum
up advance to seal the deal. The payment is made internally in a
qualif ied institutional placement
since all transactions are made
between the QIBs and the issuing
firm.
In an Offer for Sale, the business
establishes the price range in
which offers are accepted. In a qualified institutional
placement, the business determine s
the starting pr ice for the placement.
The price is typically discounted.

4.3. PRIVATE PLACEMENT OFFER LETTER
 The rules for a company's private placement are outlined in Rule
14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
(the "Rules"). Accordi ng to the Rules, a private placement offer letter in
Form PAS -4 must be used by the company to offer or encourage investors
to subscribe for its securities.
 Only those people whose names have been registered by the firm
before delivering the invitation to subscribe shall get any private
placement offers. The offer will be made to the individuals whose names
are on file, and the corporation is required to keep a detailed record of al l
offers on Form PAS -5.
 A private placement offer letter should be sent al ong with an
application form that is serially numbered, addressed in writing or
electronically, and expressly addressed to the individual to whom the offer
is being made. Within thi rty days of registering the name of the particular
individ ual, the Company must provide the Private Placement Offer Letter
to such person.
 The offer should be accepted by the individual to whom the private
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46 distributing the pri vate placement offer letter, the firm must submit the full details of the offer with the Registrar of Companies (the "ROC").
4.4. MAXIMUM LIMIT OF PRIVATE PL ACEMENT
The maximum number of people to whom the firm can make a private
placement in a financial year shall not exceed fifty people or the larger
number permitted by the rules. Qualified institutional purchasers and firm
workers who receive shares through out the fiscal year under an employee
stock option plan in accordance with Section 62 of the Act are not
included in the fifty -person maximum.
According to the Rules, no more than 200 people may be offered or
invited to participate in a private placement o ver the whole fiscal year.
The cap of 200 people will not apply to eligible institutional purchasers or
corporate workers who received shares during the fiscal year under a plan
for employee stock options in accordance with Section 62.
Each individual shou ld be given a private placement offer or invitation for
Rs. 20,000, which i s equal to the face value of the securities.
The following are exempt from the maximum number of chosen
individuals and private placement value restrictions:
1) Non-banking financial institutions authorised by the 1934 Reserve
Bank of India Act.
2) Under the Na tional Housing Bank Act of 1987, housing financing
enterprises must register with the National Housing Bank.
4.5 PENALTY FOR NON -COMPLIANCE OF PRIVATE
PLACEMENT
If a firm takes mone y or makes an offer in violation of the Act and Rules,
the company, its dir ectors, and its promoters may be subject to fines. If
there was more money involved in the invitation or offer than that, the fine
may be up to Rs. 2 crore. Additionally, the busine ss must return all
subscription fees to customers within 3 0 days of receivi ng the court
judgement imposing the fine.
Following Securities are covered under Private Placement
1. Equity shares
2. Preference shares
3. Debentures

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47 4.5.1 Equity shares:
Meani ng: An equity share, sometimes referred to as an ordinary share, is
a kind of fractional ownership that carries with it the greatest amount of
entrepreneurial risk for a trading firm. These shareholders have the ability
to cast ballots in any organisation .
4.5.1.1. Features of Equity Shares Capital
 The corporatio n still owns the equity share capital. Only after the
business is shut down is it returned.
 Shareholders have voting rights and choose the management of the
firm.
 The capacity to collect surplus capital is a requirement for the
dividend rate on equity ca pital. However, the dividend rate on equity
capital is not set.
4.5.1.2 Types of Equity Share
 Authorized Share Capital is the maximum sum that an organisation
may distribute. According to the compa ny's advice and with the
assistance of a few formalities, t his sum m ay be a ltered at any
moment.
 Issued Share Capital – This is the authorised capital provided to
investors by an organisation.
 A part of the issued capital that an investor accepts and agre es to is
known as "subscribed share capital."
 Paid Up Capital – The investors provide a portion of the subscribed
capital. Paid -up capital refers to the funds that a firm actually invests
in running their business.
 Right Shares – These are the shares that a company issues to its
current stockholders. The corporation issues shares of this sort in order
to protect the old investors' proprietary rights.  Bonus S hare – When a co mpany divides its shares among its
shareholders in the form of a dividend, we r efer to it as a bonus share
 Sweat Equity Share – This form of share is only given to an
organisation' s top managers or employees in recognition of their
outstan ding efforts in securing the company's intellectual property
rights.
4.5.1.3 . Merits of Equity Shares Capital
 Equity shares have the following benefits:
It is a continuous source of funding, a nd the enterprise has to repay; an
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48  Equity shareholders are the true owners of the company and have
voting rights.
 Equity shares can be issued even without establishing any additional
charges over the assets of an en terprise.
 It is a perpetual source of funding, and the ent erprise has to r epay.
4.5.1.4. Demerits of Equity Shares Capital
There are several drawbacks to trading on equity when only equity shares
are issued. These drawbacks include:
 The enterprise cann ot benefit from or take credit for trading on equity
when o nly equity share s are issued.
 There is a risk of overcapitalization because equity capital cannot be
recouped.
 The management may encounter obstacles from equity shareholders by
directing them an d systematising themselves.
 When the company generates hi gher profits, hi gher dividends must be
paid, which increases the value of the shares in the market.
4.5.2. Preference Share:
4.5.2.1 Meaning: Preference shares, also known as preferred stock, are
shares of a company's stock that pay dividends to owners ahe ad of
payments o n regular stock. Preferred investors are entitled to payment
from firm assets before common stockholders in the event of bankruptcy.
Common stocks often do not carry a set dividend, but the majority of
preference shares do. Additionally, ho lders of preferr ed stock often do not
have voting rights; holders of ordinary stock typically do.
4.5.2.2. Features of Preference Shares
The characteristics of preference shares are as follow
1.Sha reholders' preferred dividend option.
2.Preference sharehol ders are unable to cast a ballot.
3. In the event that the firm is wound up, shareholders have the right to
claim the assets.
4. Fixed dividend payments made to shareholders, regardless of earnings .
5. serves as a hybrid finance source.
4.5.2.3. Types of P reference Shares
The various types of preference share are discussed below:
1. Cumulative preference shares: These unique shares give owners the
right to receive cumulative dividend payments even w hen a firm is not
profitable. In years when the firm is not making a profit , these dividends munotes.in

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49 will be considered as arrears and paid cumulatively the following year
when the company makes a profit.
2. Shares of preference that do not accumulate dividends i n the form of
arrears are known as non -cumulative shares. W hen it comes to non-
cumulative preference shares, the company's current -year profits are used
to pay out the dividend. If there is a year in which the firm doesn’t
generate any profit, then the sha reholders are not given any dividends for
that year and the y cannot claim f or dividends in any subsequent profit
year.
3. Participating preference shares: These types of shares allow the
shareholders to demand a portion in the surplus profit of the firm at the
event of liquidation of the company after the dividend s have been paid to
the other shareholders. In other words, together with equity shareholders,
these stockholders receive set dividends and a portion of the company's
surplus earnings.
1.. Non -partic ipating preference shares: Owners of these shares do not
have the extra opt ion of receiving dividends from the company's excess
profits. The stockholders in this instance only receive the set dividend.
3. Redeemable Preference Shares: At a predetermined pr ice and time, the
issuing corporation may buy back or redee m redeemable pre ference
shares. These kinds of shares benefit the business by acting as a buffer
during inflationary periods.
2.3. Non -redeemable Preference Shares: Shares that cannot be redeemed
at any moment throughout the company's existence are referred to as non -
redeem able preference shares. In other words, these shares are only
redeemable when the firm is being wound up.
4. Convertible Preference Shares: A form of convertible preference share
permits owners to convert their preference shares into equity shares at a
predetermined rate following the expiration of a defined time period as
indicated in the memorandum.
5. Non -convertible Preference Shares: These shares cannot be changed
into equity sh ares. Only fixed dividend payments will be made to these
shares, and they w ill also get priority dividend payments in the event of a
company's dissolution.
4.5.2.4. Advantage of Preference shares:
One of the most popular kinds of financing for both invest ors and
corporations is preference shares. The benefits of preference share s
are listed below:
1. Shares are thought of as a really innovative way to finance the
company. This is primarily because preference shares may be issued
with relative simplicity on ce a company has completed an IPO and has
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50 2. The f irm is not required to refund the money it received from the
sale of preference shares. In other words, it is possible to think of the
principal that the company raises via the sell ing of preference shares as
a long -term investment that doe sn't need to be repaid in the future.
3. Investors are entitled to a predetermined quarterly (or yearly) return.
This suggests that companies are well aware of the conditions for
making dividend pa yments. It typically makes things easier for both
parties b ecause the issue r and investor are both aware of the dividend
to which they are both entitled.
4. The issuing of preference shares has no impact on the ownership
structure of the company that takes choices. Preference Shares have no
voting rights, thus the y have no say in how the company is managed.
Since they still retain voting rights, it encourages the ordinary
shareholders to participate.
5. Because preference shareholders receive a fixed return and the first
claim upon liquidation, they are viewed as h aving more favor ability by
investors. (before common shareholders). Investors like investing
because it has a reputation for being a low -risk investment.
4.5.2.5. Disadvantages of Preference Shares
Preference shares are seen as being quite popular, but fro m the standpoint
of the issuing corporation, it is clear that they have a number of drawbacks. These drawbacks include the following: 1. Annual fixed dividends are often paid on preference shares. Regardless
of th e amount of profit the firm made in the particular year, this dividend
must be paid to the owners.

2. Preference Shares tur n out to be expensive over time. This is so because
long-term investment in struments like debentures are subject to greater
rates of interest than dividend charges.
3. On the stock exchange, shares may only be sold to the public by public
limited businesse s. As a result, only medium and large businesses that are
officially listed on the Stock Exchange are permitted to use this option.
4. If the business is unable to pay dividends for a specific year, the
dividend accrues and is carried over to the following year in the case of
cumulative preference shares (which are the most widel y used preference
shares). This implies that in the years when they were unable to generate
significant profits, it may be difficult for the corporation to pay the
dividends.
5. Favourite In the event of a liquidation, stockholders must be
compensated with top priority (before ordinary shareholders).
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51 4.5.3. Debentures:
4.5.3.1. Meaning:
A sort of financial instrument called a debenture is one that businesses
employ to finance long-term borrowing. Since the company's capital in
this instance was borrow ed, the holder of the debenture is a creditor of the
business. The debentures are freely transferable, have an established
interest rate, and are both redeemable and non-redeemable. It is unsecured
and solely supported by the issuer's credi bility.
4.5.3.2. Types of Debentures
1. Debenture categories based on security:
A debenture may carry security in terms of either carrying security or not.
Debentures therefore here can be of two types:
a) Secured Debentures have a charge against certain assets of the i ssuing
corporation. If the business doesn't pay back the loan, creditors will be
repaid by selling off the company's assets. This debenture security may be
one of two kinds: Floatin g or fixed charges. A fixed charge is a security
that corre sponds to a cert ain firm asset. A floating charge, on the other
hand, applies to all of the company's assets collectively.
b) Unsecured Debentures: Investors should avoid these debentures at all
costs. This is so that there is no charge or security against the assets of t he
business. Only the principal and interest on the debt are guaranteed by the
corporation. If it fails to, its assets are not subject to attachment.
2. Debenture categories based o n convertibility
To draw in investors, companies may make their debentures convertible.
Based on convertibility, debentures can be classified into one of the two
categories described below:
a) Convertible debt obligations: These debentures convert into eq uity or
preferred shares after a defined period of time. Wh ether this conve rsion is
mandatory or optional is up to the holder of the debenture. It may either be
fully convertible or only partially convertible. Debentures have the option
of converting into shares with a par value, a premium, a discount, or even
at a different pric e.

b) Non -convertible debt obligations: Despite not being convertible, non -
convertible debt obligations are nonetheless regarded as debentures. They
are not convertible into share s.
3. Categories of debentures depending on permanency
Depe nding on their t erm and durability, debentures can be classified into
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52 a) A redeemable debenture is one that has a set redemption date. For
instance, after a debenture's m aturity period of five years has elapsed, it
can be redeeme d. These five ye ars shall run from the date of issuance of
the Debenture.
b) Irredeemable Debentures: Irredeemable debentures do not have a set
maturity date. They persist throughout the length of an enterprise.
Therefore, the company only redeems them in cases of impendi ng
liquidation.
4. Debenture categories based on negotiability
Transferability is mostly related to negotiability. Based on whether they
are easily transfe rable or not, this criteria separates debentures. Debenture s
are divided ac cording to the two following criteria:
a) Registered Debentures: As the name suggests, the corporation keeps
records of the information regarding the holders of these debentures. On ly
the bondholders may redeem these bonds. They are therefo re not
transfera ble freely. The Companies Act of 2013 conditions must be
completed in order for them to be transferred.
b) Bearer Debentures: In this case, businesses do not keep track of the
detai ls of the holders of the debentures. The cardholder does no t need to
have t heir identification confirmed in order to redeem them. This happens
because the debentures are easily transferable. As a result, their owners
allow anybody to buy and sell them.
5. Different Types of Debentures Based on Priority: Just like with shares,
corporations prioritise debt instruments. Investors like to buy instruments
first since it reduces their risk. Debentures in this case might take one of
the two types indicated below:
a) initially Mortgage Debentures: As the name suggests, the companies are
responsible for paying down these debentures initially. Debenture holders
receive their funds before other holders in their category.
b) Second Mortgage Debentures: These bonds are only repaid upon the
repayment of the first mortgage bonds.
4.6 SUMMARY
When deciding whether to issue a private placement, a corporation must
take private placement into account. Some essential qualities to consider
when choosing a lender or investor fo r a private placement are:
 Instead of being transaction -oriented, they are relationship -oriented. It
is crucial that they take an interest in the organisations they support
and put in the effort to comprehend their requirements and workings.
 Private p lacement debt is sometimes long -term, therefore it is cruci al
for the inves tor to be able to develop as a financial partner and to have munotes.in

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53 the skills and expertise necessary to guide a business through difficult
times.
 They have access to important decision -makers inside their
organisation and are quick to react an d respond.
Throughout market cycles across the year, the private placement investor
has a consistent desire for private placement debt .
4.7 QUESTIONS
I) Multiple Choice Questions
1. Bonds are only repa id upon the repayment of the first mortgage bo nds
a-Second Mortgage Debentu res
b-initially mortgage debentures
c-none of the above
d-all of the above

2. The companies are responsible for paying down these debentures
initially.
b-initially mortgage debentures
c-none of the a bove
d-all of the above

3. The debentures are easily transferable.
a-bearer debentures b-registered debentures
c-none of the abo ve d-all of the above

4. The corporation keeps records of the informati on regarding the holders
of thes e debentures
a-bearer debentures b-registered debentures
c-none of the abo ve d-all of the above

5. Debentures have a charge agains t certain assets of the issuing
corporation.
a-secured debentures b-unsecured debentures
c-none of the above d-all of the above
Answers( 1-a,2-b,3-a,4a,5 -a)
I) True or False
1- Share Capital is the minimum sum that an organisation may distr ibute.
2-Ireedemable debentures do have a set maturity date.
3- Business mu st return all subscri ption fees to customers within 40 days
of receiving the court judgement imposing the fine.
4-individual should be given a private placemen t offer or invitation for Rs.
25,000, which is equal to the face value of the securities.
5- In an Offer for Sale, the wi nning bidder must pay the certain sum up
advance to seal the deal
(Answers -1-false,2 -false,3 -false,4 -false,5 -false)
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54 III) Write Sho rt notes on :
1. Categor ies of debentures depending on permanency
2. Debenture categories based on negotiability
3. Features of equity share capital
4. Types of equity share
5. Merits of preferential allotment

IV) Descriptive questions:

1-What do you mean by equity share c apital .State its merits and demerits.
2-What do you mean by prefertial all otment.State its merits and demerits.
3- Who are qualified institutional buyer(QIP)
4-What do you mean by Private Placement offer letter
5-Differenc between Offer for Sale and Qualified Institutional
placement


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51 5
SHARE CAPITAL AND DEBENTURES
Unit Structure
5.0 Objectives
5.1 Introduction
5.2 Meaning of Shares and kinds of share capital. Sec 43
5.3 Certificate of shares Sec.46
5.4 Voting rights Sec. 47
5.5 Prohibition on issue of shares at discount Sec. 53
5.6 Issues of sweat equity shares Sec 54
5.7 Issue and redemption of Preference Shares Sec.55
5.8 Transfer and transmission of securities Sec.56
5.9 Power of limited company to alter its share capital Sec. 61
5.10 Further issue of share capital Sec.62
5.11 Issue of bonus shares Sec. 63
5.12 Unlimited company to provide for reserve share capital on
conversion into limited company Sec.65
5.13 Reduction of share capital Sec.66
5.14 Restrictions on purchase by company or giving of loans by it for
purchase of its sh ares Sec.67
5.15 Power of company to purchase its own securities Sec.68
5.16 Transfer of certain sums to capital redemption reserve account
Sec.69
5.17 Prohibition for buy -back in certain circumstances Sec.70
5.18 Debentures Sec.71
5.19 Power to nominate Sec.72
5.20 Summary
5.21 Questions
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52 5.0 OBJECTIVES
After studying the unit, the students will be able to:
 Understand the meaning of Shares and Debentures.
 Know the meaning of Share Capital and its types
 To understand concepts of Sweat equity shares
 To understand provisions relating to Voting rights of members, issue
of shares and alteration of share capital.

5.1 INTRODUCTION

Shares and debentures are an integral part of every company and common
instruments to raise funds. The investment decision be tween shares and
debentures depends on many factors like risk profile and returns expectations
of the investors and their investment horizon. A good por tfolio will have a
healthy mix of shares and debentures to balance the risk and maximize
investors’ weal th.

Section 2(84) “Share means a share in the share capital of a company and
includes stock.” It is the division of the capital into smaller yet equal
units. These units are then referred to as ‘ shares’ . The people who invest
and hold such shares are kn own as ‘shareholders’.

A debenture is a debt tool – the funds raised are considered loans to the
company. But shares allow you ownership in the company. It’ll be good to
know both to make a sensible investment choice
5.2 MEANING OF SHARES AND KINDS OF SHA RE
CAPITAL (SECTION 43 ):
The share capital of a company limited by shares shall be of two kinds,
namely: —
a. equity share capital —
i. with voting rights; or
ii. with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed; and
b. preference share capital:
Advantages of Equity shares:
1. They have the potential to generate high returns as they are high -risk
investments.
2. They can vote for or against corporate policies and business
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53 4. These shares are traded on stock exchanges.
5. These shares are permanent in nature. They returned only when the
company winds up.
Advantages of Preference Shares
1. Preferential dividend option for shareholders.
2. Preference shareholders do not have the right to vote.
3. Shareholders have a right to claim the assets in case of a wind up of
the company.
4. Fixed dividend payout for shareholders, irrespective of profit earned.
In a company capital refers to its share capital. The memorandum of
association mentions the amount o f capital the company is being
registered with is called the nominal capital /authorised capital or the
registered capital of the company. This amount is broken up into a number
of shares a company can issue. Share capital in excess of the limit
specified in the memorandum of association. The entire authorised capital
not to be issued. The issued capital will be in form of equity shares and
preference shares. Subscribed capital means that part of the issued capital
at nominal or face value which has been su bscribed or taken up by the
purchases of shares in the company and which has been allotted. The
company may require the buyer to pay only a part of the nominal value
and the balance to be collected when required the amount paid is called
the paid up capita l of the company.
A share also comes with certain liabilities for the shareholder if the
shareholder has not fully paid the full nominal value of the share he has to
pay whenever called to do so.
5.3 CERTIFICATE OF SHARES (SEC TION 46)
(1) Share Certificate is a d ocument issued by the company and is an
evidence that the person named therein is the holder of specified number
of shares of the company. It can be issued only in pursuance of a Board
Resolution and on surrender of the letter of allotment, if issue d.
Share Certificate is issued under the common seal of the company and
should be signed by 2 directors or by a director and the Company
Secretary. This certificate is subject to stamp duty as per the relevant
stamp Act of the state in which the registere d offic e of the company is
situated.
(2) A duplicate certificate of shares may be issued, if such certificate —
(a) is proved to have been lost or destroyed; or
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54 (3) As per the p rovisio ns of Article of Association, whenever share
certificate or duplicate share certificate is issued to the member, the
particulars of it to be entered in the register of members and other details
as prescribed in the Act.
(4) Where a share is held in deposi tory form, the record of the depository
is the prima facie evidence of the interest of the beneficial owner.
(5) If a company with intent to defraud issues a duplicate certificate of
shares, the company shall be punishable with fine which shall not be les s
than five times the face value of the shares involved in the issue of the
duplicate certificate but which may extend to ten times the face value of
such shares or Rs. 10 crores, whichever is higher and every officer of the
company who is in defau lt shal l be liable with imprisonment for a term
which shall not be less than 6 months but which may extend to 10 years
and shall also be liable to fine which shall not be less than the amount
involved in the fraud, but which may extend to 3 times the amoun t
invol ved in the fraud.
A share is a bundle of rights that includes the right to receive dividend
attend meetings of the company receive share certificates etc whereas the
share certificate is a documentary evidence of its share in the company, it
is not the sha re in itself.
Nowadays mostly shares are issued electronically in dematerialise form. A
person who owns shares is issued share certificate indicating his
ownership of the shares a single certificate mentioning the share numbers
of all the shares hel d by a person. However this will make it inconvenient
for the person to sell some of the shares he owns at the same time a share
certificate for each share would be equally inconvenient to be issued by
the company shareholders would need to receive and sto re a la rge number
of share certificate which would occupy space and volume and which is
inconvenience to shareholder as well as to the company also the purpose
of share certificate is to facilitate transfer therefore this should be in units
convenient for trading .
Therefore, the companies act make provision for holding of shares in
electronic form through the mechanism of depository. Depositories are
like banks holding shares, debentures, bonds and units of the owners in an
electronic form a depository deal s with its customer only through specific
agents who are called as depository participants (DP). A customer opens
an account with a depository participant in much the same way one opens
and account with a branch of a bank. The system of depository is not
availabl e in relation to shares of private companies. The depositories,
depository participants, stock brokers and companies and beneficial owner
are electronically connected. All the parties are regulated by the SEBI. A
shareholder can get a credit of shar es in h is account by dematorization.
The account holder applies to the depository participant for the conversion
of physical certificate into electronic form. The physical shares are
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55 replaces the sha re certificate with an electronic record of membership this
is this process is called as dematorization .
5.4 VOTING RIGHTS: ( SECTION 47 )
(a) Every equity shareholder have a right to vote on every resolution
placed before the company; and
(b) his voting rig ht on a poll shall be in proportion to his share in the paid -
up equity share capital of the company.
(2) Every member of a company limited by shares and holding any
preference share capital therein shall, in respect of such capital, have a
right to vote o nly on resolutions placed before the company in proportion
to his share in the paid -up preference share capital which -
(a) directly affect the rights attached to his preference shares and,
(b) any resolution for the winding up of the company or
(c) fo r the repayment or reduction of its equity or preference share capital
5.5 APPLICATION OF PREMIUMS RECEIVED ON
ISSUE OF SHARES AND PROHIBITION ON ISSUE
OF SHARES AT DISCOUNT (SEC TION 52 & 53 ):
A company can issue shares in any denomination. Howe ver SEBI
guidel ines provide that share should be of denomination of Rs.1or its
multiple. The allotment of shares of a company is a contract of sale of
shares between the company and the subscriber. When a company issues
shares for sale at the face value or nominal value of the share it is called as
issue at par . For example: the face value of the share is Rs.10 and the
shares are sold for Rs.10then it will be called as issue at par.
S. 53 of the companies act prohibits issuing shares at a value lower than
the face value t he only exception to it is for issue of sweat equity shares.
If the shares are offered for a sale at Rs.15, it would be an issue at
premium. The subscribed share capital would be Rs.10and the premium
would be Rs.5 the companies act does not restrict the is sue of shares by a
company at a premium . However the Act regulates the utilisation of the
premium collected on shares the entire amount received should be treated
share capital of the company the premium collected is to be taken into a
separ ate account whi ch is called as securities premium account .
5.6 ISSUES OF SWEAT EQUITY SHARES (SECTION 54 )
A company may issue sweat equity shares of a class of shares already
issued, if the following conditions are fulfilled, namely: —
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56 (b) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(c) not less than on e year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and
(d)where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in acco rdance with the
regulations made by the Securities and Exchange Board in this behalf.
Sweat Equity shareholders have the same rights like any other equity
shareholders.
5.7 ISSUE AND REDEMPTION OF PREFERENCE
SHARES (SECTION 55 )
 A company limited by share s, if authorised by its articles, may issue
preference shares which are liable to be redeemed within a period not
exceeding 20 years from the date of their issue with such conditions as
may be prescribed:
 A company may issue preference shares for a perio d exceeding 20
years for infrastructure projects, subject to the redemption of such
percentage of shares as prescribed on an annual basis at the option of such
preferential shareholders.
Redemption is subject to such conditions that:
a. not out of the profits of the company wh ich available for dividend or
b. not out of the proceeds of a fresh issue of shares made for the purposes
of such redemption;
c. no such shares shall be redeemed unless they are fully paid;
d. made out of separate amount kept in Capital Redemp tion Reserve
Accou nt, wherein a sum equal to the nominal amount of the shares to
be redeemed, is kept as a reserve
The capital redemption reserve account may be applied by the company,
in paying up unissued shares of the company to be issued to members of
the company as fu lly paid bonus shares.
5.8 TRANSFER AND TRANSMISSION OF SECURITIES
(SECTION 56 )
The transfer of shares is a voluntary act by the holder of shares and takes
place by way of contract. Whereas, the transmission of shares takes place
due to t he operation of law that is on the death of the holder of shares or in
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57 Section 58 (2) of the Companies Act paves the way for the possibility of
the transfer of shares in a Public Company. Such a transfer , by means of
any co ntract or some arrangement, between two or more people, will be
deemed legally enforceable as a contract. There lies no transfer of shares
unless a proper instrument of transfer duly stamped, dated and executed by
or on behalf of the tr ansferor and the tra nsferee has been delivered to the
company by the transferor or transferee within a period of 60 days (listed
or unlisted company) from the date of execution along with the certificate
relating to the securities, or if no such certificat e is in existence, t hen along
with the related certificate or letter of allotment of securities.
Where the instrument is lost, the company may register the transfer on
basis of indemnity.
This is due to the fact that transmission of share/s takes place whe n the
shares are tra nsferred due to the operation of law. Operation of law may
include different circumstances/situations like the death of a member,
member adjudicated as insolvent, lunatic, the order passed by court or
arbitration award was given, etc. T his process is devoi d of a transfer deed
or need for payment of stamp duty. Nonetheless, the liability associated
with such shares persists even after transmission. Once the transmission of
shares is completed, the person who receives such shares becomes t he
legal shareholder and may enjoy all the rights and duties (liabilities)
attached to those shares.
According to Section 56(4), every company, unless prohibited by any
provision of law or any order of court, tribunal or other authority, deliver
the certif icates of all securi ties allotted, transferred or transmitted, within a
period of one month from the date of receipt by the company of the
instrument of transfer or as the case may be of the intimation of
transmission.
Section 56(4) states that where the s ecurities are dealt with in a depository,
the company shall intimate the details of allotment of securities to
depository immediately on allotment of such securities.
According to section 56(5) of the Companies Act, 2013, the transfer of
any security of a deceased person in a company made by his legal
representative shall, even if the legal representative is not a holder thereof,
be valid as if he had been the holder at the time of the execution of the
instrument of transfer
According to Section 56(6), when any default is made in complying with
the above provisions, the company shall be punishable with fine which
shall not be less than Rs. 25,000/ -but which may extend to Rs. 5 Lakh and
every officer of the company who is in default shall be punishable with
fine which shall not be less than Rs. 10,000/ - but which may extend to
Rs.1 Lakh.

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58 Distinction between transfer and transmission of securities:
Sr.
No. Basis Transfer of Securities Transmission of
Securities
Nature Transfer takes place by
a voluntary ac t of the
transferor Transmission is the
result of the operation of
law.
Instrument An instrument of
transfer is required in
case of transfer No instrument of
transfer is required in
case of transmission
Circumstance Transfer is a normal
course of trans ferring
property Transmission takes
place on death or
insolvency of a holder of
securities
Consideration Transfer of securities is
generally made for
some consideration Transmission of
securities is generally
made without any
consideration

Stamp Duty Stamp duty is payab le
on transfer of securities
by a holder of
securities No stamp duty is
payable on transmission
of securities.


Only securities i.e. the shares, debentures, any other securities of a public
limited company (listed as well as unli sted companies) have been made
freely transferable. The Board of directors of such a company or the
concerned depository shall not have any discretion to refuse or withhold a
transfer of such security. Any other security, for example, shares or
debentures of a private company or any unit of a mutual fund, or any
security issued by any issuer other than a public limited company are not
freely transferable and would be subject to the restrictions contained in the
articles of association of the concerned issue r and terms of issue
5.9 POWER OF LIMITED COMPANY TO ALTER ITS
SHARE CAPITAL (SECTION 61 )
A limited company with share capital can alter its capital as provided in
memorandum of association in any of the following ways provided
authority to alteration is g iven by the articles of association.
a. It may increase its authorised capital by such amount as it things
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59 b. Consolidate and divide the whole or any part of it share capital in to
shares of large amount.
c. Convert all or any of its fully paid up shares into stock or vice versa into
any denomination.
d. Sub divide the whole or any part of it share capital into shares of
smaller amount.
e. Cancel the shares which have not been taken up and reduce its capital
accordingly.
Any of the above things c an be done by the com pany by passing a
resolution at a general meeting, but do not required to be confirmed by the
National company law tribunal. Within 30 days of alteration notice must
be given to the Registrar who will record the same and make necessary
alteration in the Co mpany’s memorandum and articles of association.
Notice to the register has similarly to be given when redeemable
preference shares have been redeemed. Similar information is also
required to be sent to the resistor where the capital ha s been increase
beyon d the authorised limit or where a company being not limited by
shares has increased the number of its members.
5.10 FURTHER ISSUE OF SHARE CAPITAL
(SEC TION 62)
A company can at any time by passing an ordinary resolution a t its general
meeting resolve to increase its capital by such amount as it things
experience by issuing new shares the time at which and the person to
whom new shares are to be allotted is an important question in the
company law if the directors or the ma jority of shareholders are allowed to
this disperse the new issue at the discretion they would naturally offer it to
the nominees does adding to their own majority and reducing the strength
of the minority deals with this problem.
The new issue must be off ered to the existing holders of the equit y shares
in the proportion as nearly as the circumstances admit of the shares held
by them the object of the section is that there should be an equitable
distribution of the shares and the holding of shares by each shareholder
should not be affected by the issue of new shares. Offer is to be made by
giving a notice specifying the number of shares offered the notice must fix
a time which should not be less than 15 days and not exceeding 30 days
from the date of the of fer within which the offer must be accept ed the
notice must also inform the shareholders that if the offer is not accepted
within the specified time it shall be them to have been declined again the
notice has to inform the shareholders that they have the r ight to renounce
all or any of the shares of it to them in favour of their nominees the notice
can be dispatched to register post Speed Post or through electronic mode
at least 3 days before opening of the issue if the shareholder has neither
nominated any one or not accepted the shares himself th e board of
directors will get the description to dispose of the shares decline in such munotes.in

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60 manner as they think beneficial to the company. Such shares can also be
offered to employees under a scheme of employees’ stock option it can be
done under the authority of a special resolution and also subject to such
condition as may be prescribed. They can also be offered to any persons if
so authorised by a special resolution even if they are not within the two
categories menti oned above such offer can be for a cash o r for a
consideration other than cash.
Power to convert loans into capital section 62 (3 to 6):
The central government has taken a new power of converting into shares
any debentures issued to a loan taken from the government by a company.
Where a company has issued any debentures to the government or has
taken any loans from it, the central government may direct that such a
ventures on loan shall be converted into shares in the company. The power
is to be exercised only if such conversion appears to be nec essary in the
public interest. The conversion shall be on such terms and conditions as
appears to the government to be reasonable in the circumstances of a
particular case. If the terms and conditions proposed by th e government or
not acceptable to the com pany it may within 60 days prefer an appeal to
the tribunal and the decision of the tribunal shall be final. A copy of every
order proposed to be issued by the government is to be laid in draft before
each house of the parliament for total period of 30 day s. Where the
government has converted its debentures or loans into capital, the capital
of the company shall thereby stand increase by an equal amount and its
memorandum altered accordingly the central government is required to
send a copy of the order to the Registrar so that he may effect the
necessary alteration in the companies’ memorandum.
5.11 ISSUE OF BONUS SHARES (SEC TION 63)
Bonus shares are additional shares allotted to the current shareholders
without any additional cost, based upon the number of sha res that a
shareholder owns.
A company may issue fully paid -up bonus shares to its members out of —
a. its free reserves;
b. the securities premium account; or
c. the capital redemption reserve account:
Issue of bonu s shares shouldnot be made by capitalising re serves created
by the revaluation of assets.
Bonus shares are issued only if:
a. it is authorised by its articles
b. it has, on the recommendation of the Board, been authorised in the
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61 c. it has not defaulted in payment of interest or principal in respect of
fixed deposits or debt securities issued by it;
d. it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity an d bonus;
e. the partly paid -up shares, if any o utstanding on the date of allotment,
are made fully paid -up;
f. it complies with such conditions as may be prescribed.
Once bonus issue is declared, it cannot be withdrawn.
The bonus shares shall not be issued in lieu of dividend.
5.12 UNLIMITED COMPANY TO PROVIDE FOR
RESERVE SHARE CAPITAL ON CONVERSION INTO
LIMITED COMPANY (SECTION 65 )
An unlimited company having a share capital may, by a resolution for
registration as a limited company under this Act, do eith er or both of the
following things, namely —
a. increase the nominal amount of its share capital by increasing the
nominal amount of each of its shares, subject to the condition that no part
of the increased capital shall be capable of being called up except in the
event and for the purposes of the compa ny being wound up;
b. Provide that a specified portion of its uncalled share capital shall not
be capable of being called up except in the event and for the purposes of
the company being wound up.
5.13 REDUCTION OF SHARE CAPITAL ( SECTION 66 )
After confirmatio n by the tribunal on an application by the company, a
company limited by shares or limited by guarantee and having a share
capital may, by special resolution, reduce the share capital in any manner
and in pa rticular may:
1. Extinguish or reduce the liability on any of it shares in respect of the
share capital not paid up or
2. Either with or without extinguishing or reducing the liability on any of
it shares:
a. Cancel any paid up share capital which is lost or is un represented by
available assets or
b. Pay off any pa id up share capital which is in excess of the wants of the
company,
No such reduction shall be made if the company is in arrears in the
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62 Reduction of capital of a company results in a lteration of its memorandum
by reducing the amount of its share capital and of its shares accordingly.
5.14 RESTRICTIONS ON PURCHASE BY COMPANY
OR GIVING OF LOANS BY IT FOR PURCHASE
OF ITS SHARES. SEC TION 67)
(1) No company limited by shares or by guarantee and having a share
capital shall have power to buy its own shares unless the consequent
reduction of share capital is affected under the provisions of this Act.
(2) No public company shall give, whether d irectly or indirectly and
whether by means of a loan, guarantee, the provision of security or
otherwise, any financial assistance for the purpose of, or in connection
with, a purchase or subscription made or to be made, by any person of or
for any shares i n the company or in its holding company.
(3) Nothing in sub -section (2) shall apply to —

(a) the lending of money by a banking company in the ordinary course of
its business;

(b) the provision by a company of mone y in accordance with any scheme
approved b y company through special resolution and in accordance with
such requirements as may be prescribed, for the purchase of, or
subscription for, fully paid up shares in the company or its holding
company, if the purch ase of, or the subscription for, the share s held by
trustees for the benefit of the employees or such shares held by the
employee of the company;

(c) the giving of loans by a company to persons in the employment of the
company other than its directors o r key managerial personnel, for an
amount not exceeding their salary or wages for a period of six months
with a view to enabling them to purchase or subscribe for fully paid -up
shares in the company or its holding company to be held by them by way
of benef icial ownership:

Provided that disclosure s in respect of voting rights not exercised directly
by the employees in respect of shares to which the scheme relates shall be
made in the Board’s report in such manner as may be prescribed.

(4) Nothing in this s ection shall affect the right of a company to redeem
any preference shares issued by it under this Act or under any previous
company law.

(5) If a company contravenes the provisions of this section, it shall be
punishable with fine which shall not be less than one lakh rupees but
which may extend to twenty -five lakh rupees and every officer of the
company who is in default shall be punishable with imprisonment for a munotes.in

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63 term which may extend to three years and with fine which shall not be less
than one lakh ru pees but which may extend to twenty -five l akh rupees.

5.15 POWER OF COMPANY TO PURCHASE ITS OWN
SECURITIES (SEC TION 68)
Section 68 of the Companies Act 2013 allows for the buyback of own
shares of a company:
a. out of its free reserves or
b. the securities premium account or
c. the process of the issue of any shares or other specified securities.
No buy back of shares or security shall be made out of the proceeds of an
earlier issues of same kind of shares or securities.
5.16 TRANSFER OF CERTAIN SUMS TO CAPITAL
REDEMPTION RESERVE ACCOUNT (SECTION 69 )
1. Where a company purchases its own shares out of free reserves or
securities premium account, a sum equal to the nominal value of the
shares so purchased shall be transferred to the capital redemption reserve
account and details of such transfer shall be disc losed in the balance sheet.
2. The capital redemption reserve account may be applied by the
company, in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares.
5.17 PROHIBITION FOR BUY -BACK IN CERTAIN
CIRC UMSTANCES (SECTION 70 )
No company shall directly or indirectly purchase its own shares or other
specified securities —
a. through any subsidiary company including its own subsidi ary
companies;
b. through any investment company or group of investment companies;
or
c. by making default repayment of deposits accepted and interest
payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment of any term
loan or interest payable thereon to any financial instituti on or banking
company.

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64 Following conditions are required to be fulfilled before buy -back of
securities by a company:
1. The buy -back is authorised by the AOA of the company.
2. A sp ecial resolution has been passed at a general meeting of the
company authorising buy-back.
3. The ratio of the aggregate secured and unsecured debts owed by the
company after buy -back is not more than twice the paid up capital and
free reserves.
4. Central gover nment may by order, specify higher ratio of debt to capital
and free reserves for a class or classes of companies.
5. All the shares or other securities for buy -back are fully paid up.
6. It should be made as per SEBI guidelines.
7. The process of buy -back of secur ities to be completed within a period
of one year from the date of passing of the special resolution.
5.18 DEBENTURES (SEC TION 71)
Debentures are debt tools; issued by companies to raise funds as loans
from the public. It is an acknowledgement from a corporate e ntity that it
has taken a loan from you. It is backed solely by the creditwo rthiness of
the issuing firm. But it carries some amount of assurance.
Types of debentures
1. Secured Debentures:
Secured debentures are the debentures that are backed by an asset of the
company which can be liquidated to recover the interest and redemption
value.

2. Unsecured debentures :
Unsecured debentures do not have any charge on any asset of the company.
So debenture holders will have to wait after the secured debenture holders t o
get their value of the investment at the time of liquidation.

3. Convertible debentures :
Convertible debentures are the debentures that can be converted to equity
shares at the time of redemption.

4. Non-convertible debentures :
Non-convertible debentures c annot be converted to equity shares upon
redemption.

5. Registered debentures:
Registered debentures are where the names of the debenture holders are
mentioned as per the register of the company.
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65 6. Bearer debentures :
In the case of bearer debentures, no nam e is registered under the records of
the company and they can be easily tran sferred to any person.
Debentures can be either floating or fixed in nature. The payout on
floating rate debenture varies with the market movement. But, for fixed -
rate debentures , final payout remains assured.
1. A company may issue debentures with an optio n to convert such
debentures into shares, either wholly or partly at the time of
redemption:
2. Provided that the issue of debentures with an option to convert such
debentures into s hares, wholly or partly, shall be approved by a special
resolution passed at a general meeting.
3. No company shall issue any debentures carrying any voting rights.
4. Secured debentures may be issued by a company subject to such terms
and conditions as may be prescribed.
5. Where debentures are issued by a company under this section, t he
company shall create a debenture redemption reserve account out of
the profits of the company available for payment of dividend and the
amount credited to such account shall not be utilised by the company
except for the redemption of debentures.
6. No com pany shall issue a prospectus or make an offer or invitation to
the public or to its members exceeding five hundred for the
subscription of its debentures, unless the company has, before such
issue or offer, appointed one or more debenture trustees and the
conditions governing the appointment of such trustees shall be such as
may be prescribed.
7. A debenture trustee shall take steps to protect the interests of the
debenture -holders a nd redress their grievances in accordance with such
rules as may be prescrib ed.
8. Any provision contained in a trust deed for securing the issue of
debentures, or in any contract with the debenture -holders secured by a
trust deed, shall be void in so far as it would have the effect of
exempting a trustee thereof from, or indemnifyi ng him against, any
liability for breach of trust, where he fails to show the degree of care
and due diligence required of him as a trustee, having regard to the
provisions of the trust deed conferring on him any power, authority or
discretion:
9. Provided t hat the liability of the debenture trustee shall be subject to
such exemptions as may be agreed upon by a majority of debenture -
holders holding not less than three -fourths in value of the total
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66 10. A company shal l pay interest and redeem the debentures in
accordance with the terms and conditions of their issue.
11. Where at any time the debenture trustee comes to a conclusion that the
assets of the company are insufficient or are likely to become
insufficient to disc harge the principal amount as and when it becomes
due, the debenture trustee may file a petition before the Tribunal and
the Tribunal may, after hearing the company and any other p erson
interested in the matter, by order, impose such restrictions on the
incurring of any further liabilities by the company as the Tribunal may
consider necessary in the interests of the debenture -holders.
12. Where a company fails to redeem the debentures on the date of their
maturity or fails to pay interest on the debentures whe n it is due, the
Tribunal may, on the application of any or all of the debenture -holders,
or debenture trustee and, after hearing the parties concerned, direct, by
order, the compa ny to redeem the debentures forthwith on payment of
principal and interest d ue thereon.
13. If any default is made in complying with the order of the Tribunal
under this section, every officer of the company who is in default shall
be punishable with imprison ment for a term which may extend to three
years or with fine which shall not be less than two lakh rupees but
which may extend to five lakh rupees, or with both.
14. A contract with the company to take up and pay for any debentures of
the company may be enfor ced by a decree for specific performance.
15. The Central Government may prescr ibe the procedure, for securing the
issue of debentures, the form of debenture trust deed, the procedure for
the debenture -holders to inspect the trust deed and to obtain copies
thereof, quantum of debenture redemption reserve required to be
created and su ch other matters.

Shares vs Debentures
Now that we have a basic understanding of what shares and debentures
are, let’s understand the difference between shares and debentures:
S.No. Basis Shares Debentures
1. Meaning Shares are owned
capital of the
compa ny. Debentures are
borrowed capital of
the company.
2. Representation They represent
owner's equity
capital. They represent debt
and liabilities. munotes.in

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67
3. Risk Share prices are hard
to predict and
depend on the
company’s
performance. Debentures are
associated with lesser
risks and promise
interest payments.
4. Interest Returns on shares
fluctuate according
to the market and the
company’s
performance. Debenture holders are
entitled to a fixed
interest irrespective of
market conditions.
5. Terminology Investors holding
shares are called
shareholders. Investors holding
debentures are called
debenture holders.
6. Rights Shareholders hold
voting rights. Debenture holders
don’t have voting
rights and can’t
participate in annual
general meetings.
7. Trust deed No t rust deed is
created when shares
are issued to the
public. A trust deed is
executed when
debentures are issued.
8. Repayment In the event of
winding up of the
company,
shareholder s are paid
at the very end. Debenture holders get
priority over
shareholders and are
thus paid off before
them during the
winding up of the
company.
9. Security Shares aren’t as
secure as debentures.
Rather, share price
depends on market
conditions. Debe ntures are fixed -
income securities and
hence, are secured.
10. Returns Shareholders can
enjoy high returns,
but these returns are
never fixed. Debenture holders get
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68 11. Conversion Shares can’t be
converted to
debentures. Some deben tures can
be converted into
shares

5.19 POWER TO NOMINATE (SECTION 72 )
 Every holder or joint holder of securities of a company may, at any
time, nominate, any person to get securities transferred in his name
after the death of security holder.
 The nomi nee enjoys all rights after the death of security holder which
he was havin g it.
 If the nominee is a minor, security holder should appoint any other
major person to hold these securities till he reaches the age of
majority.
5.20 SUMMARY
 The capital with which a company is registered that is the capital
mentioned in the memoran dum of association is called the nominal
capital/ authorised capital/ registered capital. The part of the authorised
capital the company issues for raising capital is called the issued
capital . The part of the issued capital which gates bought or purchase d
is called the subscribed capital . The contract for subscription maybe to
actually pay the amount in full or partially to be subscribed capital .
Fully paid up later when called for by the company the amount of the
capital paid by the subscriber is called the paid up capital .

 A share certificate is only documentary evidence of the share of the
person in the company it is not the right itself.

 A share in a company is a movable pro perty it is fully transferable
subject only to the existing loss and the arti cles of association.

 If a company decides to pay dividends preference shareholders have to
be paid first in addition a preference share mentions a minimum amount
of dividend eith er as a percentage of the face value of the share or an
amount.

 All shares o ther than preference shares are equity shares.

 Depository is an arrangement whereby the records of shares are
maintained in the electronic form in this form the physical shares are
dematerialised and converted into electronic records a depository
electron ically integrates companies stock exchange is stock brokers and
the shareholders when a share is transferred from one account to
another automatic become a member in the records of the company. munotes.in

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69
 Alteration of share capital of a company means a change in th e number
of authorised shares of a company as authorised by the articles of
association.
 Debenture is an instrument of debt executed by the company
acknowledging its obligation to r epay the sum at specified rate and also
carrying an interest.

 The nominee enjoys all rights after the death of security holder which
he was having it.
5.21 QUESTIONS
I) Fill in the blanks:
1. The part of the authorised capital the company issues for raising
capital is called the___.

2. The capital with which a company is registere d that is the capital
mention in the memorandum of association is called____.

3. A company can issue only two kinds of shares___ and ____.

4. Only a _______ company can have it shares list ed on a stock
exchange.

5. Sweat equity share is authorised by a __ pass b y the company.

6. Share means a share in the shape capital of company and include
______.

7. Paid up share capital means such aggregate amount of___ as paid up.

8. Preferential share capi tal means carries____ treatment at the time of
payment of____ the compan y.

9. Company shall not issue shares at a ______.

10. A_______ shall takes steps to protect the interest of debenture
holders.

11. ______ is an instrument of debt executed by the company
ackno wledging its obligation to repay the sum at specified rate and
also carr ying an interest.



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70 (1. Issued Capital 2. Authorised/ Nominal/Registered capital 3.
Equity and Preference shares 4. Public 5.Special resolution 6.
Stocks 7. Subscribed 8. Preferen tial, winding up 9. Discount 10.
Debenture trustee 11. Debenture)

II) True or false:
1. The memorandum of association mentions the amount of authorised
and issued share capital.

2. A Equity shareholder has the right to participate in the meetings of a
company.

3. In a depository the mention of a beneficial owner is the equivalent of a
share certificate.

4. A preference shareholder has equal rights of participation and voting in
the general body meeting like equity shareholders.

5. A private company can have its shares listed for trading on a stock
exchange.

6. Share does not include stoc k.

7. Duplicate share certificate maybe issued even without any valid
reasons.

8. Sweat equity shares issued to outsider at a discount for consideration.

9. Transfer of shares takes place during the life of the shareholders.

10. The securities premium account maybe applied by the companies
towards the issue of shares of the company.

(1. False 2. True3. True 4. False 5. False 6.False 7. False 8. False 9.
True 10. False)
III) Answer the following:
1. What is sha re and share capital?
2. Explain types of share capital
3. What is d ebentures of a company?
4. What is capital redemption account?
5. Explain the provisions regarding the reduction of share capital of a
company?


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71 IV) Write short notes on:
a. Issued capital
b. Share certificate
c. Preference shares
d. Debentures
V) Test your knowledge:
1. XYZ company issue shares to its employees for the value addition
given to them the company gives the shares at a premium stating that the
employees have been given preference over the outside us is it a valid
contract? Justify.

2. ABC company could not issue s hares to the public due to under
subscription the directors of the company return the money to the public
after 150 days of the withdrawal of the public issue has the company
committed any offence ca n the public hold a company liable advise the
shareholder s.



munotes.in